In a financial landscape often dominated by panic, Nominal News delivers a sobering counter-narrative to the recent credit rating downgrade of the United States. While the market reacts to the symbolism of a lost AAA rating, the piece argues that the underlying economic reality tells a different story: the US is not on the brink of collapse, but rather navigating a complex fiscal environment where borrowing remains economically rational. This distinction is vital for investors and policymakers who need to separate the noise of rating agency politics from the mechanics of sovereign debt sustainability.
The Mechanics of the Downgrade
The piece begins by contextualizing the May 16, 2025, decision by Moody's to lower the US credit rating from Aaa to Aa1. Nominal News reports, "government debt and interest payment ratios [have gotten] to levels that are significantly higher than similarly rated sovereigns." This is the agency's primary justification, yet the commentary immediately pivots to explain why this technical adjustment matters less than the public fears. The article notes that credit ratings are fundamentally "a measure that confers certain information about the riskiness of default," but crucially, they are also "somewhat of a subjective opinion."
This subjectivity is the piece's first major insight. It reminds readers that while agencies like Fitch, Moody's, and S&P hold immense power—acting as the "Michelin stars" of the financial world—their judgments are not infallible laws of physics. The editors highlight the historical baggage of these institutions, noting the controversy surrounding their role in the 2008 financial crisis when they "failed to estimate the risk properly" on complex mortgage-backed securities. By invoking this history, the piece suggests that the current downgrade should be viewed with skepticism rather than immediate alarm.
"Although, there are countries and companies that are now rated higher than the US... investors can disagree with the ratings and still choose to see US debt as less risky."
This point is well-taken. The market's reaction often diverges from the rating agencies' models. If the global community continues to treat US Treasuries as the ultimate safe haven, the downgrade becomes a bureaucratic footnote rather than a financial crisis. The piece effectively reframes the event not as a loss of trust, but as a shift in the mathematical thresholds used by private firms.
The Economics of Debt
Moving beyond the rating drama, the commentary dives into the core economic question: is the US debt burden actually sustainable? Nominal News argues that the popular metric of Debt-to-GDP is "not actually very informative about the ability of a country to keep up with its debt payments." Instead, the piece leans heavily on the work of economist Olivier Blanchard, who revolutionized the debate by pointing out that for developed economies, the cost of borrowing is often lower than the growth of the economy.
The article explains this dynamic clearly: "if the interest rate on the debt is lower than the return gained by spending this debt, the debt would have no negative fiscal impact." This creates what economists call a "free lunch," where the government can borrow money to fund investments without increasing the net burden on future generations. Nominal News cites research by Mian, Straub, and Sufi (2021) to suggest that the US currently sits in this favorable zone, with nominal borrowing rates below nominal GDP growth rates.
Critics might argue that this "free lunch" scenario is fragile and dependent on sustained economic growth that may not materialize in a slowing global economy. If interest rates rise faster than GDP, the math flips, and debt servicing costs could spiral. However, the piece counters this by noting that even if the debt burden grows, the US has two clear paths to resolution: a one-off tax increase or a default. It dismisses the latter as unlikely and frames the former as a manageable political challenge rather than an existential threat.
"So my answer to the question is, I do not know what level of debt, in general, is safe. Give me a specific country and a specific time, and I will use the approach above... to give you my answer. But don't ask me for a simple rule. Any simple rule will be too simple."
This quote from Blanchard serves as a powerful rebuttal to rigid fiscal rules like the EU's 60% debt-to-GDP cap. The piece argues that such arbitrary limits can be "too restrictive" and may actually harm economic welfare by preventing productive investment. The editors suggest that the US sustainable fiscal limit could be as high as 220% of GDP, far above the current 120%.
The Verdict on Risk
The article concludes by synthesizing these points into a clear verdict: the downgrade is more a reflection of political gridlock and concerns about future spending cuts than an imminent risk of default. Nominal News asserts, "From an economic and fiscal perspective, there appears to be no risk of the US defaulting on its obligations in the foreseeable future." The piece posits that the US should continue to borrow if the funds are directed toward "productive investments," as this yields a net positive return for the economy.
The coverage effectively strips away the fear-mongering often associated with credit downgrades. By focusing on the relationship between interest rates and growth, the editors provide a more nuanced view of fiscal health than the headline-grabbing "AA+" rating suggests. The argument holds up well against the backdrop of current economic data, though it relies heavily on the assumption that the US can maintain its growth trajectory without triggering inflationary spikes that would force interest rates higher.
"It appears that the credit downgrade by Moody was more driven primarily by concerns that some of the newly proposed spending/revenue cuts may not boost growth as much."
This observation shifts the blame from the US economy's fundamental weakness to the potential policy missteps of the executive branch. It suggests that the rating agencies are worried about the direction of fiscal policy, not the capacity of the state to pay its bills.
Bottom Line
Nominal News provides a necessary corrective to the panic surrounding the US credit downgrade, grounding the discussion in the reality that debt sustainability is a function of growth and interest rates, not just a letter grade. The piece's strongest asset is its refusal to accept the rating agencies' narrative at face value, instead offering a sophisticated economic framework that suggests the US is still a safe bet. However, the argument's vulnerability lies in its optimism about future growth; if the economy stagnates while interest rates remain high, the "free lunch" could quickly turn into a costly meal. Readers should watch not the rating agencies, but the trajectory of US GDP growth relative to borrowing costs.