Moody’s recent downgrade of US government debt wasn’t only well justified — it was arguably long overdue. Despite America’s economic strength and the dollar’s global supremacy, the decision to cut the debt rating to AA1 was unarguable: America’s fiscal position is deteriorating, both relative to its history and to other countries. Crucially, there’s no political appetite to change course.

The numbers speak for themselves. America’s budget deficit stands at 6.4 per cent of GDP, a level typically seen only during wartime or severe recessions. This adds to a national debt rapidly approaching its historical peak, exacerbated by the Great Recession, the Covid-19 pandemic, and persistently high structural deficits. Startlingly, America’s net interest payments now roughly match the country’s mammoth defence budget. By 2035, Moody’s projects interest payments will consume 30 per cent of all tax revenue, up from 9 per cent in 2021.

True, America isn’t alone in having seen its debt to GDP ratio almost triple these past 18 years. Its jump from 35 to 97 per cent is practically identical to Britain’s own debt surge. The key difference is that all UK political parties still pay lip service to fiscal probity. Labour wants to reduce the headline deficit to about 2 per cent of GDP by the end of the decade. In contrast, Moody’s reckons America’s could grow to 9 per cent. Accurate or not, the US really stands out among OECD countries for lacking any meaningful fiscal rules or deficit targets.

America’s recent experience shows there’s no painless escape from this debt problem either. Debt levels match those seen immediately after the Second World War, but with no prospect this time of demilitarisation to slash spending. Robust economic growth hasn’t meaningfully improved the debt outlook, and even a burst of unexpected inflation provided temporary relief. Worse, automatic spending increases on healthcare and social security, driven by an ageing population, will blow up budgets further in the coming decades. You can’t “inflate away” commitments for hip replacements and inflation-proofed elderly benefits.

Yet Moody’s downgrade wasn’t really a reaction to these long-known economic realities. It was an indictment of America’s political paralysis. For years, economic forecasters have just assumed that, at some point, American politicians must become fiscally responsible, otherwise their models would crash. For example, analysts at Penn Wharton warned in 2023 that America had just two decades left to make its budget sustainable. Without substantial deficit reduction, either outright default or a burst of debt-fuelled inflation would then become inevitable.

Well, rather than heed that warning, a Republican governing trifecta is busy readying what President Trump calls “One Big Beautiful Bill” of tax cuts and spending plans that, if made permanent, would add another $5 trillion to a debt pile already projected to grow by $20 trillion through 2035. In other words, America’s sleepwalk towards default is hastening.

No wonder investors are re-evaluating their positions and selling off long bonds. As the legendary investor Ray Dalio noted this week, credit rating agencies like Moody’s focus on whether debt will actually be repaid. The greater risk is that “countries in debt will print money to pay their debts, causing bondholders to suffer losses from inflation”. This growing threat, coupled with America’s political dysfunction, helps explain why markets are demanding higher yields to lend long-term to Uncle Sam.

Finally, politicians are getting the reaction they deserve. For years, some commentators excused them, trying to pin America’s debt binge instead on “global imbalances”. Apparently, a foreign savings glut had pushed down borrowing costs, which somehow forced American politicians to run massive deficits to prop up the economy — as if fiscal recklessness was inevitable.

Well, in the past two years, real interest rates have surged — and instead of tightening their belts, American lawmakers plan to borrow yet more. That’s the real reason Moody’s finally cut America’s rating. When the political equilibrium is for ignoring clear market signals and basic arithmetic, what choice did they have?