What enabled to make America truly great is in decline

The recent downgrade by the rating agency Moody’s of America’s AAA rating has passed by largely unnoticed among the plethora of world and local events taking place.

For a weekly (or bi-weekly) columnist trying to focus on a single topic among the many –from the genocide taking place in Gaza, the indiscriminate bombing in Ukraine, the vengeful attack on independent academic institutions in the US to the absurd attempt here in Cyprus to frame the attempt for a European defence mechanism that would rightly include Turkey as incompatible with even our own interests – one is challenged to decide on what he should write.

And so it is to economics that I turn to in my hour of confusion. As it happens, my recent visit to see the musical “Hamilton” in London made me realise how America’s journey to greatness started with the creation by Alexander Hamilton – the US’ first treasury secretary under Washington – of a unified credit standing for the country as a whole. Hamilton ensured, against fierce opposition, that the US government stood behind the value of the dollar which enabled the US to borrow and grow into the superpower it is today.

The foundation of any currency is based on the trust that people have in holding that currency. As Paul Volcker – the legendary US Federal Reserve chairman in 1979-1987 – put it: “We give the government the right to print money because we trust our elected officials not to abuse that right, not to debase the currency by inflating. Foreigners hold our dollars because they trust our pledge that those dollars are equivalent to gold. Failure to maintain those promises undermines trust in America. And trust is everything.”

While Volcker himself was instrumental in abolishing the pledge of dollars being equivalent to gold in 1971, the new monetary system that emerged essentially bolstered American credit into a more powerful position, as the world displayed its trust in the US by accepting to hold dollars without requiring the guarantee that it was backed up in gold.

The strength of American credit is now being questioned. To put things in perspective, the Moody’s ratings downgrade is the first time Moody’s have done it. To be sure the US rating has been downgraded twice before, by the two other major rating agencies (S&P and Fitch), but this is the first time in history that all three agencies have downgraded it at the same time.

The immediate trigger that sparked the round of down-gradings was the passing by the House of Representatives of Trump’s ‘Big Beautiful Bill” which is projected to add about $3 trillion to the US public debt over the next decade and is now before the Senate for final approval. Putting aside for a moment the content of the bill, and its redistributive aim to bolster the higher income classes, adding to government debt which is at its second highest level in history (about $36tn) with the public debt to GDP at 123 per cent, at a time when the economy is booming (higher debt to GDP ratios are expected during a period of recession), has set the alarm bells ringing. Adding insult to injury, even Elon Musk in a preview of an interview that is officially coming out on Sunday, has criticised the bill saying that “a bill can either be big or beautiful, but it cannot be both.”

I have watched several interviews of US Treasury Secretary Scott Bessent trying to discern the approach on handling the increased debt. His response on the Moody’s downgrade – “who cares?” – did not inspire confidence. More importantly his analysis of the effects of the bill leading to a boost in growth and thus making all problems disappear was not at all convincing. It reminded me how the UK gilts market deemed the growth promises on which then UK Prime Minister Liz Truss based her unfunded tax cuts to be magical thinking. You may say that the US is very different from the UK. That is correct. But the total absence of taking into account the likely rekindling of inflation as a result of increased growth in a booming economy convinces me that things have not been thought through.

Instead, Bessent was quick to say that confidence in the US was high, pointing to the agreements the US had just made with the three monarchies of Saudi Arabia, UAE and Qatar promising high investments in the US. It is ironic that the first visit of Trump outside the US was to countries who ideologically appear close to his heart, and which despite the massacre that is taking place in Gaza appear to be willing to close their eyes.

These agreements, however, had the smell of a photo-op, wanting to project the image of a stable America but unlikely to shore up the long-term trust in a well-managed economy. The thing with trust is that it takes a long time to build but can evaporate quickly. It is much the same with how Ernest Hemingway described the process of going bankrupt, first gradually and then suddenly.

It is of course too early to argue that the US is about to go bankrupt. Edward Luce has noted in the Financial Times (“America’s rising ‘moron’ premium”, 27/5/2025) that the US would only default by choice, not force. That is a fair point. Yet, that prospect, like the “moron premium”, has been rising as of late.

The suggestion that has been aired in financial circles that the treasury could swap existing long-term bonds with perpetual ones is not very different to a debt restructuring. I recalled an article written by Michael Lewis (mostly known for his book on the 2008 Great Financial crisis, The Big Short), written in 2019 in Prospect magazine titled “Are we heading for Trump’s financial crisis?”. In it he argued how debt was higher than it should be, and if Trump hit trouble with it then defaulting might be his answer.

A similar but more general analysis has been made by Ray Dalio, (the billionaire founder of mega hedge fund Bridgewater), in his latest book “How countries go broke: The overall Big Cycle”. He takes a historical perspective on how countries go through cycles and eventually lose their credit worthiness and slip into decline. The latest Moody’s downgrade may just be the beginning of that US decline. Alexander Hamilton must be turning in his grave.