Fitch Ratings downgrade: Is panic warranted in the markets?

economictimes.indiatimes.com:

Now the question is do we need to panic now? Is a rating downgrade the end of the world? Let us first understand the main reasons behind the rating downgrade by Fitch. They cited three main reasons behind credit downgrade. 1.

Rising Debt 2. Decline in governance standards 3. Potential of a recession Let’s deal with each of these reasons one by one.

While classical economists would think rising debt is bad, there is another set of economists who believe in Modern Monetary Theory (MMT). Their belief is that government deficits and national debt don't matter much as long as the country printing it is the world’s reserve currency. Instead of relying on tax revenue or borrowing money from the markets, the country can simply create its own money.

Countries with fiat currency don’t have to restrict themselves to a particular deficit number since they have a monopoly over money. Apart from this US government’s deficit is the US households and company’s surplus. A surplus isn’t bad after all for them.

While MMT is still a net concept, it remains to be seen whether it stands true to the test of time. Nevertheless, the US debt has been rising for several decades and still US is the world’s leading economy. Downgrading the US simply downgrades the benchmark for everyone else.

Next is the decline in governance standards. Another point noted by Fitch is the repeated standoffs between Democrats and Republicans regarding the debt ceiling. No matter which government is in power but last-minute resolutions lead to uncertainty.

I have written about this earlier in this column that the US debt ceiling is nothing more than political arm-twisting. The US debt ceiling has been raised 78 times since the 1960s. The debt ceiling is just like the