The pro-Biden media has pooh-poohed the significance of the surprise Fitch downgrade of U.S. creditworthiness to AA from AAA on long-term foreign currency default, calling it an embarrassment at worst.

But economist Steve Hanke, a Johns Hopkins University professor of economics whose knowledge of credit markets and monetary policy is extraordinary, says not so fast.

"Well, it is a big deal, because the interest cost on that debt will go up.  And that cost -- taxpayers will have to pay for it," he told videojournalist David Lin.

How big is it? Hanke has a summary:

The debt trajectory in the US is not sustainable. Right now, the US federal debt held by the public equals 98% of GDP. By 2053, the CBO expects that ratio will SURGE to a stunning 181%. No wonder Fitch downgraded the US's credit rating. https://t.co/zQG5lXRjKY

— Steve Hanke (@steve_hanke) August 5, 2023

He told Lin (edited slightly for brevity):

...So those are big numbers, but to get your head around the thing, look at the interest expense on that debt as a percent of the budget. Right now it's 10.3% and going up ... and in 30 years if things keep going the way they are going, interest expenditures will be 23% of the total budget. Now that's expenditures for nothing. They're just interest charges. So this irresponsible government spending has created these deficits and the deficits of course pile up, more and more debt, more and more debt, and that has to be financed with more and more interest charges being made against the taxpayers.

So this idea that you don't ever really have to pay your debt is ridiculous. You have to pay interest on the debt. Even if you don't advertise the debt, and don't pay it down, you have to pay interest on it. And as interest rates are going up, that and the absolute size of the debt means that the interest charges are going to be higher and higher. In 30 years, what if 25% of the total budget is taken up by interest? Getting nothing. So that's why the Fitch thing, and thinking about it -- it's not surprising. It's not a fatal knockout blow, it's like a black eye, it doesn't knock you out or knock you to the ground, but it's kind of embarrassing.

Fitch itself largely said as much in its own statement:

The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA'-rated peers over the last two decades that has manifested in repeated debt limit standoffs and last minute resolutions.

Could the U.S. ever default, Argentina-style?

Hanke said it could happen but it probably wouldn't. With the debt as a percentage of GDP going up in scary ways, he said he anticipated that there would be adjustments before it happened, to bring the debt as a percent of the GDP down. But of course, that could be wishful thinking, he added. He recommended that the U.S. adopt a Constitutional measure comparable to the Swiss constitutional system for managing debt -- where government expenditures couldn't go up any faster than the rate of growth in GDP and that over the short term, fiscal accounts would have to be balanced. You could have a deficit for a year or two, but it would have to be balanced by a surplus for a year or two. The Swiss voted by 86% for this system.

All other fixes, he said, were ad hoc.

Hear the whole excellent explanation of what is going on from Hanke, here.

Image: Screen shot from David Lin video, via YouTube