O'Leary Ventures Chairman Kevin O'Leary joined "America's Newsroom" to break down the downgraded U.S. credit rating and why it should concern all Americans and their wallets.
KEVIN O'LEARY TO TEACH COLLEGE STUDENTS ABOUT BUD LIGHT'S 'IMPOSSIBLE TO DREAM' LOSSES
KEVIN O'LEARY: There is no way to sugarcoat this at all. It's bad. And I'll tell you how you measure it's bad. Basically, when you downgrade the U.S. economy, which is what this downgrading is, you are losing a little faith in the U.S. dollar and the U.S. Treasury bill because the default currency of the world, defined by every commodity priced by U.S. dollars, is the good faith of the U.S. government and the whole world. Trust it. Most sovereign funds keep the majority of their liquidity in U.S. dollars. That got hurt 24 hours ago because now you start to ask yourself, Well, where is this going? A downgrade from AAA to AA, does it go to single? Now, if you're a sovereign wealth fund, you start to put that in your mind. And the bottom line for you and me is the cost of capital goes up. In other words, what it costs for us to borrow money to fund the government and deficit goes up. No sugarcoating that.
Now, how does this actually affect the next 24 months? Well, let me explain. Think about the CHIPS Act and the Inflation Reduction Act. We're printing billions of dollars. Government claims it has merit. It's important to do this. But at the same time, that's just a lot of spending, and that increases the deficit. And that's why Finch did this. They downgraded it. And I wouldn't say it was the two bills that caused the camel's back to be broken, but it was enough for them to say, OK, I've seen enough now for me and you or anybody. The kitchen table in America, your car loan just went up from five to somewhere between seven and 9%. That's not going to help. So the cost of your loan and your borrowing and your mortgage going up, period.
Fitch announced Tuesday it has officially downgraded the United States' long-term foreign-currency issuer default rating to "AA+" from "AAA," saying the downgrade "reflects the expected fiscal deterioration" and the nation's heavy debt burden.
The ratings agency pointed the America's "erosion of governance," rising deficits, and tightening by the Federal Reserve. It also said its expects the U.S. economy to slip into a mild recession in the fourth quarter.
U.S. Treasury Secretary Janet Yellen issued a statement pushing back on Fitch's move, saying the rating agency was using old data and arguing conditions have improved under the Biden administration.
Investors use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets. Generally, the lower a borrower's rating, the higher its financing costs.
The agency also said it expects the US federal deficit to grow from 3.7% of GDP in 2022, to 6.3% of GDP in 2023.
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Fox Business' Breck Dumas contributed to this report.
