US Credit Downgrade Sparks More of the Fighting It Warned About

Plus: The IRS pushes toward paperless processing ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ [The Fisc](   By Yuval Rosenberg and Michael Rainey Good evening. Former President Donald Trump is expected to be arraigned in a Washington, D.C., federal court tomorrow, but even as that important political drama plays out, lawmakers may be gearing up for another fiscal class as well. Here’s what’s happening. (TFT/iStockphoto) Fitch Downgrade Sparks More of the Political Strife It Warned About The downgrade of the U.S. credit rating from AAA to AA+ by Fitch on Tuesday has produced a range of reactions from politicians, economists and Wall Street analysts. Here’s a roundup of key points. Political finger-pointing aplenty: Democrats and Republicans took turns blaming each other for the downgrade, with the former focusing on the recent showdown over raising the debt ceiling, in which Republicans refused to raise the debt limit unless Democrats agreed to spending cuts. “The downgrade by Fitch shows that House Republicans’ reckless brinksmanship and flirtation with default has negative consequences for the country,” Senate Majority Leader Chuck Schumer said in a statement. “Republicans need to learn from their mistakes and never push our country to the brink of default again.” Senate Budget Committee Chair Sheldon Whitehouse, Democrat from Rhode Island, said there’s “a straight line from Republicans’ manufactured debt crisis to Fitch’s downgrade,” while Rep. Brendan Boyle, the top Democrat on the House Budget Committee, said, “Fitch’s decision to downgrade rests on the shoulders of Speaker McCarthy and the extreme MAGA Republicans who openly rooted for default.” Republicans charged that it was President Biden’s fault for refusing to negotiate at an earlier date. “When Fitch specifically cited the problem of ‘last-minute’ resolutions, they may as well have noted Biden’s refusal to negotiate with Republicans for months, while insisting on even more wasteful spending,” House Ways and Means Committee Chairman Jason Smith, a Republican from Missouri, told [Fox News](. The conservative House Freedom Caucus also blamed Biden, saying he “played politics with a possible government default.” They also indicated that they would push for more spending reductions during the budget process this fall. “The Fiscal Responsibility Act debt ceiling deal does not change our nation’s trajectory,” they [said]( on the social media site formerly known as Twitter. “It's time to end Washington’s addiction to spending, and we have an opportunity to begin that during the appropriations process.” A defense of the U.S. economy and the Biden administration: Citing a string of recent strong economic reports, Treasury Secretary Janet Yellen sharply criticized the downgrade. “Fitch’s decision is puzzling in light of the economic strength we see in the United States,” she said in prepared remarks for an event in Virginia. “I strongly disagree with Fitch’s decision, and I believe it is entirely unwarranted. Its flawed assessment is based on outdated data and fails to reflect improvements across a range of indicators, including those related to governance, that we’ve seen over the past two and a half years. Despite the gridlock, we have seen both parties come together to pass legislation to resolve the debt limit, as well as to make historic investments in our infrastructure and American competitiveness.” Yellen added that the Fitch move “does not change what all of us already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.” Questions about how much it really matters: JPMorgan Chase CEO Jamie Dimon said the downgrade “doesn’t really matter that much” because borrowing costs are determined in the market, not by ratings agencies. Dimon questioned the idea that countries that rely on the U.S. for security and stability, such as Canada, will have higher credit ratings. “To have them be triple-A and not America is kind of ridiculous,” he [told CNBC](. “It’s still the most prosperous nation on the planet, it’s the most secure nation in the planet.” Dimon also called on lawmakers to “get rid of the debt ceiling,” which causes unnecessary uncertainty for investors when it’s used as a hostage in budget negotiations. A stock market selloff: Stocks fell on Wednesday, with the S&P 500 dropping 1.3%, the Dow Jones Industrial Average down nearly 1% and the NASDAQ tumbling 2.1%. Although it’s never entirely clear why stocks move the way they do on any given day, the narrative Wednesday was that boosted borrowing plans from the Treasury Department and the Fitch downgrade were the immediate cause of the market decline. Treasury said it plans to increase its sale of long-term debt next week to a total of $103 billion, up from the previous estimate of $96 billion. Bond investors on Wednesday pushed U.S. Treasury yields higher, with the 10-year hitting 4.12%, its highest level since November 2022, while the 30-year hit 4.2%, a nine-month high. “The timing of the downgrade is a bit weird, but the fiscal situation in the U.S. is concerning,” said Tracy Chen, a portfolio manager at Brandywine Global Investment Management, per [Bloomberg](. “And this downgrade happens amid the Treasury refunding, so we might see term premium rising and curve steepening.” Still, if fears are rising about instability in the global financial markets, that could increase demand for Treasuries as investors rush to buy safe assets — which would likely reduce rates. “U.S. Treasuries remain the preeminent safe haven asset with no practical substitute,” Ed Al-Hussainy, a global rates strategist at Columbia Threadneedle, told Bloomberg. A renewed focus on the national debt: Whatever the short- and long-term implications may be, the downgrade does draw attention to the large and ever-increasing national debt, and the rising cost of servicing that debt as interest rates rise. Some analysts speculated that the debt could ultimately result in higher taxes that reduce income and slow the economy. “Ultimately, if the deficit isn’t contained, taxes will be raised to the point that the engine of the US economy — the all-important consumer — will have considerably less discretionary income,” said Quincy Krosby, chief global strategist for LPL Financial. The deficit hawks at the Committee for a Responsible Federal Budget said the downgrade should serve as a “wake-up call” for lawmakers to do something about the nation’s fiscal trajectory. “As Fitch points out, our national debt is high, deficits are rising rapidly, interest costs are consuming an increasing share of revenue, and we have numerous major fiscal challenges on the horizon,” the group said in a statement. “Whether one agrees with Fitch’s decision to downgrade the United States government or not, we are clearly on an unsustainable fiscal path. We need to do better.” Worries about more strife ahead: Ian Shepherdson, chief economist of Pantheon Macroeconomics, pushed back against the idea that the U.S. may not be able to afford its interest costs, and instead emphasized the political nature of the downgrade. “This is not an argument that the U.S. won’t be able to make payments,” Shepherdson told [Bloomberg](. “The point they’re making is more about governance issues. It’s the potential risk that you’ll get your payments late.” Richard Francis, a senior director at Fitch Ratings, told CNBC on Wednesday that politics did indeed play a major role in the downgrade. Fiscal concerns are important, but so too is the political polarization in the U.S. that produced not just the showdown over the debt ceiling but also the attempted insurrection on January 6, 2021. “You have the debt ceiling, you have Jan. 6. Clearly, if you look at polarization with both parties … the Democrats have gone further left and Republicans further right, so the middle is kind of falling apart basically,” Francis [told CNBC](. Francis added that the U.S. could win back its top rating by dealing with its major social programs, which need more revenue, with the goal of reducing deficits and stabilizing debt. Suspending or even eliminating the debt ceiling would also be beneficial, Francis said. Hope for a decline in political strife is hard to come by, however. With House Republicans threatening to push for lower spending levels in 2024 that those in the budget agreement reached in June, the potential for more brinksmanship this fall is growing, with many analysts expecting to see another government showdown at some point. Speaking about the likely budget battle ahead, Marc Goldwein of the Committee for a Responsible Federal Budget told Bloomberg that the fight may provide another example of the inability of lawmakers to work together productively. “I worry it is going to inflame the chances of a shutdown and prove Fitch right,” he said. Number of the Day: 12 Bloomberg’s Danielle Moran points out that [12 states]( now have higher credit ratings than the federal government does after Fitch Ratings knocked the U.S. sovereign credit grade down to AA+. Bloomberg’s count was based on whether states have AAA or equivalent ratings from at least two of the three rating agencies: Moody’s Investors Service, S&P Global Ratings and Fitch. Eleven states — Delaware, Florida, Georgia, Maryland, Minnesota, Missouri, North Carolina, Tennessee, Texas, Utah and Virginia — have top ratings from all three services. South Carolina has two top ratings. Ohio and Washington have one top rating each. Yellen Hails ‘Massive Transformation’ as IRS Pushes to Go More Digital Taxpayers will be able to digitally file all correspondence with the Internal Revenue Service by 2024, Treasury Secretary Janet Yellen announced Wednesday. She added that the agency is committing to digitally process 100% of returns filed by paper and half of all paper correspondence by 2025. The agency is also aiming to digitize the roughly 1 billion historical documents in its catalog, which cost around $40 million a year to store. In a visit to an IRS facility in McLean, Virginia, Yellen said the changes mark a “massive transformation” for the IRS as part of modernization efforts funded by the Inflation Reduction Act signed into law last year. “Thanks to the IRA, we are in the process of transforming the IRS into a digital-first agency,” Yellen said in her prepared remarks. “This ‘Paperless Processing’ initiative is the key that unlocks other customer service improvements. It will enable taxpayers to see their documents, securely access their data, and save time and money. And it will allow other parts of the IRS to rely on these digital copies to provide faster refunds, reduce errors in tax processing, and deliver a more seamless and responsive customer service experience.” Congressional Republicans have sought to roll back the additional IRS funding provided under the Inflation Reduction Act and to cut the agency’s annual budget. Yellen called on lawmakers to “provide stable and sufficient annual appropriations for the IRS” to continue its progress. And she defended the agency’s efforts to ramp up enforcement on corporations and the wealthy. “I believe that these improvements are a matter of smart economics,” she said. “After all, we expect our fair enforcement effort to more than pay for itself – reducing our deficits by hundreds of billions of dollars over the next decade. But I also believe it is a matter of fundamental fairness. It’s essential that when regular taxpayers accurately file their taxes, they know that other Americans are also doing the same.” Yellen noted that the agency has recovered about $38 million in taxes by closing about 175 delinquent tax cases involving millionaires in recent months. --------------------------------------------------------------- Send your feedback to yrosenberg@thefiscaltimes.com. And please encourage your friends to [sign up here]( for their own copy of this newsletter. --------------------------------------------------------------- Fiscal News Roundup - [Credit Downgrade Shocks Biden Aides, as More Debt Fights Loom]( – Washington Post - [Lawmakers Express Outrage Over Surprise Fitch Decision]( – The Hill - [Fitch Triggers New Jan. 6 Political Battle With U.S. Rating Cut]( – Politico - [Fitch’s US Downgrade Is Stoking the Very Fight It Warned Against]( – Bloomberg - [Fitch Move Spotlights US Debt Risk as Recession Fear Fades]( – Bloomberg - [Treasury Yields Hit 2023 Highs]( – Bloomberg - [What Analysts Say About US Credit Downgrade by Fitch]( – Bloomberg - [Medicare Could Save Billions Covering Obesity Meds: Study]( – Axios - [Crypto Rules Delay Puts Billions in Tax Revenue at Risk]( – Wall Street Journal - [Veteran Banker Jeffrey Schmid Picked to Lead Kansas City Fed]( – CNBC - [Amid Signs of a Covid Uptick, Researchers Brace for the ‘New Normal’]( – New York Times - [NIH Taps Jeanne Marrazzo to Succeed Fauci as Infectious-Disease Chief]( – Washington Post - [Alabama Women's Health Researcher Picked to Head NIH's Infectious Disease Work]( – Axios - [AI-Supported Mammogram Screening Increases Breast Cancer Detection by 20%, Study Finds]( – CNN - [Republicans Want to Plant a Trillion Trees. Scientists Are Skeptical.]( – Washington Post Views and Analysis - [The Odd Logic to Fitch's U.S. Debt Downgrade]( – Neil Irwin, Axios - [Tight Labor Market Stands in the Way of the White House Manufacturing Push]( – Emily Peck, Axios - [Inflation Pierces a Classic Defense of US Creditworthiness]( – Jonathan Levin, Bloomberg - [Bidenomics Is a Battle Between Efficiency and Resilience]( – Claudia Sahm, Bloomberg - [Health Care’s Intertwined Colossus]( – Krista Brown and Sara Sirota, America Prospect - [Taxing Remote Workers: “Convenience,” Conflict and the Courts]( – Renu Zaretsky, Tax Policy Center - [AI Improves Breast Cancer Detection. But Will That Save Lives?]( – Lisa Jarvis, Bloomberg Copyright © 2023 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website or through Facebook. The Fiscal Times, 399 Park Avenue, 14th Floor, New York, NY 10022, United States Want to change how you receive these emails? 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