Fitch Ratings recently downgraded America’s debt situation from AAA, the highest level, down to AA+.
Although this has the potential to be cause for concern, this is based not on where America is right now but on where we could be headed.
This doesn’t mean the economy is about to hit a recession, but it does mean that it’s time for a wake-up call before it’s already too late.
In today’s episode, you will learn more about why Fitch Ratings downgraded America’s debt situation.
Some of the specifics discussed include:
- The reason for concern behind Fitch’s downgrading.
- What you should be doing right now to protect yourself from any upcoming market instability.
- How America’s lack of solutions for its excessive spending habits is affecting the daily lives of the population.
If you learned something from today’s episode, be sure to share it with a friend or family member!
Transcript:
Hey, this is Darryl Lyons, CEO and Co-Founder of PAX Financial Group. Thanks for tuning in to Retire in Texas. I appreciate that you’re here. And as always, I need to give you the legal disclosure that this information is general in nature only. It’s not intended to provide specific tax, legal, or investment advice. Visit PAXFinancialGroup.com for more information.
And I want to encourage you, if you need to speak with one of our advisors, we have the best financial advisors. Text the number 74868, the word Texas to the number 74868. One of our advisors will connect with you for a 15-minute quick, no fee consultation. Okay, so let’s get started. I want to talk today about the Fitch downgrade, and you may or may not have heard about that, so I’ll explain it to you.
But let me give you context real quick. So, like when I first got in this business, I didn’t have any clients because people from trailer parks and college graduates don’t have any money. So, I was struggling as a financial advisor, which is like a shop teacher, teaching a class with no fingers. And it was a real struggle. So, what had happened?
This was pre-Dave Ramsey. I had racked up my credit cards and I looked up one day my credit cards. I’m not exaggerating here. My credit card debt was equal to my income. And you could just do the math for yourself and ask yourself, okay, if my credit card was equal to my income today, would I freak out?
Yes, I was freaking out. I had to grind to get out of that thing. I had to do two things. One, I had to make more income. And two, I had to pay down the debt. Now, before I pay down the debt, I had to make sure that my spending wasn’t out of control. So that leads me to today’s conversation about the United States debt, which is what Fitch addressed.
Fitch is one of the three rating agencies. There’s the S&P, Moody’s and Fitch, and they rate debt and companies, whether or not these companies, countries, cities, municipalities, they give them ratings so everyone can quickly take an inventory and assess whether or not they will get paid back. And so, these ratings are different. Grades are applied by Fitch, by Moody’s, and by S&P.
Fitch, just recently, one of the three rating agencies, Fitch, downgraded the United States from the highest rating of AAA to the next highest one, which is AA+. Okay. And so that was a big deal and it sent shockwaves through the entire economic system that the United States has some problems. And that if you lend money to the United States, you’ll still likely get paid back.
But the chances aren’t as high, according to Fitch.
Now, this is not the first time that the United States has been downgraded. In 2011, there’s a very difficult time in the markets. I remember trading in this environment in 2011 is very, very hard. S&P. One of the other credit rating agencies downgraded the United States. There is a concern that the United States has overextended itself.
And we all know this. Many, many, many of my peers have been screaming this from the rooftop credit to Paul Ryan. Paul Ryan, who’s no longer a politician. As far as I know. He’s one of the few people out there that he went in wholeheartedly with his pitchfork and said, “we’ve got to resolve this.” We’ve known this for a long time.
We’ve all known this is a problem. You cannot spend more than you make. So, I read the report by Fitch, and the Fitch downgrade was, I mean, Fitch talked about political instability. But I would suggest to you that the main thing that Fitch was referencing was not where the United States is at today, but where they’re headed.
So, Fitch was really concerned. If you really read it, it appears to me, and I think you would make this same assessment, it’s not about where the United States is right now. It’s about where they’re going. That’s a concern. And so, I think there’s two groups of people that I’ve seen in the marketplace lately that I’m going to unpack each of their arguments in the brief amount of time that we have.
There’s actually a group of people that says that we shouldn’t take this too seriously, that this Fitch downgrade is really irrelevant. It’s not a big deal. And then there’s another group that says we should take it very seriously. So, let’s kind of look at both of those arguments real quick. So, the camp that says, hey, don’t take this too seriously, this is not a big deal.
This is really a popular opinion right now. I know you’re like, are you serious? Have you been watching what’s going on? Jamie Dimon, who’s the head of JP Morgan and Warren Buffett and many others, I mean, these are the biggest, most successful people in the world. They say this is not a big deal. They say, don’t worry about it now, I have a little bit of a problem with that.
And obviously, I’m an expert in my own opinion. But here’s why they say that. They say, okay, look, Fitch downgraded it. So what? What you’re saying is that we can’t pay our bills and that higher rated countries are more reliable than us. Really? So, what you’re saying is that those triple-A companies, because the United States no longer has a triple-A like Canada, is more reliable than us, like Denmark, like Hong Kong.
So, Jamie Dimon said, okay, so Fitch, you’re saying that these countries are more reliable than us. Okay. That’s a stretch. So that’s you know, that’s their case. They also reference the reality that these credit rating agencies lost a ton of credibility in 2008 when the market crashed. You guys remember this in 2008. Seems like a long time ago, but they crashed.
Many of these mortgages that these rating agencies had as triple-A defaulted. I mean, they totally missed the mark in 2008. All of these highly rated debt institutions really, really, I want to say crash, but I mean, some of them crash, obviously, you know that. I mean, we talk about Lehman and all that, but many of them had problems just across the board.
And whether they crashed or defaulted or went bankrupt, many of these institutions were highly rated by the rating agencies. And so, I think the credibility of these rating agencies is still, I think, suspect. And so that’s why a lot of these major talking heads are like, we really don’t take these rating agencies seriously. And then they go on to say, okay, look, I know everyone’s scared about China.
Ooh, China. But you know, these Jamie Dimon’s and Warren Buffets of the world, you know, they might suggest in their argument that China still has a lower rating than the United States. So, the United States is still more reliable and paying back its bills than China. I’m just saying that. So, there’s the argument by the talking heads out there.
And I guess the smart money, as you might say, is that this is not a big deal. But I think most of middle America and most people that listen to this show aren’t in that camp. Most of us. And I think it’s rooted in our biblical faith because there’s a lot of scriptures about debt. The borrower is the slave to the lender.
I was actually reading some Old Testament text about not even charging interest to your brother if you lend them money. So, debt is talked about in our Judeo-Christian faith quite a bit, and it’s something that we tend to avoid. Or if we have to find ourselves in debt, we try to resolve it as soon as possible. And so that framework of life most of middle America takes very seriously.
And so, the situation that we’re in right now, doesn’t sit well. And that’s where I’m at. And then it starts with spending. I mean, the United States spends money on stupid stuff. I don’t know if you know this, but it takes $0.10. It takes $0.10 to make a nickel. Like, this is just a microcosm of stupid stuff.
And we know that there’s been a lot of spending on frivolous lawsuits that have been in multiples of tens of millions of dollars. I mean, we could go on and on about the spending issue, but if we just look at it from it, just like, okay, I’m just going to look at it really simply what we collect in revenues from taxes, $15,000 per year per person.
That’s how the math works. We spend 19,000 per year per person. So, any rational person, you don’t need a bunch of degrees realize that that’s a real problem. But if you look at the spending as a whole, it’s not necessarily the frivolous spending that’s the problem, although it’s just dumb, but it’s the real issue is Social Security, Medicare, Medicaid.
If you look at the way that we spend money, like the pie charts, a big chunk of money is in Medicare, Medicaid spending. And so how are we going to resolve that? There has been some bipartisan conversation about how to resolve it, not without some challenges. I think that it’s a political chess game right now. Nobody wants to go out there and say, yes, I’m going to raise taxes or I’m going to lower benefits.
And because obviously that voting public is going to eat you alive. That’s just the reality of it. But they’re going to have to do something. I’d suggest there’s two things that they’re probably going to do. I haven’t read the latest Congressional Budget Office suggestions. It’s usually a really boring read, and I might read it this year. I’ve read it the last couple of times.
But, you know, they have a cap on the amount of taxes that you’re assessed for Social Security. And they might, um, they might raise that cap. So, if you’re working and you look at your pay stub, a good chunk of that, about 6.2%, goes towards just Social Security, but it’s up to a certain income limit and they’ll raise that limit.
They will. The other thing that they might do, this is really a tricky one, is that if you don’t need your Social Security, you don’t get it or you get a reduced amount. Now they can do it another way. They can maybe not reduce the amount, they can just tax it. So, there’s several different ways they can go around this thing, but it’s called means-based testing.
And I’ve seen bipartisan support, both Republican and Democrat. If you don’t need it, then you get a less amount. So that’s concerning, obviously. But regardless, they’re just going to have to resolve this Medicare, Medicaid and Social Security thing. They’re just going to have to. That’s the biggest, biggest by far largest chunk of our spending as a country. So, what do you do in the context of all of this craziness?
First of all, thank you to Fitch for at least getting the conversation going. There needs to be some degree of wake-up call. This trajectory is just not sustainable. And so, thank you to Fitch for doing that. I hope some people start taking it very seriously and I hope we start making some progress before it’s really painful.
So, what should you do as an investor and as an American, frankly, an investor, a businessperson, a retiree, as a mom and dad, what do you do knowing that the government is not being a good steward of our money? What do you do? So, a couple of things. One, I think that, you know, the Roth 401ks, and IRAs, I think they have some more credibility.
I was thinking about my own personal planning. I was like, man, I probably should lean in even more Roth IRAs, because when you pull out the Roth IRA money in retirement, it is considered tax free money. So that’s a potential workaround for a means based tested system. So, think about that. If you don’t have any Roth IRAs or if you don’t have, you’re not putting money in your Roth 401K, you might want to start considering that that could be, I think, a good way to diversify your future tax situation.
So, you have a few levers to pull. Not knowing how they’re going to manage the Social Security issue. And the second thing is, I think we just focus on what we can control. I know this is oversimplification, but I seriously just can’t worry about things we can’t control, and I really just wouldn’t worry about it. I mean, I know people are putting bunkers in their backyard and they’re doing all kinds of stuff biblically.
You read in James and James 5, it says, you know, don’t hoard in the last days. Now, I could unpack that a little bit more and probably a whole new show. But I think we have to be careful that we just don’t go into this bunker in the backyard kind of mentality. But we have a responsibility to be not only good stewards of our money and resources, but also of the people that are in our lives.
So, I think you focus on what you can control and don’t worry about this with the exception of your voting, and make sure that you vote for somebody who’s going to be fiscally responsible. So those are the two things I would suggest as just an everyday American, and that’s kind of an executive summary of the situation. I’ll keep you posted as new information comes up.
But overall, I’m appreciative of it, just kind of slapping a few people around and saying it’s time to wake up. So here we go. All right, guys, thank you so much for tuning in today to
Retire in Texas. I haven’t ever asked you guys, but I am asking you now, would you do me a favor and will you rate this podcast? Will you put reviews, and will you share it with others?
And that’s just helpful to get this messaging out there. And I certainly appreciate it, I see the podcast numbers and they’re going up. You guys are listening, you guys are sharing it. So, I do appreciate that. And as always, I want to remind you, you think different when you think long term. Have a great day.
Additional Resources:
https://money.com/coin-costs-us-mint-solutions/
https://usafacts.org/state-of-the-union/budget/
https://www.wsj.com/articles/fitch-downgrade-us-credit-rating-4ad98230
https://worldpopulationreview.com/country-rankings/credit-rating-by-country
https://www.nationalpriorities.org/budget-basics/federal-budget-101/spending/
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