Reality TV star Kevin O’Leary isn’t pleased that the U.S. sovereign-debt rating has been downgraded for only the second time in the nation’s history.
O’Leary has said that the downgrade caused him to worry about the nation’s fiscal resilience, the strength of the economy and the cost of borrowing money.
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“There is no good news here — zero,” said O’Leary on a recent episode of Fox News’ Sunday Night in America.
Here’s why some business leaders agree with O’Leary, while others are less concerned.
Reasons for the downgrade
On Aug. 1, Fitch Ratings officially lowered the U.S.’s long-term-foreign-currency Issuer default rating (IDR) from AAA to AA+. To be sure, the new rating is still better than that of most other countries; the American government remains one of the most reliable borrowers in the world. But the downgrade does reflect some concern about the nation’s creditworthiness.
In a release announcing the move, Fitch said concerns about “a high and growing general government debt burden, and the erosion of governance” were among the primary triggers for this downgrade. The agency specifically called out the fact that lawmakers in the U.S. had engaged “in repeated debt limit standoffs and last-minute resolutions” over the past two decades.
Concerns stretch to the future as well. Fitch forecasts “fiscal deterioration over the next three years,” which means the downgrade reflects more pain ahead.
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Impact on the economy
“It is a big deal,” O’Leary said during his segment on Fox. He argued a lower credit rating, which impacts the U.S. dollar as well as interest rates on loans from other countries, is effectively a negative assessment of the country’s entire economy.
He also expressed concern over America’s role on the world stage, saying a lower credit rating has the potential to shake confidence in the U.S. as a trustworthy borrower and partner.
“If ever the world thinks we’re unable to pay our bills and would default on them,” he said, “that’s when it’s all over.”
Looking ahead, O’Leary said that because of some recent high-profile legislation, such as the Inflation Reduction Act and the CHIPS and Science Act — which together commit more than $1 trillion in future spending — the government can be expected to allocate lots of money to support the economy. But he said that larger corporations, like those on the S&P 500, are likely to capture much of this benefit.
“If you’re an S&P 500 company, you’re going to be flush with cash for the next three years because government is printing like crazy for you,” O’Leary says. “If you’re a small guy in Des Moines, Iowa, or Champaign-Urbana, you’ve got some big problems because that car loan that you used to pay 5% for is now sitting between seven, eight, nine and even 10% on AAA credit.”
Buffett and Musk dismiss the downgrade
It’s worth noting that some business leaders don’t share O’Leary’s concerns. In the wake of the announcement, legendary investor Warren Buffett said he added more Treasury bills to his portfolio and is likely to continue adding them, signaling his willingness to continue lending the U.S. government large sums of money despite the downgrade.
“There are some things people shouldn’t worry about,” he told CNBC’s Becky Quick. “This is one.”
And for his part, Elon Musk tweeted called short term Treasuries a “no-brainer.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.