The Big Beautiful Downgrade

How the U.S. Lost Its Last AAA Credit Rating—And Why It Matters

On Friday night, after markets closed, Moody’s delivered a gut punch few were ready for: the U.S. government’s credit rating has been officially downgraded, stripped of its coveted AAA status. From Reuters:

NEW YORK, May 16 (Reuters) - Moody's on Friday downgraded the credit rating of the United States by a notch to "Aa1" from "Aaa", citing rising debt and interest "that are significantly higher than similarly rated sovereigns."

Rising debt and interest you say? Sounds like Moody’s is finally catching on too.

Now, technically, a downgrade means a country should face higher borrowing costs. In reality though, for large, wealthy nations, these ratings rarely move the needle.

France, for example, has a lower AA rating yet still manages to borrow at fairly modest rates. Norway, on the other hand, holds a spotless AAA rating—but typically ends up paying more.

So, what makes this downgrade significant?

It matters for two key reasons, both of which I’ll break down below. Let’s start with…

Breaking the Collective Delusion

For decades, major players in global finance have operated under a kind of collective delusion about the U.S. government’s fiscal health. The media, Wall Street, politicians, and even credit rating agencies all maintained the fiction that America’s finances posed no real concern. You could call it a “too big to fail” doctrine—just on a country level.

But as the national debt surged from $16 trillion to $26 trillion, and then from $26 trillion to over $36 trillion in just a few short years, something started to crack.

In 2011, S&P became the first major rating agency to break ranks when it downgraded the U.S. long-term credit rating from AAA to AA+. This was a historic move that marked the first time the U.S. had ever lost its top-tier status. Fitch followed more than a decade later with its own downgrade in August 2023 (citing rising deficits and political dysfunction). Moody’s didn’t go that far at the time—but it did cut its outlook to “negative” in November 2023.

Now, these downgrades didn’t come out of nowhere. Normally, credit rating agencies are notoriously cautious when it comes to downgrading large, wealthy nations. They tend to be lenient and avoid rocking the boat for as long as possible.

But even they couldn’t ignore the steady erosion of global confidence in America’s fiscal discipline.

Just look at China.

The world’s second-largest economy used to be our top debt buyer. But by 2019, it had ceded the position to Japan. And in the years since, China's appetite for U.S. debt fell off a cliff.

In fact, they’ve sold off roughly $283 billion in U.S. Treasuries between January 2022 and March 2025. That’s a near-30% drop. Most recently, they slashed their holdings by nearly $19 billion in March alone.

But it’s not just China. Throughout 2023 and 2024, a growing number of foreign entities actively diversified away from U.S. dollar assets at an unprecedented pace. Even traditional allies like Belgium and Switzerland quietly sold off billions in Treasuries.

Since foreign nations hold roughly 25% of the total outstanding U.S. federal debt—not including the many trillions in additional agency debt they also own—their steady retreat, paired with the relentless rise in deficits and interest costs, became a wake-up call for the rating agencies. Moody’s was simply the last to catch up.

Big, Beautiful...

From my decades-long experience watching financial markets, I’ve learned one thing: everything happens for a reason. Very little—if anything—is ever truly coincidental.

So when I received the news about the credit downgrade in my inbox, I had to wonder: Why now?

Did Moody’s really just pick a random Friday in May to drop this bombshell? Or is there something else going on?

My money’s on the second option.

Here’s my theory: Moody’s wanted to send a signal to Congress—slow down on the “Big Beautiful” bill.

As you may know, the “One Big Beautiful Bill Act” is Trump’s flagship legislative initiative—an effort to extend and expand the 2017 tax cuts. It includes big tax breaks like scrapping taxes on tips and overtime, raising the standard deduction, and boosting the child tax credit. It also adds new programs like a “MAGA savings account” for kids born during his term.

Notably, the bill was up for a key vote in the House Budget Committee that same Friday—the day Moody’s dropped its downgrade.

Note: The “One Big Beautiful Bill” didn’t clear that day, but after some weekend wrangling, it squeaked through Sunday night by a 17–16 vote.

Now, I’m all for tax cuts. I truly believe the “temporary” income tax introduced in 1913 is one of the biggest injustices ever perpetrated on the American public.

But I also have to be a realist—the U.S. government is all but bankrupt. And while I’d like to believe there’s a bigger plan at play, I can’t ignore the numbers.

Consider this…

In 2021, 9% of federal revenue went to interest on the debt. By 2024, it was 18%. Moody’s projects that by 2035, nearly one-third of all federal revenue will be swallowed up by interest payments alone.

Note: The typical AAA-rated nation has less than 2% of revenue going toward interest.

But even that scary projection sounds overly optimistic.

Keep in mind, interest on the debt is already north of $1 trillion—more than the country spends on its entire military.

Meanwhile, the Congressional Budget Office (CBO) projects a staggering $21.8 trillion in total deficits by 2035. Factor in the billions needed to shore up insolvent Social Security, plus an estimated $4.3 trillion from the “Big Beautiful” bill (based on the midpoint of current projections), and you’re looking at a budget gap that could easily top $30 trillion.

That’s an absurd amount of money… and it’s essentially all new debt.

Now, again, I’m not against tax cuts—far from it. But it’s important to recognize that this isn’t 2017. The debt is $16 trillion higher than it was back then. Global confidence in U.S. credit just isn’t what it used to be. De-dollarization is in full swing. I could go on... but you get the picture.

The bottom line is, I’d sleep much better if the President were championing fiscal restraint and calling on Congress to get serious about spending. But that’s not what’s happening.

Regards,

Lau Vegys