Tangle - The U.S. gets downgraded, explained.

Episode Date: August 8, 2023

Last week, the Fitch Ratings agency downgraded the U.S. government's top credit rating from AAA to AA+, a decision that drew an angry response from the White House and surprised investors. In the initial reaction to the announcement, investors moved money from stocks into government bonds and the dollar. Plus, why does Tangle have slightly more liberal readers than conservative?You can read today's podcast here, today’s “Under the Radar” story here, and today’s “Have A Nice Day” story here. Today’s clickables: Quick Hits (2:33), Today’s Story (04:23), Right’s Take (6:54), Left’’s Take (11:13), Isaac’s Take (15:48), Your Questions Answered (19:04), Under the Radar (22:08), Numbers (22:48), Have A Nice Day (23:27)You can subscribe to Tangle by clicking here or drop something in our tip jar by clicking here.Our podcast is written by Isaac Saul and edited by Zosha Warpeha. Music for the podcast was produced by Diet 75.Our newsletter is edited by Bailey Saul, Sean Brady, Ari Weitzman, and produced in conjunction with Tangle’s social media manager Magdalena Bokowa, who also created our logo.--- Send in a voice message: https://podcasters.spotify.com/pod/show/tanglenews/message Hosted on Acast. See acast.com/privacy for more information.

Based on Charles Yu's award-winning book, Interior Chinatown follows the story of Willis Wu, a background character trapped in a police procedural who dreams about a world beyond Chinatown. When he inadvertently becomes a witness to a crime, Willis begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+. The flu remains a serious disease. Last season, over 102,000 influenza cases have been reported across Canada, which is Chinatown is streaming November 19th, only on Disney+. yourself from the flu. It's the first cell-based flu vaccine authorized in Canada for ages six months and older, and it may be available for free in your province. Side effects and allergic reactions can occur, and 100% protection is not guaranteed. Learn more at flucellvax.ca.

From executive producer Isaac Saul, this is Tangle. Good morning, good afternoon, and good evening, and welcome to the Tangle Podcast, the place we get views from across the political spectrum, some independent thinking, and a little bit of my take. I'm your host, Isaac Saul, and on today's episode, we're going to be talking about the Fitch rating downgrade of the United States, what it might mean for the economy, and what we can kind of glean from it. Before we jump in, though, I do want to give you a quick reminder. In the last few days, I've gotten a lot of emails, messages from listeners asking about supporting the newsletter and the podcast in light of our event and our growing team and all this stuff. And I want to remind you that always the best

way to support us, it's two prong. Well, I guess it's three prong. First is become a member. We offer Tangle subscriptions, readtangle.com forward slash membership. That is a great way to just generally support our work and make it sustainable. It's a recurring monthly or yearly payment that funds everything that we do. Our podcast, our YouTube channel, our newsletter, all of our growth, our advertising, everything we do basically comes from there. So that's like the number one best way to support us. You can also gift a subscription to a friend or family member if you already are a subscriber. There's a link to do that in today's episode description. And I know a lot of people have asked if we can turn some Friday edition stuff in the newsletter

into paywalled podcast content. Again, that is still something that is on our radar. I wish I had the bandwidth to just flip the switch and do it, but it takes a lot to record this podcast, to put it out, and we are trying to find a way to fit it into our workflow. But I do hope long-term our Friday edition newsletters can become paywalled podcasts. And finally, the third of those three wrong ways to help us is just to spread the word,

to give five-star ratings to the podcast. If you're on an app that lets you rate podcasts, all that stuff to just get Tangle out there into the ether. Anything you can do is greatly appreciated. All right, with that out of the way, we'll kick things off with our quick hits for today. First up, Ukrainian authorities arrested a woman yesterday who was purportedly part of an assassination plot against President Volodymyr Zelensky. Number two, former Minneapolis police officer Tu Tal was sentenced to nearly five years in prison

for aiding and abetting second-degree manslaughter in the killing of George Floyd. Number three, a federal judge threw out President Donald Trump's defamation counterclaim against writer E. Jean Carroll. Number four, Ohio voters are deciding today whether to raise the threshold for approving a constitutional amendment from a simple majority to 60%. The ballot measure was proposed by Republicans, who hope to make it harder to pass an abortion rights amendment in November and say they want to protect the Constitution from special interests. Number five, the U.S. Navy deployed 3,000 troops to the Red Sea after

Iranian attempts to seize commercial ships near the Strait of Hormuz. Today's podcast is sponsored by Arnold Ventures, a philanthropy dedicated to improving the lives of Americans through evidence-based policy solutions. As part of their efforts, they also support journalism throughout the United States, including outlets like the Texas Tribune, ProPublica, and the Institute for Nonprofit News, among others. To learn more about their work, go to ArnoldVentures.org. That's ArnoldVentures.org. And stocks are in the red again today as markets react to Fitch downgrading the U.S. credit rating. It's the second time in history the nation's credit has been downgraded. And it comes months after a congressional stalemate took the debt ceiling talks down to the wire.

Fitch is saying that they, I think most importantly, that they are concerned about the growing U.S. budget deficit. U.S. budget deficit. In fact, they see it getting higher and higher all the time from about 3% of GDP up to over 6%. The Treasury Department is very strongly pushing back against Fitch's rating downgrade. And if you really dig into what Fitch has been rating on here, it is a number of different factors. They say that they are actually concerned about the U.S. erosion of governance over the last two decades. Last week, Fitch Ratings Agency downgraded the U.S. government's top credit rating from AAA to AA+. A decision that drew an angry response from the White House and surprised investors. In the initial reaction to the announcement, investors moved money from stocks into government bonds and the dollar. A reminder, Fitch is one of three major credit agencies that informs the world about a country's credit worthiness.

If a country has a high credit rating, that signals to investors that it will likely yield long-term gain, and investing in that country's companies or industries is a safe bet. The U.S. Treasury bonds are traditionally one of the safest investments there is, though that has largely been due to an era in which the U.S. has enjoyed premium ratings. So what just happened? Well, Fitch cited fiscal deterioration and repeated instances of down-to-the-wire debt ceiling negotiations as the reasons for its decision. The U.S. debt is now more than $31

trillion. Fitch is the second major rating agency after Standard & Poor's to downgrade the United States from a AAA rating. Australia, Germany, Singapore, and Switzerland are the only countries with AAA ratings from Fitch, Standard & Poor's, and Moody's, the top three rating agencies. It defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world, White House Press Secretary Karine Jean-Pierre said. Fitch defines a AAA rating as the lowest expectation of default risk and an exceptional strong capacity to meet financial commitments. Meanwhile, Fitch's AA rating indicates expectations of a very low default risk

with a very strong capacity to meet financial obligations. In 2011, when the S&P cut the U.S. government's credit rating, it spurned concern about the U.S. economy but had minimal long-term impact. One curious issue with the rating downgrade is that there is little question about the United States' ability to pay its debt. Instead, it appears Fitch's concerns are centered around whether the government will always be willing to pay its debt, as evidenced by political standoffs like the debt ceiling showdown we witnessed earlier this year. Today, we're going to take a look at some reactions to the downgrade from the left and the right, and then my take.

First up, we'll start with what the right is saying. Many on the right believe the downgrade is justified, but criticize aspects of Fitch's reasoning. Some argue that it is a clear warning sign that we are in a precarious situation with our level of debt. Others criticize Fitch for citing January 6th and Republican efforts to cut spending as reasons for the downgrade. The Wall Street Journal editorial board asked why anyone was surprised. The downgrade to AA plus from AAA may even be an overly optimistic assessment of the U.S. fiscal outlook, and it ought to be a warning to the political class, which will ignore it, the board said. The credit raters aren't perfect oracles, and we don't agree with Fitch's complaint about debt limit standoffs since those have been the only recent times when anyone in Washington considers spending restraint.

since those have been the only recent times when anyone in Washington considers spending restraint. But Fitch's decision captures the unseriousness of America's economic decision-making. At the time of the last downgrade, the ratio of U.S. debt held by the public to GDP was only 65.5%, while the Congressional Budget Office expects it to be 98.2% this year. That's up from 79.4% before the pandemic, and it is expected to rise to 115% of GDP by 2033 on present budget trend, the board said. As Fitch notes, U.S. general government debt, including state and local government, is more than two and a half times greater than the median 39.6% of GDP for a AAA rating. The future looks worse. The deficit in the first nine months of this fiscal year hit $1.39 trillion, up 169% from the same period the

year before. In City Journal, Milton Esrati said the move has rightly been mocked, but made an important point. The move made waves. Stock prices fell in the U.S. and around the world. Bond prices also dropped, pushing up yields on treasury bonds as well as bonds generally, as Roddy wrote. Fitch cited deterioration in standards of governance, pointing to the January 6, 2021 capital riot and how the recent debt ceiling crisis had brought the federal government to the brink of default. But this reasoning is weak. The January 6th riot never threatened the stability of the government. The debt ceiling fight may have stymied Washington's ability to borrow, but it never threatened default. Tax revenues, though inadequate to run the entire government, were always more than adequate to meet Washington's debt obligations.

What is more, the debt ceiling debate was a demonstration not of government failure, but of Congress's ability to meet its constitutional obligations by debating political agendas and reaching a compromise, as Roddy said. The downgrade is financially meaningless, as the Fed could print money and pay bondholders in a pinch, avoiding default. But the downgrade still makes a worthy political economic point, namely that debt is piling up faster than the economy's ability to support it in real terms, inviting inflation if not default. In contrast to 2011,

today's budget policies and excessive spending are of more concern. In USA Today, Ingrid Jock wrote about the irony of this downgrade coming as Biden touts Bidenomics. It turns out Democrats' unlimited appetite for spending and their refusal to address growing deficits isn't sitting well with close watchers of our economy, and this should serve as a warning that inaction is no longer acceptable, Jock wrote. Despite the left's attempt to dump all of the credit downgrade blame on Republicans who worked to trim spending for the debt ceiling showdown earlier this year, the report from Fitch Ratings spells out much bigger concerns about the U.S. fiscal outlook and the need for a spending

overhaul. If anything, the downgrade indicates that lawmakers didn't do nearly enough in their negotiations over raising the debt ceiling. Biden got bailed out in the press with the latest Trump indictment that may be juicy, but the huge expansion of the national debt has real-life implications for each one of us. Rising deficits mean the debt will continue to bloom, especially as trust funds for entitlement programs such as Social Security near insolvency. As the debt increases, economic growth slows and leads to even higher interest rates. In the next 30 years, spending on net interest will become the nation's biggest expenditure,

surpassing even Social Security. Alright, that is it for the rightist saying, which brings us to what the left is saying. Many on the left are critical of the downgrade, arguing that it comes at a time when Biden has ushered in an era of economic strength. Some blame Republicans for the downgrade, saying the debt ceiling standoff and erosion of governance are largely the fault of conservatives. Others argue that this is a timely reminder we need to reform our spending. The Washington Post editorial board called it a weird downgrade. It is as though someone at Fitch Ratings accidentally hit publish Tuesday on its announcement that it was downgrading U.S. government debt from AAA to AA+. The timing was bizarre. The report came out just as the

nation was distracted by former President Donald Trump's indictment. Economic news has been so positive this summer that the Federal Reserve and many on Wall Street no longer predict a recession. Yes, the United States has a long-term debt problem, but the situation has improved slightly in recent months after President Biden and House Republicans struck a deal to avert a debt ceiling crisis, and the U.S. economy has performed better than expected. All of this makes U.S. debt more attractive, not less. Americans should not panic, yet they also should not dismiss concerns about the national debt's long-term trajectory, the board said. Fitch's rationale is flawed as it predicts a tough few

years ahead, largely because of its forecast of an imminent recession, but that prediction appears outdated. And while few would disagree that politics has become more partisan and contentious, lawmakers didn't default on U.S. debt obligations. Fitch is right about the growing government debt burden, and that outlook didn't suddenly worsen. The best way to address the debt is for lawmakers to begin to tackle the country's long-term fiscal challenges, starting with Social Security. In Bloomberg, Carl W. Smith said to take Fitch's

downgrade seriously, but not literally. Based on Charles Yu's award-winning book, Interior Chinatown follows the story of Willis Wu, a background character trapped in a police procedural who dreams about a world beyond Chinatown. When he inadvertently becomes a witness to a crime, Willis begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+.

The flu remains a serious disease. Last season, over 102,000 influenza cases have been reported across Canada, which is nearly double the historic average of 52,000 cases. What can you do this flu season? Talk to your pharmacist or doctor about getting a flu shot. Consider FluCellVax Quad and help protect

yourself from the flu. It's the first cell-based flu vaccine authorized in Canada for ages six months and older, and it may be available for free in your province. Side effects and allergic reactions can occur, and 100% protection is not guaranteed. Learn more at FluCellVax.ca. There's next to zero chance the government won't be able to pay its creditors, and the Treasury Department's access to funding is determined by forces far more fundamental than a few capital letters tied to a ratings report. That doesn't mean the U.S.'s rising debt burden isn't a problem, he said. There are at least three ways in which federal borrowing could be disruptive. The first and most worrying is the potential for a so-called

debt bomb in which the government's debt burden, which currently stands at $32.3 trillion, becomes so great that even a small increase in interest rates means the Treasury needs to borrow just to cover the cost of servicing the debt. This leads to a vicious cycle, with the added borrowing discouraging buyers, driving interest rates higher, and forcing even more borrowing. The resulting sky-high interest rates throws the economy into a deep recession. The second is the monetization of the debt, meaning if traditional buyers of U.S. debt went on strike, so to say, the government might resort to selling treasuries directly to

the Federal Reserve. This is different than the Fed's quantitative easing program, where it bought treasuries and related securities in the secondary market to inject funds into the financial system, which ultimately leads to more inflation. The third potential crisis stemming from too much debt is political. Recall that Trump criticized the Fed raising interest rates to combat inflation, so it stands to reason that if Trump had his way, inflation rates would probably have been even higher and more sustained than they've been. In the New Republic, Tory Otten called the downgrade another indictment on Trump. A top official confirmed Wednesday that part of the reason for the downgrade was increased political divisions as evidenced by the January 6th insurrection, Otten said. Fitch predicted the U.S. would see

fiscal deterioration over the next three years and cited the erosion of governance over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions. But another major reason for the downgrade was the dramatic increase in political polarization seen in the January 6th attack. The fact that the downgrade was the dramatic increase in political polarization seen in the January 6th attack. The fact that the downgrade was announced the same day Trump was indicted is likely a coincidence, but the connection between the two events is still significant. Trump faces four counts that include conspiracy to defraud the United States, conspiracy to corruptly obstruct an official proceeding, obstruction of an attempt to obstruct an official

proceeding, and conspiracy against the to obstruct an official proceeding, and conspiracy against the right to vote, she said. Hundreds of people who descended on Washington to try and stop the certification of votes had said they were responding to a call from Trump. So it turns out that Trump, who promised a strong economy, has actually cost the U.S. standing in the global market. All right, that is it for the left and the right are saying, which brings us to my take. So first of all, I'm surprised this didn't happen sooner. There's no

way around the precarious state of both our government and our economy. I think January 6th certainly destabilized the government, though I don't think it destabilized the economy in any way. I admit I scoffed a little bit when I read the January 6th reference, but I do think it is indicative of real political issues that could lead to the kind of instability that ultimately could inhibit our ability to function and to take care of the economy. The debt ceiling negotiations, the unending partisanship, all of that is a manifestation of the deep divides we currently have in Congress, and it makes sense that Fitch would see those divides and worry. But the factor to be most concerned

about is, or should be, the most obvious and biggest reason for the downgrade in the first place, our massive debt. We need fiscal reforms in our country in order to find solid ground. Neither President Biden nor leading Republican candidate Donald Trump have shown any interest in reforming entitlement funding, which is the single biggest threat to our fiscal stability going forward. Trump attacks any Republican who wants to mention tax reforms, and the party is deathly allergic to any increases. Biden and the increasingly progressive Democratic Party want to expand entitlement programs that would cost more money.

Both sides face this stark reality. U.S. debt as a share of the economy is skyrocketing. Costs for Social Security are going up faster than revenue raised. Our population is aging, meaning there are more people getting their payouts. If nothing is done, Social Security may have to reduce payments by 2034. Even in a world where our debt does not cause the kind of crisis some economists warn about, there is no doubt that putting our money towards servicing government debt will take government funding away from other programs. Every dollar we have to put toward debt payments is a dollar we can't put

into infrastructure, education, healthcare, or the military. This rating downgrade won't immediately impact your life or mine, but it is a shot across the bow, and our legislators need to take note. Fortunately, there are options. The Washington Post editorial board has a compelling, pragmatic, and realistic plan that draws on ideas from the right and left to address the problem. It includes increasing the retirement age to keep up with rising life expectancy, broadening taxes to fund social security, and decreasing what high-income households get while increasing what low-income households get. It's a smart and realistic plan, one that this Congress could pass if it had the courage and political will. The board also lays

out ideas on Medicare, farm subsidies, veterans care, and the defense budget. Sensible ideas abound. Addressing Social Security needs to be the priority and could spur suggestions and compromises in other areas if President Biden or members of Congress show they were really serious about addressing the problem. Fortunately, the board is not alone. The bipartisan fiscal forum is drawing in representatives from the right and left to form a fiscal commission aiming to take partisanship out of some budget cutting.

These embers could turn into a real fire with enough public urging. These embers could turn into a real fire with enough public urging. All right, that is it for my take, which brings us to your questions answered. Today's question is from Caleb in Goshen, Indiana. Caleb said, why do you think there are more liberal Tangle readers than conservative ones? My initial instinct was that either Tangle leans more to the left, or that more liberal people read the news and are open to moderate viewpoints. I doubt the first explanation and wonder about the second. Do you think it's one or a combination of these ideas or something else?

So let me provide a little background on the stats first. When we surveyed our readership at the end of 2022, we found that roughly 40% of our readers are liberal, 30% are centrist or independent, and 30% are conservative. While this is a good ideological spread that demonstrates more balance than any other publication that I know of, it does skew a little to the left. So your question is a good one. Up front, I'll say that there are a few theories I don't find particularly compelling. One is that maybe I'm a secret leftist, that bias is pervading my arguments, and that it's turning away conservatives. Two is that maybe liberals are more likely to read news like Tangle, or conservatives

are less likely to read anything critical of conservatism. Three is that maybe we just aren't critical enough of the current administration for conservatives to want to stick around. I know number one is not true, and I know our structure offers a great deal of balance in every newsletter. Number two is a reasonable hypothesis, but it's based on dated social science. It appears no longer true that conservatives are much more closed-minded than liberals. And number three doesn't make much sense because I personally have been openly critical of this administration, and we share arguments very critical of it nearly every day under what the right is saying.

Perhaps the imbalance is entirely due to conservatives just being less likely to respond to polls. That may be part of it. But that should be cancelled out by polling respondents tending to skew older, and older Americans tending to be more conservative. So it's possible that conservatives are actually overrepresented in our surveys. It's just difficult to say. One idea that I have is that there are just more left-of-center news outlets out there, which I think has the opposite effect for Tangle readership of what you might expect. Rather than meaning fewer potential Tangle readers,

it means that a person who would want to read Tangle, a person who wonders what do people disagree with me think, is more likely to be left-leaning because it's easier for a right-leaning person to have an answer to that question. It's the prevailing viewpoint of the majority of mainstream media. Then again, it may just be the network effect. I lived in Brooklyn when I started Tangle and a lot of my friends were more liberal and the initial social circle that spread Tangle was more liberal. So maybe that was just it. friends were more liberal, and the initial social circle, that spread tangle, was more liberal, so

maybe that was just it. It might be some combination of all those things, of course, but honestly, I just don't know. What I can say is that it is a matter of introspection for us. We're very proud of the ideological spread and our readership, since our goal is to be trusted by people across the political spectrum equally. So keeping those numbers where they are or even closer to an even split is very important. All right, that is it for our reader question, which brings us to our under the radar section. Floods in China and wildfires on several continents are disrupting important crop yields

that we rely on to feed the global population. Corn, wheat, and rice make up roughly 42% of the world's food calories, but corn yield is going down, and rice production in India has been hurt by the droughts and heavy rains. Efforts are underway to develop more climate-resilient crops, but price hikes and constrained supply will be more and more likely as these climate events become more common. Axios has this story, and there's a link to it in today's episode description. All right, that is it for our Under the Radar section, which brings us to our numbers story. The total U.S. national debt as of this morning is $32.7 trillion. The number of retirees who currently receive Social Security is 49 million.

The average monthly payments to those retirees is $1,538. The total amount of money spent by the U.S. government in 2022 is $5.8 trillion. The amount of money that was spent on Social Security is $1.2 trillion. The age at which anyone born after 1960 can currently receive full Social Security benefits is 67. Alright, and last but not least, our Have a Nice Day section. In July, Everett Collins summited the Half Dome in Yosemite, becoming one of the oldest people, if not the oldest person, to ever do so. He completed the trek with the help of his 57-year-old son, John, and his 19-year-old granddaughter, Sydney, who secured the needed permit and planned the journey.

When the Collin family got to the top, there was an outburst of cheering from the many people they had met along the way. It was like paparazzi, everyone taking videos and photos, John said. I'm choking up just talking about it now. The power of seeing him was so much joy and inspiration. Just a day after he returned home to Oakland, Colin said he wasn't even sore from the height. I just feel so very grateful to the people that made it possible, he said. I'm actually feeling great. San Francisco Gate has the story and there's a link to it in today's episode description. All right, everybody,

that is it for today's podcast. As always, if you want to support our work, please go to readtangent.com forward slash membership and consider becoming a member. We'll be right back here same time tomorrow. Have a good one. Peace. Our podcast is written by me, Isaac Saul, and edited by Zosia Warpea. Our script is edited by Sean Brady, Ari Weitzman, and Bailey Saul. Shout out to our interns, Audrey Moorhead and Watkins Kelly, and our social media manager, Matt Gwendoly-Vikova, who created our podcast logo. Music for the podcast was produced by Diet75. For more from Tangle, check out our website at www.tangle.com.

Based on Charles Yu's award-winning book, We'll see you next time. Willis begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+. What can you do this flu season? Talk to your pharmacist or doctor about getting a flu shot. Consider FluCellVax Quad and help protect yourself from the flu. It's the first cell-based flu vaccine authorized in Canada for ages 6 months and older, and it may be available for free in your province. Side effects and allergic reactions can occur, and 100% protection is not guaranteed. Learn more at FluCellVax.ca.