The US has just received an unwelcome debt-rating downgrade, and it’s got prominent business figures, including the “Shark Tank” stalwart Kevin O’Leary, also known as Mr. Wonderful, sounding the alarm.
“Investors, brace for impact,” O’Leary cautioned on a recent Fox News appearance. “A downgrade to the US economy, which is what just happened, means we’re seeing dwindling faith in the US dollar and the US Treasury bill. Let’s face it; there’s no silver lining to this news.”
On Tuesday, Fitch Ratings slashed the country’s long-term credit rating from AAA to AA+, putting a spotlight on the nation’s governance issues, such as the debt ceiling standoff, and its deficit and debt trends.
O’Leary didn’t mince words when he said, “It boils down to debt and the capability to repay it. As the government increases deficit spending, rating agencies will scrutinize the quality of that debt more rigorously.”
This downgrade is the second one the US has faced, the first being S&P Global’s downgrade in 2011. This current rating dip, according to O’Leary, could make sovereign wealth funds reconsider their dollar holdings, which comprise a significant chunk of their liquidity. The question they may be asking themselves is whether further downgrades are on the horizon.
The impact of this downgrade isn’t limited to the realm of macroeconomics; it also hits home for the average American consumer. A lowered rating means a higher borrowing cost for the US, exacerbating federal deficit spending and making loans more expensive for everyone.
“Picture this scenario at your dinner table. The interest rate on your car loan just jumped from 5% to somewhere between 7% and 9%. That’s going to leave a dent in your wallet,” O’Leary stated. “It’s a given. The cost of your loans, your borrowing, your mortgage, they’re all set to rise.”
However, not all financial heavyweights echo O’Leary’s apprehensions. Some Wall Street insiders have shrugged off Fitch’s downgrade. Goldman Sachs stated it “should have little direct impact on financial markets.” Meanwhile, JPMorgan CEO Jamie Dimon and Allianz’s Mohamed El-Erian seem nonchalant, with El-Erian noting that the downgrade “is more likely to be dismissed than have a lasting disruptive impact on the US economy and markets.”
Whether you align with the alarmists or the dismissers, this downgrade presents an unignorable shift in the landscape of American economics, putting the resilience of the US dollar and the faith of investors to the test.