Insights, The Bridge
Jason Hsu, Ph.D.
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This following article was first published to
Jason Hsu’s LinkedIn newsletter, The Bridge.
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The S&P downgraded the US credit rating in 2011. Then, in 2023, Fitch followed suit. Finally, Moody’s pulled the trigger on May 16, 2025. Their decision followed a review of the latest White House proposal—code name “One Big Beautiful Bill”—adding $3.3T in new debt over the next 10 years.
For context, the stock market dropped 7% after the S&P downgrade. The Fitch downgrade led to a more muted 2.3% decline. This time, the stock market didn’t flinch—but the bond market showed irritation, with the 30-year yield rising above 5%.
But should you be concerned?
The 2025 budget, passed in April, already entails a $1.9T deficit this year. Total debt stands at $36.7T. What’s another $0.33T per year, incrementally?
Whether you like or dislike the Trump administration, this has little to do with Trump. If President Trump doesn’t spend more, we believe the next POTUS will.
Who would stop the music and spoil the party? And to what end? Who are we really hurting with all this debt—debt we neither plan nor need to repay?
To be sure, the US would not actually default on its debt! US debts are issued in USD. The US is uniquely skilled at manufacturing the USD—that is our biggest comparative advantage, after all! We can always print more USD to pay.
We don’t believe the credit downgrading is about “US default risk.” It warns the decline in the value of the dollar—driven by ever larger government bureaucracy and worsening efficiency. We believe the math of currency debasement is straightforward.
When the state bureaucracy doles out financial wealth through pork and welfare—often creating more wealth for the administrative machine than the recipients of the welfare—we find no corresponding real production occurs. As government grants wealth, it essentially gives consumption rights without earned contribution. This usurps the wealth that other American workers have earned.
On the other hand, if government spends wisely on critical infrastructure, education or research, the resulting productivity gain is deflationary. For that reason, good government policy often drives strong USD.
In downgrading the US, the rating agencies signal their judgment: federal spending is increasingly wasteful, and the expanding role of government risk crowding out the private sector. A higher inflation and a weakening USD is therefore the future.
Before we get too far, let’s be absolutely clear, when economists talk about “printing money,” they don’t mean the actual production of the dollar bills by the Bureau of Engraving and Printing to replace worn out bills.
In reality, when we say the Fed “can print money” we mean it is able to borrow, at will, an unlimited amount of money from the big banks, which hold the collective savings of Americans. The Fed also gets to “choose” the rate it borrows at and when it repays the debts.
With potentially infinite access to money, the Fed is the lender of last resort—not just to troubled banks during financial crises but to the US government when other lenders are reluctant. When push comes to shove, the Fed can and always has “bailed” out the spending addiction of our political rulers.
Thus, the US government cannot technically default on its debt servicing. When facing maturing debts, it simply issues new bonds, which the Fed stands ready to buy with its unlimited credit card! The government’s debts and interests are easily rolled over.
Once you understand the mechanism, you shouldn’t be surprised that the government has $36.7T in debt going on $40T. With unlimited credit and infinite refi—you too will owe $36.7T.
Technically, the Fed is independent. But its chairman and board of governors are appointed by the POTUS. While the POTUS can’t fire a Fed Chair, he certainly has leverage.
Frankly, no one is appointed the Fed Chair without a track record of having “played ball” well. Counting on the Fed to be the adult in the room—that it will discipline politicians by withholding funding for pork and welfare—is idealistic.
Argentina has had a long list of short-lived Central Bankers. It most certainly is not because they repeatedly pick bad economists, who can’t manage inflation. He, who refused to print to fund the president, didn’t survive long on the job.
Let’s be honest, our two political parties are in collusion to never balance the budget. Sadly, neither the debt ceiling nor the Fed independence has credibility in stopping our political rulers from spending more.
The government’s unlimited credit card is backed by the collective balance sheet of all Americans. The tipping point comes when liabilities exceed assets.
The press often cites the US debt-to-GDP, now 130% ($36.7T/$28T). But comparing debt to income misses the broader picture. A better metric is debt-to-wealth.
US national wealth is estimated at $170T. With annual income of $28T and tax receipts of $5T, the government spends $7T—resulting in a $2T deficit. Households save about $1T per year.
Terrifyingly, the government spends $1T more than we collectively save. Thankfully, rising asset values (stocks and real estate) have offset this imbalance.
The US debt-to-wealth ratio is about 20%. For comparison:
Thirty years ago, US government debt was $3.6T. Today, it’s $36.7T. But national wealth also rose tenfold, from $17T to $170T. Debt-to-wealth ratio is unchanged at ~20%.
We think some body fat is fine—necessary, in fact. But we shouldn’t be obese. At 20% “body fat,” we’re tolerable. But we should be ever vigilant regarding the trajectory.
For now, there is, perhaps, an organic awareness—a built-in restraint that keeps the government from driving the economy into ruin.
A sensible parasite doesn’t kill its host.
Let me prove to you that the government deficit is not the primary concern.
Let’s tax an extra $2T to eliminate the US budget deficit. However, we fund the exact same government expenditure—including all the same waste, welfare, and pork. Have we solved the real problem? Economic theory would predict similar inflation and growth drag.
The question isn’t how we fund inefficiency—it’s whether the inefficiency itself is acceptable.
The government invests in schools, infrastructure, basic scientific research, law and order—things which aren’t naturally undertaken by private for-profit companies. However, most people suspect that a substantial amount of the budgeted spending is wasteful: bloated welfare state and pork.
Looking naively at our deficit would misguide us on the bigger problem: the government—this inefficient non-profit entity has grown from an iguana to a Komodo dragon. If we aren’t careful, it could become Godzilla.
Japan, UK, and the US run government deficits of 3.5%, 5%, and 6% of GDP, respectively. The US ranks poorly here. Deficits mislead you here. Let’s look at true government imposition:
In terms of government footprint, the US still looks relatively reasonable for now!
At its worst, Greek government spending hit 70% of GDP. Argentina peaked at 140% and averaged 80% until Milei brought it below 40%.
Do not let deficits and debt—which are financing problems—distract you from the real problem. In our opinion, good firms don’t fail because they choose to finance their bad projects with external debt instead of internal equity capital. Good firms fail because they keep funding failing divisions.
Ironically, a large deficit—a visible warning sign that forces public awareness—might help. It reminds politicians: the public won’t pay more taxes to fund bloated programs.
What can we do? Perhaps not much—except hope.
A well-behaved parasite coexists with its host. Argentina has shown what happens when that balance is broken. The host dies. So does the parasite.
For now, for the US, there is no threat of bankruptcy to deter government spending. We predict Moody’s or the “bond vigilante” will, in due course, be overruled by the Fed, who ultimately serves the US government. To be sure, pork and welfare will keep flowing. The parasite is still mindful not to kill the host.
Back to the original question: Who are we really hurting? Wise men have said in different tongues and in different words: Life is not fair. Get over it. If you are a red blood cell or T-cell, simply be glad that the body will live and even thrive, despite it all.
Disclosure: This article contains opinions which are subject to change without notice. The reader should not construe these opinions as a recommendation to invest in any security or as investment or financial advice.
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