[By GuanchaNet Columnist Shaoshan Bao, Translation by Ma Li]
"Who cares about Moody's downgrade of the rating? Qatar doesn't care, Saudi Arabia doesn't care, and the UAE doesn't care either. They are all pouring money in. They have already drawn up a ten-year investment plan."
In the latest episode of "Meet the Press," U.S. Treasury Secretary Scott Bessent made such remarks while attempting to divert attention from concerns over Moody's downgrade of U.S. Treasury bonds by hyping up President Trump's recent Middle East trip.
Bessent may have done so unintentionally, but in my view, connecting these two events indeed raises some interesting and important questions.
Moody's downgrade of U.S. sovereign credit rating, Treasury Secretary Bessent insists it is a "lagging indicator." Video screenshot.
Although Moody's downgrade is based on an incorrect assumption about the nature of U.S. government debt, Bessent's dismissive attitude toward the downgrade is still too cavalier. Furthermore, his assertion regarding what the investments announced by three Middle Eastern countries might foreshadow is also overly hasty, whether for the United States or the mid-term global economy and financial architecture.
In my opinion, Moody's recent downgrade of U.S. Treasury bonds is not just a market signal; it is also a cultural and symbolic moment—a blow to the narrative that once underpinned the dollar system. For decades, U.S. Treasury bonds have been considered risk-free assets and the benchmark for global financial pricing. Now, with all three major rating agencies issuing warning signals, U.S. Treasury bonds are no longer seen as sacred and untouchable assets.
At the same time, President Trump completed a whirlwind tour of the Middle East during which he boasted about a series of "deals" reached with Saudi Arabia, Qatar, and the UAE. The total value of the deals announced by Trump (including some projects previously announced) amounted to $1.043 trillion, and there is also a $1.2 trillion plan in progress with Qatar. This "achievement in closing deals" received extensive media coverage after hitting a wall on tariff issues with China.
The downgrade of U.S. ratings by Moody's and the investment announcements from the Middle East indicate continuous changes in America's political economy, domestic society, and global economic influence. These changes have far-reaching implications: they will significantly impact global capital flows, investment activities, asset pricing, and the architecture of the international monetary system.
However, these changes are not occurring for the reasons typically discussed. Moody's downgrade actually deviates from the key issue, pointing again to common but flawed public fiscal and debt concepts. As for Trump's investment announcement regarding the Middle East, it indicates that demand for the dollar is decreasing in the medium to long term, and the trend of de-dollarization continues.
This reality also confirms this point. After Moody's downgrade of U.S. ratings, the yield on 20-year Treasury bonds broke through 5%, reaching its highest level in nearly a year. The declining attractiveness of U.S. Treasuries may trigger capital outflows. Coupled with the possible increase of $3.8 trillion in deficits due to Trump's tax cuts, market concerns have intensified, even leading to calls for "selling America."
Misleading Views
Let us start by discussing Moody's announcement of the downgrade of U.S. sovereign credit ratings.
Moody's downgrade of U.S. sovereign credit ratings this time is based on a common but ultimately flawed understanding of public debt. This view holds that the rising ratio of debt to gross domestic product foretells an impending debt crisis.
However, it should be noted that this logic holds when applied to users of money (such as households, businesses, or member state governments in the eurozone). However, it does not hold when applied to sovereign currency issuers like the U.S. federal government. The U.S. cannot "run out" of dollars because the currency it issues is the unit of account for its own debts. What the U.S. Treasury calls "borrowing" is fundamentally different from household borrowing; in fact, it is a monetary operation aimed at managing interest rates and providing security for investors' assets. You cannot borrow something that does not exist.
Moody's downgrade of U.S. sovereign credit ratings has released a dangerous signal that is easily overlooked by people.
Monetary Realism
Let us start with a simple fact: the U.S. federal government essentially creates the funds it needs to spend out of thin air. Every expenditure authorized by Congress injects funds into the economy by increasing bank reserve account balances. There is no need to raise taxes or issue bonds beforehand. There is no gold standard, fixed exchange rate, or any operational limit on the issuance of dollars. The limit is not insolvency but actual resource constraints and inflation. I will elaborate on these points later.
This understanding of the dollar is not radical; in practice, it is a reality acknowledged by modern banking, represented by institutions such as the Bank of England and the Bundesbank. It has also been substantiated by detailed research, such as that conducted by Werner (Werner) et al. Since the late 19th century, economic thinkers have at least recognized that financial institutions create money out of thin air. Berkeley (Berkeley) et al. have recently conducted detailed studies on the methods and mechanisms used by the UK to create new money.
Historical anthropologist David Graeber, who wrote *Debt: The First 5,000 Years*, and economic historian Michael Hudson both point out that money originates from credit, which is a social construct rather than the reverse. In other words, regardless of its form, money is created out of thin air. For those interested in the historical evidence of endogenous money, the paper "Endogenous Money: The Evolutionary Versus Revolutionary Views" by Louis-Philippe Rochon and Sergio Rossi, published in 2013, provides a detailed discussion.
However, despite the acknowledgment by central banks and commercial banks, and research by scholars and historians, policymakers and media experts continue to insist that government spending must be "financed" through taxation or bond issuance. They warn that the burden of debt is growing heavier and interest costs are rising, as if the U.S. government could run out of dollars one day. Yet, the U.S. government can only create dollars out of thin air.
If this fabricated narrative had any value, it might serve to constrain government spending. But as the periodic farce of raising the debt ceiling shows, it has not served this purpose.
The supposed constraints on government spending are purely political. They are more a matter of form than substance, rarely limiting actual government expenditures or prompting a calm assessment of spending priorities. On the contrary, these constraints on government spending merely provide cover for arbitrary austerity policies, progressive tax policies, and the increasingly severe inequality. Such practices will inevitably lead to the collapse of American society and exacerbate instability in global capital flows.
In fact, the belief in constraining fiscal spending often leads to irrational behavior. Because the debate revolves around abstract fiscal constraints rather than real-world impacts, fiscal policy becomes disconnected from substantive socio-economic goals such as full employment, productive investment, improving housing affordability (reducing homelessness), raising education levels, reducing infant mortality, reducing drug overdose deaths, and strengthening ecological sustainability.
Hypocritically, those who still believe that fiscal deficits must be bridged through bond issuance are precisely the ones who have consistently advocated reckless fiscal policies in recent decades. As long as deficits can be bridged through borrowing or spending cuts, endless wars, corporate tax cuts, and plans to stimulate asset growth can pass without scrutiny. Meanwhile, public investments in healthcare, housing, infrastructure, climate change mitigation, or education are dismissed as fiscally unaffordable.
Yet, despite all these supposed fiscal constraints, U.S. fiscal deficits continue to expand, and debt keeps rising. The U.S. government has not constrained spending but instead misallocated funds. If not for decades of import-induced deflation driven by cheap Chinese goods, low global wages, and financialized supply chains, this framework would have triggered severe inflation long ago.
In this sense, U.S. Treasury bonds are not typical borrowing behaviors; they are financial tools provided by the U.S. government to the private sector, offering means to store savings, earn interest, and manage portfolios. If the U.S. cannot default in its own currency, then what does a downgrade really mean? The answer lies not in fiscal calculations but in geopolitical shifts and domestic political crises within the U.S.
Bonds have never been a constraint.
This leads to the fallacy of viewing the issuance of government bonds as a fiscal brake mechanism.
This view is based on the belief that market demand for U.S. Treasury bonds can restrain excessive expansion of U.S. policy spending. However, in practice, U.S. Treasury bonds are globally considered risk-free assets—or nearly so relative to all other assets. U.S. Treasury bonds have never been a burden; they have always been favored by commercial banks, central banks, companies, and investors worldwide as a means of wealth preservation. Historically, U.S. Treasury bonds have been very popular financial instruments, playing a foundational role in the global financial system.
The U.S. issues Treasury bonds not to raise funds but to provide holders of dollars with a safe and liquid asset. Operationally, the issuance of Treasury bonds is simply a conversion of one type of government debt (bank reserves) into another interest-bearing security. Issuing Treasury bonds falls more into the realm of monetary policy than fiscal policy. That is, issuing Treasury bonds is a tool used by the U.S. to manage interest rates and liquidity, not to finance spending.
U.S. Treasury bonds have never been a burden on the world; instead, they have always been a critical pillar of the global financial system. Their roles include:
· Providing a risk-free benchmark for cross-market asset pricing;
· Acting as collateral in repurchase markets, enhancing liquidity in the banking system;
· Providing foreign central banks with reserve funds to ensure monetary stability;
· Offering safe-haven assets for institutional investors and insurers seeking capital preservation.
For these bondholders, the U.S. government's "debt" is actually a crucial asset. Demand for U.S. Treasury bonds is not just financial but systemic.
Historically, the size, depth, and liquidity of the U.S. Treasury market have been key factors making U.S. Treasury bonds a vital part of the global financial architecture. Therefore, issuing Treasury bonds to "fill" fiscal deficits is essentially a rearrangement of asset portfolios, replacing reserve balances (the Federal Reserve's non-interest-bearing liabilities) with securities (the U.S. Treasury's interest-bearing liabilities). Private sector entities gain access to income-generating financial instruments, while the Federal Reserve alters the composition of the monetary base. In reality, no practical restrictions are imposed; there is no crowding-out effect, nor forced tightening measures. It is merely an accounting operation.
If primary market demand were to decline (due to political chaos, a downgrade, or a weaker dollar, for example), the Federal Reserve would be prepared to intervene. This is not speculation but follows precedents.
In 2008, 2020, and even more subtly in 2023, the Federal Reserve demonstrated its willingness to intervene as a buyer of last resort when market functions faltered, purchasing Treasury bonds. The Fed did this to maintain controlled interest rates, ensure liquidity, and maintain financial stability—not to "fund" the government. In fact, during the week beginning May 12, 2025, the Federal Reserve quietly purchased $4.63 billion worth of Treasury bonds.
The only reason the Federal Reserve does not directly purchase Treasury bonds from the Treasury is usually due to self-imposed legal restrictions: the prohibition on direct monetization enacted in 1939. However, this is a choice of institutions, not an economic necessity. The Federal Reserve can and does indirectly support the Treasury market through open market operations.
In fact, the boundary between fiscal policy and monetary policy is much blurrier than traditional theories admit. Even the legal ban on the Federal Reserve directly purchasing Treasury bonds from the Treasury is merely a policy outcome, not a structural necessity. When market fluctuations occur (whether in 2008 or 2020), the Federal Reserve intervenes and purchases Treasury bonds in the secondary market, indicating that it will not allow bond issuance to disrupt broader policy objectives. This makes the concept of "market discipline" seem increasingly hollow.
If demand in the primary market for Treasury bonds issued by the U.S. Treasury were to decline—whether due to a downgrade or political chaos—the Federal Reserve would almost certainly take intervention measures again (either explicit or implicit), just as it did in mid-May 2025. This demonstrates support for the bond market. It is not a restriction but a management mechanism. Therefore, we must clarify one thing: bond issuance has never been an actual constraint on spending but a political and ideological tool that skillfully distracts attention from what truly matters.
The True Sustainability Issue
Moody's defines "sustainability" as fiscal solvency, but this analogy is incorrect. The true sustainability issue is not a financial problem but a political and structural one. The issue is not about the U.S. government's ability to issue dollars but about the willingness of the world to accept and hold dollars. For decades, the dollar system has relied on trust, convenience, utility, and coercion to maintain itself, but it is losing these foundations.
The erosion of the dollar's foundation is partly reflected in its reputation. As the U.S. increasingly uses its financial system to impose sanctions, freeze assets, and arbitrarily interfere, other countries are compelled to reduce the risks associated with holding dollar-denominated assets.
But more fundamentally, the dominance of the dollar depends on a material foundation: the U.S. must provide the world with valuable goods or valuable assets. With deindustrialization, the focus has shifted to the latter: dollar-denominated financial instruments.
But this model is under pressure, as the expansion of virtual capital exceeds the actual economic capacity to convert "use value" into "cash." When fewer tangible goods are produced for consumption by other countries and the U.S. uses the dollar as a weapon, the material basis for holding dollars becomes weak.
And this transformation is happening now.
Exit from the Middle East: The Reversal of Petrodollars
As I mentioned at the beginning of this article, during Trump's recent Middle East trip, he boasted about "deals" worth over $1 trillion with Saudi Arabia, Qatar, and the UAE. Bessent attempted to use these "deals" to dispel concerns over Moody's downgrade.
But Trump's boasted agreements are not a demonstration of confidence in the dollar system; on the contrary, they may indicate the opposite. These Gulf states are not agreeing to hold more U.S. Treasury bonds or accumulate dollars. Instead, they are converting their dollar surpluses (or expected surpluses) into tangible assets: weapons, aircraft, infrastructure, and artificial intelligence hardware like Nvidia chips. Readers may have noticed that these countries are purchasing physical goods rather than bonds.
This shift reveals a broader trend emerging: Middle Eastern countries are preparing for a world that no longer relies on petrodollars, with their energy transition fully underway. Their large-scale investments in renewable energy, green hydrogen, and smart city infrastructure reflect their strategic judgment that the long-term value of holding dollars is declining. Why continue accumulating financial assets of a declining empire when dollar-denominated financial assets may be frozen, devalued, or surpassed by actual technological advancements?
What the Middle East is interested in is no longer U.S. bonds. Photo taken on May 14 shows former U.S. President Donald Trump holding a pen gifted by Emir Sheikh Tamim bin Hamad Al Thani of Qatar. Associated Press.
Crisis of Autoimmune Bond Markets
All these factors have placed the U.S. Treasury and the Federal Reserve in an increasingly dire predicament. To attract foreign investors to buy U.S. Treasury bonds, interest rates must be raised. However, rising interest rates bring a series of problems, increasing borrowing costs for households and businesses, weakening effective demand, and increasing the risk of economic contraction. The current spike in mortgage rates, rising credit card defaults, and stagnation in business investment are evidence. To make U.S. Treasury bonds more attractive, the U.S. is plunging into its own economic recession.
This is an autoimmune reaction. Measures taken to maintain the credibility of the dollar system, such as interest rate hikes and potential fiscal tightening, ultimately harm the system itself. Moreover, the groups holding large amounts of assets benefit: their rents rise with higher interest rates, and their wealth appreciates as physical assets become scarcer. Meanwhile, workers, renters, and borrowers with insufficient assets are陷入 increasingly unstable lives.
This is the core paradox in the current U.S. political economy: poor people are financially suppressed while the rich receive rent income increases. Policies meant to stabilize capital inflows further destabilize the domestic economy.
On May 22, Trump posted on "Truth Social" celebrating the passage of his "big and beautiful" tax reform bill in the House of Representatives. The bill will raise the debt ceiling by $4 trillion (approximately RMB 28.76 trillion), allowing the federal government to continue borrowing to finance its debt.
Fiscal Theater vs. Economic Substance
The problem with the U.S. is not profligate fiscal spending but fiscal theater overshadowing economic substance. The showmanship surrounding raising the debt ceiling, downgrading credit ratings, and Treasury auctions diverts attention away from focusing on assessing priorities, managing inflation, and investing in long-term national development capabilities.
As Paul Samuelson pointed out as early as the 1950s, the outdated dogma of striving to maintain a balanced budget may not be without value, as it can at least constrain short-sighted politicians. But as he implied, an outdated and no longer applicable idea becomes a burden. It distorts the focus of debates, reduces options, and ultimately provides an excuse for abnormal phenomena to exist.
Now, the risk of maintaining this notion has become too great to continue. The U.S. needs a clearer and more honest framework for thinking about money, policy, and prosperity. The real deficit is not in the budget but in the collective mindset of American society, and this deficit affects the entire world.
Those who merely identify with monetary realism are often criticized for believing that governments will inevitably overspend, showing no concern for inflation or waste. This is actually a misunderstanding, often rooted in malice or outdated interpretations of certain inflation cases in the 20th century.
In fact, economists, policy researchers, and advocates who have a more accurate understanding of money creation and public fiscal accounting are often more vigilant in monitoring actual limitations and consequences. Their concerns center on four interrelated aspects:
1. Inflation risk. They understand that the limitation on sovereign spending is not fiscal bankruptcy but inflation. Since the creation of money increases purchasing power, it must be matched by the economic capacity to expand supply (including goods, services, labor, and infrastructure).
Moreover, inflation does not affect everyone equally. In fact, recent research clearly shows that the impact of inflation is asymmetric, with its negative effects primarily concentrated among low-income groups. [Related research can be found in Mark Blyth and Nicolo Fraccaroli's 2025 publication *Inflation: A Guide for Users and Losers*]. Therefore, the goal is not random spending but productive investment that benefits the real economy and addresses issues related to income inequality.
2. Wealth distribution and class. Monetary realism emphasizes that traditional debt-driven policies and monetary tightening (such as raising interest rates) tend to exacerbate wealth inequality because they reward holders of financial assets while suppressing wage growth. It sustains a political economy dominated by property owners.
Rational fiscal policy must consider who benefits from creating new money, not just the scale of spending. Social inequality is not an abstract issue; persistent poverty and limited social mobility breed resentment and discontented political sentiments, potentially leading to violent consequences.
3. Misuse of funds. The risk is not overspending but inappropriate spending. Keynes succinctly pointed out in a 1942 BBC interview, "What we can actually afford is what we can do." Excessive military spending, various subsidies, and bloated contracts that fail to generate public value are far more dangerous than superficial fiscal deficits. Monetary realists advocate for productive public investments with long-term benefits, such as investments in healthcare, education, green energy, and infrastructure, while rejecting vanity projects or aid programs for the elite.
4. Material resources and ecological constraints. Money can be created without limits, but material resources cannot. The real economy is embedded in ecosystems and subject to strict limitations, meaning that energy, arable land, raw materials, and the carrying capacity of biological systems are crucial. Fiscal policy must align with sustainable, renewable development rather than pursuing endless financialized GDP growth numbers.
In summary, gaining a deeper understanding of the actual mechanisms of money creation imposes greater responsibilities, reducing various indiscriminate fiscal expenditures. It focuses our attention on real-world limitations, such as labor, infrastructure, climate, and fairness, rather than merely on artificially set financial constraints.
Going Beyond Finance: Ideological Dimensions
In fact, the function of rating agencies extends beyond technical assessments; they are also executors of certain accumulation mechanisms. Moody's downgrade of the U.S. rating is equivalent to emphasizing numerous important viewpoints and familiar teachings. Advocates for fiscal austerity gained further emphasis, prompting the government to impose restrictions on overall spending under the guise of "fiscal responsibility." The legitimacy centered on the market (that trust in government stems from the attractiveness of its issued bonds rather than its ability to provide welfare, jobs, or ecological security) was questioned. The technocratic independence of unelected institutions placed at the heart of economic meaning construction was seen as necessary corrective force.
However, this rating downgrade is not merely a technical issue; it carries ideological undertones. Moody's action aims to reaffirm the core tenets of the U.S. political system: the government is akin to a family with a credit card, and it must "live within its means." This downgrade particularly highlights its power in the U.S., where it will be exploited by deficit hawks as a justification for further cuts to public services, while simultaneously leading to increased military budgets, thereby accelerating a more severe political-economic crisis—a crisis that was the initial cause of the downgrade.
On a deeper level, this downgrade reflects a fissure in an entrenched system. For decades, the U.S. economic system has relied on dollar hegemony, the global demand for financialized assets, and the leveraging effect of domestic consumption. This system is now feeling pressure across multiple layers. This downgrade reflects deepening skepticism among investors, institutions, and even allies about the sustainability of this system. Due to political dysfunction, the shifting global economic center, and increasing geopolitical backlash against financial weaponization, skepticism about the U.S. economic system has been deepening.
Erosion of Anchors: Physical Assets Over Virtual Capital
This downgrade affects more than just the U.S. Treasury market. Without a risk-free benchmark, the pricing of all other financial assets becomes unstable. Corporate bonds, mortgage-backed securities, financial derivatives, and pension fund portfolios all rely on U.S. Treasury bonds as benchmarks. When U.S. Treasury bonds become "risky," the structure of modern global finance begins to crumble. Fund managers who promised to invest only in risk-free assets will face legal dilemmas. After this downgrade, portfolio optimization models need to be recalibrated, and valuation frameworks will change.
Trump may not have realized it, but he has destroyed the U.S. Treasury market. His overuse of tariffs, policy vacillations, and confrontational stance toward major trading partners have weakened global preference for assets denominated in dollars. From this perspective, Moody's downgrade is not a result of U.S. fiscal pressure but a precursor to geopolitical decoupling.
If U.S. Treasury bonds can no longer act as pillars of the global financial system, what will replace them? When "risk-free" no longer means "free of political influence," how will this void be filled? What will happen when risk-averse funds begin seeking alternative options?
These are the questions raised by Moody's downgrade, but they cannot be answered. Moody's performance may be striking, but the plot lacks novelty. The dramatic events have not occurred on stage; a new system is already emerging. The Middle Eastern countries' preference for physical assets may reflect a growing global disfavor toward virtual capital.
30-year U.S. Treasury yield curve. Wall Street Journal.
Social Collapse
The post-war capital accumulation and governance model of the U.S. is collapsing.
The U.S. capital accumulation system is built on a series of robust mechanisms, with the dollar playing the role of global reserve currency. This lays the foundation for the current international monetary order, in which the dollar has become the de facto global debt instrument, giving the U.S. a unique ability to exchange its own currency-denominated debt for actual goods. U.S. economic growth has increasingly relied not on wage increases but on asset appreciation, consumer debt, and credit-driven speculative behavior.
Johnna Montgomerie, currently at the University of British Columbia, points out that the continuous rise in household debt in the U.S. reflects the combined effects of stagnant real wage growth and the proliferation of credit products since the turn of the 21st century. These credit products exploit the cultural psychological vulnerability of "keeping up with the Joneses" (i.e., the desire to maintain or improve social status).
Globally, trust in the U.S. economic system is sustained by its dominant military-industrial complex and global economic interdependence networks. These provide conditions for expanding leverage between the private and public sectors, with few adverse consequences in the short term. Ultimately, this capital accumulation system is built on the symbiotic relationship between U.S. financial instruments and fossil fuel-exporting countries like the Gulf states, which convert trade surpluses into investments in U.S. assets.
This capital accumulation system is gradually unraveling due to internal pressures and contradictions, with financialization expanding and material production capacity relatively weakening simultaneously.
Internationally, over the past 30 years, the modes of capital formation and production have changed. Regarding economic activities centered on "use value," the U.S. economic position at the center of the world has been severely weakened. Technological development is no longer monopolized by the U.S., and the ability of the U.S. to establish technological superiority in economic, military, and cultural terms is no longer unchallengeable. Moreover, the U.S. no longer has the capability to dominate the global energy sector. In short, as I have argued, what the U.S. provides to the world is not without alternatives.
Domestically, poverty in the U.S. has become extremely severe, passed down from generation to generation and spreading across regions. As the U.S. Department of Commerce pointed out in 2023, over the past 40 years, regional development imbalance in the U.S. has worsened, and the gap in life expectancy between the rich and poor has continued to expand.
A recent report by the Ludwig Institute for Shared Economic Prosperity indicates that for the bottom 60% of U.S. households, "minimum quality of life" has become unattainable. The failure of public health, the deterioration of education, and the high cost of housing have created favorable conditions for political division in the U.S. The upward mobility, economic security, and intergenerational progress promised by the U.S. are no longer credible for most Americans. For many ordinary Americans, the American Dream has turned into a nightmare.
The rise in interest rates will only worsen this situation. High interest rates cannot curb excessive spending but instead exacerbate inequality. When capital flows to asset holders like landlords, productive investments stagnate. The means used to restore financial confidence instead lead to greater destruction of U.S. social structures.
The Symbolic Significance of Downgrading U.S. Ratings
Moody's downgrade of U.S. ratings reflects their view that U.S. Treasury bonds are no longer considered risk-free assets. While this is technically a shift in market sentiment, it should more accurately be interpreted as a rupture in the broad institutional framework and material foundation on which the U.S. monetary and capital markets depend.
The willingness of foreign investors to hold dollars is now more uncertain than at any time in history. The multitrillion-dollar deals recently struck between the Trump administration and Gulf states indicate a shift: Gulf states are buying physical assets like weapons, planes, and chips rather than U.S. Treasury bonds. This is not a vote of confidence in the U.S. economy but rather a severe weakening of confidence in dollar-denominated assets.
The ongoing global energy transition heralds the end of the petrodollar era. Gulf states are preparing for the demise of the petrodollar era by investing in renewable energy infrastructure and new technologies. In today's world, continuing to accumulate dollar assets linked to traditional fossil fuels makes no sense.
It can be said that financialization is becoming harmful. Efforts to stabilize Treasury bond demand through interest rate hikes instead place a heavier debt burden on U.S. households and businesses, weaken demand, and accelerate economic contraction. The result is a self-destructive feedback loop, or what can be called an autoimmune reaction, where treatment becomes the problem itself.
This differentiation will have profound implications. As borrowing costs rise, inequality becomes more severe, with families and institutions holding large amounts of assets benefiting from higher interest returns and higher leverage. Meanwhile, low-income groups face increasing debt burdens, stagnant wage increases, and declining service quality. This exacerbates long-standing structural inequalities. Poverty is passed down from one generation to the next, difficult to reverse due to poor health, insufficient infrastructure investment, and regional economic disparities.
From Farce to Policy Reality
Moody's downgrade of U.S. ratings is not the end but a signal. It does not herald an imminent bankruptcy of the U.S., but rather a crisis in the model sustaining its powerful influence. It is a warning that the time of the most influential currency issuer in the world may be running out, even though it still holds an infinite supply of dollars.
Moody's and other credit rating agencies treating the U.S. government the same as other debt issuers is incorrect. The U.S. will not be forced to default on its debt because it controls the issuance of the dollar. The only real risk of default comes from political refusal to fulfill obligations (such as raising the debt ceiling), not from an inability to repay economically.
Moody's downgrade of U.S. ratings does not reflect the fundamentals of the U.S. economy but stems from a stubborn attachment to outdated fiscal concepts: that deficits are "dangerous," debts must be "repaid," and federal budgets must be "balanced." These statements may feel reasonable emotionally, but they are wrong in practice.
In fact, persistent deficits are a feature rather than a defect of a sovereign currency system. This is because deficits are one of the two mechanisms for injecting net financial assets into the economy (the other being credit creation by commercial banks, which I won't discuss in detail here), maintaining total demand and promoting private savings. Concerns about government fiscal deficits and their "sustainability" lead to the wrong questions being asked.
Samuelson's "noble lie" may have played a role after the war, but now the risk factors have changed. Measures that once curbed excessive spending now lead to austerity. The false scarcity they create hinders investments in infrastructure, education, healthcare, and climate change mitigation. At the same time, they fail to relieve actual inflationary pressures, which rarely stem from government overspending but more often from bottlenecks, pricing power, or industry imbalances on the supply side. Broad-based tariff hikes only increase supply-side shocks.
The deadlock over the debt ceiling and the credit rating downgrade do not indicate serious fiscal mistakes in the U.S.; they reflect a deeper political dysfunction rooted in outdated thinking. These are mere farces performed on the stage built in the 20th century, using props and lines that are out of touch with the world we live in. Yet, the U.S. elite clings tightly to this comfortable zone steeped in nostalgia, while the rest of the world has moved forward.
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