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this post was submitted on 16 May 2025
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The key issue is with confidence. I'm not saying that QE can't work in principle. Obviously a government can issue as much currency as it wants up to unlimited amount. The problem is with the way the US economy is structured around the dollar being the reserve.
It's not about debt, it's about perceived value of the dollar. If holding US bonds means you're just losing money long term then you have no choice but to divest from US bonds.
That, once again, relies on the confidence that holding treasuries will actually be risk-free in the long run. Furthermore, the US is not a self sufficient economy, and it needs to import goods for the economy to function. If the value of the dollar continues to fall relative to other currencies, as it is right now, then costs of imports go up.
Again, there will be direct negative consequences of the US government doing that. It would be a huge market shock.
As long as Americans have to pay debts (public or private), and the debts are enforced, they will want Dollars, and the only risk free interest bearing Dollar assets are Treasuries. Also keep in mind that people have to give their (existing) Dollars in form of bank reserves mostly to get Treasuries.
This credit rating nonsense has happened before too. Also see. Nothing happens. In a week everyone will forget.
True, but that will happen long term. Not instantly, and there will be adjustment in living standards in the U.S., also depends on the willingness of China and others to accumulate US Dollar assets.
No there won't be, look at 2008 or 2020. Federal Government has successfully backstopped private financial assets many times. Is this good? No, but it's (mainly) because private sector messed up.
Again, I'm not saying the credit rating itself will have any impact long term. What I'm saying is that it signifies continued loss of confidence in the US economy by global investors. It's pretty clear that China is dumping treasuries at a record rate, and has already dropped below UK in terms of holdings. Meanwhile, the BRICS are actively working on doing trade outside the dollar which will obviously have an impact on the status of the dollar going forward as well.
The impact of 2008 and 2020 was that millions of people lost all their savings. Each time a crash happens, the working majority ends up on ever thinner margins and less able to withstand the next crash. The US is primarily a consumer economy, and consumption continues to drop because people can't afford to make ends meet. US consumers have accumulated $74 billion in new credit card debt last year, while defaults surged to levels unseen since the 2008 recession. Over half of US households now rely on credit to purchase essentials like groceries, exposing the collapse of wage growth against inflation. Unsurprisingly, consumer sentiment has cratered to its second-lowest level since record-keeping began in 1952. These pressures culminated in an official GDP contraction during the first quarter of 2024, confirming recessionary conditions.
The collapse in spending leads to a classic capitalist crisis of overproduction that feeds into itself. And if US consumption drops, then its main appeal as a global trading partner evaporates as well. Which will necessarily lead countries to continue devesting from US.