The Peter Zeihan Podcast Series - The US Credit Rating, Budget Deficits and Debt || Peter Zeihan

Episode Date: October 25, 2023

We've all heard about the drop in the US credit rating, but what does it mean? Given the United States' size and global standing, the resulting impact on financing costs is nominal. Full Newsletter: https://mailchi.mp/zeihan/the-us-credit-rating-budget-deficits-and-debt

Hey everybody, Peter Zine here coming to you from Austin, Texas at the 360 Bridge. A lot of you have written in with the same question. U.S. credit rating has been dropped. What does it mean? Is this something we should be worried about? The very short version is isish. Whenever your credit rating gets dropped, it generally means that you get put into a different category in terms of reliability of repayment.

And that means you might have to pay a different amount to service your debt. So imagine, if you will, that you're trying to buy a house. And on your last house, you just walked away and left the keys in the mailbox. That's a hit to your credit rating. The next time you try to get a loan, that loan is going to cost you more. And since the United States government is issuing bonds debt every single day, there's an incremental increase in what we have to pay because of reliability. Now, in the case of something like a country, the wobble,

especially for a country the size of the United States, tends to be pretty minor. In addition, the United States is the global superpower. It is the sole global currency that is not going to change in my lifetime. And as long as that is the case, the United States kind of is the marker of 100% on what you can do it. And anyone who is above that kind of gets extra credit. Anyone below that has to compare themselves to the United States. So we're talking at most a couple tens of a percent in the difference on what financing costs are. Now, in a country the size of the United States, that comes out to something in the tens of billions of dollars a year. insignificant, the bigger impact is what you're going to be feeling if you happen to be downstream of that, where your debt is indexed to what the U.S. government does. And in that sort of environment,

you're talking about your mortgage, your credit card and everything is going to get a little bit more expensive. Again, from a very low base, but still adds up to tens, if not hundreds, of billions of dollars a year in additional credit costs. That's not what I see is the big concern. So let me give you two. One relatively minor one that's really big. First, the minor one. is only going to get worse. When George W. Bush was president, he issued the most debt, did the most deficit spending of any president in modern history. And then Obama came and was like, hold my beer, and he doubled it. And then Trump was like, well, I'm the best. I'm going to make the deficit huge. And he did so. And now Biden's in. He's trying to top Trump. So this isn't a

Democrat thing. This isn't a Republican thing. This is just a bad math thing. All the fiscal people who have voted based on what the federal government will do with budgets have variously been purged from the political system on both sides. And so we should expect budget deficits to get larger and larger and larger and larger, especially as the baby boomers go from being the largest tax payers in American history to the largest tax takers as they go from people earning income and paying taxes to people who are drawing on Social Security, Medicare, and Medicaid, and the like. So this is going to get a lot worse before it might start to get better and say the late 2030s when the boomers are mostly all gone. So bad news, but we'll live with it. The worst thing,

the concern that most folks in the markets have today isn't that the U.S. can't pay. After all, the U.S. Federal Reserve has the ability to control the money supply with the click of a button and can basically print enough currency to buy all the government debt, and that's exactly what we've done in the last four presidents. However, the concern now is that the U.S. won't have. Donald Trump said we could renegotiate or abrogate some of the debt, which is the sort of thing you hear out of Greece or Argentina or Cuba. And in the current environment, we've had a number of people across the political spectrum,

heavier on the right but not exclusively, who have tried to use the ability in Congress to shut things down. Maybe it's a program, maybe it's debt repayment, maybe it's the government itself. But basically saying that we abrogate responsibility, for taking care of any of this anyway. And if the U.S. were to just walk away from any of its debt, whether it's because we apply something like monetary theory,

or we just simply shut down the Treasury Department, then all of a sudden you're talking about the biggest financial asset class on the planet being thrown into question. And in that sort of environment, just the fact that this is even a minor risk, just the point that this is a point of discussion, is sending up American credit costs vis-a-vis the rest of the world. and that very rapidly turns into a trillion-dollar question. Now, for an economy the size of the United States,

military the size of the United States, the reach of the United States, the U.S. dollars complete domination of the financial space, a trillion-dollar question is almost a rounding error, but you will feel it each and every time you make your credit card payment, get a mortgage, get a car loan. This is now hardwired into the system until such time that we have a twist in our political system

that injects a little bit more responsibility. that's not going to be this presidential cycle.