The financial rift in the United States under Moody's downgrade storm

On May 16th, the international rating giant Moody's downgraded the US sovereign credit rating from Aaa to Aa1 and adjusted the outlook for the US sovereign credit rating to stable. As soon as the news came out, the US stock market plunged, US bond yields soared, and the US dollar index fell below the 100 mark. The market was plunged into a panic vortex of a "triple blow to stocks, bonds and foreign exchange". However, this storm is by no means accidental. Instead, it is an inevitable outcome of the United States' long-term overdraft of fiscal credit, abuse of the hegemony of the US dollar, and short-sighted policies. Its impact lies not only in the short-term market turmoil, but also indicates the reconstruction of the global financial order and the end of the era of the US dollar hegemony.

Specifically, Moody's downgrade decision directly points to the unsustainability of the US fiscal situation. According to Moody's forecast, by 2035, the US federal fiscal deficit will expand to 9% of GDP, the debt-to-GDP ratio will rise to 134%, and interest expenses alone will consume 30% of government revenue. On the day Moody's downgrade, the US capital market suffered an epic sell-off. The S&P 500 index dropped by more than 3% in a single day, the yield on 10-year US Treasuries soared to 4.5%, the US dollar index fell below the psychological threshold of 100, and the safe-haven functions of both safe and risky assets within US dollar assets simultaneously failed. Market doubts about the credit foundation of the United States have intensified, and the price of gold has broken through $3,400 per ounce, with a year-to-date increase of 29%. RMB and euro assets have become new favorites for safe havens, and global capital is reconfiguring its value anchors.

It is worth noting that this is the first time since 1917 that Moody's has downgraded the US sovereign credit rating. Fitch and Standard & Poor's have respectively downgraded the US sovereign credit rating in 2023 and 2011. The US has lost its highest sovereign credit rating among the three major international credit rating agencies. This downgrade decision is by no means an accidental technical adjustment. As early as November 2023, the agency adjusted the credit outlook for the United States to negative. After an 18-month observation, it was ultimately confirmed that the fiscal deterioration of the world's largest economy far exceeded that of other AAA-rated countries. At the same time, this downgrade was in a fatal resonance with the legislative failure that the Trump administration suffered on the same day. The $3.8 trillion tax reform plan failed at the House Budget Committee, and five hardline Republican lawmakers defused. This exposed that the US political system has lost its ability to carry out fiscal reform. This vicious cycle of policy inertia has made the US government need to borrow more than $500 billion every quarter to keep operating, and the Treasury bond market has become the ultimate stage of Ponzi schemes.

From the perspective of fiscal policy, the fiscal policies of successive US governments have shown the characteristics of addiction to tax cuts and excessive spending increases. If the Tax Cuts and Jobs Act of 2017 is made permanent, it will add a deficit of 4 trillion US dollars in the next ten years. The beautiful Big Bill promoted by the Republicans plans to further widen the fiscal gap through tax cuts and increased spending. This political game of competing to spend money has led to mandatory spending accounting for more than 78%, while investment spending is less than 5%. International rating agencies have even warned that The current fiscal proposals in the United States fail to achieve substantial reduction in the deficit, and the failure of policy coordination has become the norm. Although Treasury Secretary Besson claims to maintain financial hegemony with a strong dollar, the reality is that the United States is neither able to curb the expansion of debt nor can it abandon the abuse of financial sanctions. This unreasonable logical paradox has accelerated the estrangement of Allies and the disintegration of the system. Perhaps, as the Yale Budget Lab warns, if the current policies continue, U.S. debt will devour all economic output by 2055.

From the perspective of political governance, the decisions made by the two major parties in the United States on the debt ceiling issue have exposed the structural flaws of the governance system. The 2025 fiscal year budget has yet to be passed, and federal agencies rely on interim resolutions to keep operating. Such fiscal paralysis is unprecedented among AAA-rated countries. The legislative defpositions within the Republican Party further indicate that the United States has lost its ability to solve fiscal problems through political consensus. Meanwhile, the regulatory system has fallen into functional disorder. Trump signed an executive order requiring that the policies of independent regulatory agencies be reviewed by the White House and directly intervene in monetary policy. The Federal Reserve was the first to move between fighting inflation and safeguarding the bond market, being forced to reduce the scale of its balance sheet reduction from 95 billion US dollars per month to 30 billion US dollars, and the independence of monetary policy vanished completely.

From the perspective of the financial market, the counterproductive effects of the weaponization of the US dollar have been fully manifested. The average daily trading volume of the SWIFT system decreased by 17% year-on-year. 39 countries initiated local currency settlement agreements, and the global financial order entered a window for reconstruction. The price of gold soared by 5.2% after the downgrade, and the proportion of gold reserves of central banks around the world rose to a 30-year high of 35%. Even more disruptive is that the number of users of the multilateral settlement mechanism supported by blockchain technology has exceeded 200 million. Emerging markets are building alternative solutions to the US dollar at the technical level, and the policy combination of the Trump administration has further magnified the crisis. On the one hand, its policy of imposing tariffs has led to a sharp increase in the costs of US enterprises and a rebound in inflation. The GDP shrank by 0.3% quarter-on-quarter in the first quarter, marking the worst performance since 2022. On the other hand, large-scale tax cuts have exacerbated the gap between the rich and the poor, and the fiscal deficit has snowboned. Although Treasury Secretary Basenter insists that Walmart should absorb the pressure of tariffs, the financial reports of the retail giant show that The transfer of tariffs has led to a 12% reduction in corporate profits and may trigger a new round of price hikes. The tariff policy has not only failed to relieve fiscal pressure but also disrupted the global trade order and accelerated the collapse of the US dollar's credit.

In short, Moody's downgrade is not only a technical adjustment, but also the ultimate judgment on the fiscal unsustainability of the United States. From debt crisis to political paralysis, from policy short-sightedness to the collapse of market trust, the United States is undergoing a comprehensive reconstruction of its credit system. When fiscal runaway, policy disorder and credit collapse resonate, the once financial empire is falling into the abyss it dug itself.