How times have changed. Back in August 2011, when the accumulated U.S. federal debt was under $15 trillion and Congress was debating how high to raise the debt ceiling, Standard & Poor’s cut their rating on U.S. Treasury debt a notch, from their highest rating (AAA) to AA, and the market panicked.

The S&P 500 fell 6.7% the next day and gold soared, rising 20% in about a month. This was reminiscent of the dramatic reaction to President Richard Nixon taking the U.S. off the gold standard exactly 40 years earlier.

But 10 years later, with the S&P debt rating still at AAA, a second agency (Fitch) lowered its rating of U.S. debt a notch, and the stock market yawned. There was no meaningful reaction while gold began its long and quiet ascent from around $1,800 to its current levels around $3,200 per ounce.

On Friday, May 16, after the stock market closed, the third and final rating agency (Moody’s) lowered its Treasury credit rating from the top level by the same single notch and gold rose while the stock market shrugged off the news.

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This reflects an honest reaction from gold traders compared to shocking complacency from the rest of the world. Stock and bond traders do not see the catastrophe of trying to fund $37 trillion in debt, rising by $2 trillion each year, with a series of bond auctions funding America’s rising debt at higher interest rates at each auction. At some point, bond buyers will demand even higher interest rates, pushing the service on the U.S. debt to stratospheric levels. This is one reason for the debt downgrade by major rating agencies.

During the week of May 12th, we reported on the bond auctions coming up this year. There are also existing bond renewals. About one-third ($9.3 trillion) of all existing debt held by the public is scheduled to mature between April 1, 2025, and March 31, 2026, according to the Peter G. Peterson Foundation. More than $3.1 trillion of the debt set to roll over during this period was last issued two or more years ago, so it will probably need to be reissued at higher rates. “For those looking for a signpost to tell us when to stop adding to our national debt, they should look no further than Moody’s downgrade,” said the CEO of the Peterson Foundation.

To demonstrate the difference between the stock market’s most recent casual reaction to Moody’ debt downgrade and the reaction to the first downgrade by S&P in 2011, here is part of our Metals Report of August 15, 2011:

Last week, the Dow Jones Industrial Average gained or lost at least 420 points four days in a row … but the net result was a 17% drop in the major averages in just two weeks, July 25 to August 8. This shook the confidence of many stock investors, driving them into the arms of gold.  When the stock market reached its bottom on Wednesday, gold reached its peak, $1818 per ounce but then the regulators stepped in to “pop” the gold bubble and bring traders back into the stock market on Thursday and Friday.

Adding to the stock market rescue team, Ben Bernanke sounded like a market savior last Tuesday when his Federal Open Market Committee (FOMC) said that the Fed would hold key interest rates near zero for another two years, at least, through mid-2013.  This was a way to get investors out of the zero-yield gold and low-yield bonds, back into stocks, but it also fueled a gold rally, since the old argument against gold (“you can’t earn interest on gold”) backfired, since you can’t earn much interest on U.S. dollars, either!

Bernanke also indicated that the Fed is examining all of its policy options to “promote a strong economic recovery.”  By that, he means he can print more money or buy more Treasury bonds, thereby debasing our dollar further. The Fed now controls nearly $4 trillion of cash and bonds on its balance sheet (up from less than $1 trillion three years ago), so it could easily launch another round of quantitative easing (QE-3).

In the meantime, the former Fed Chairman, Alan Greenspan, gave gold a boost when he said on NBC’s “Meet the Press” that “The United States can pay any debt it has because we can always print money to do that.  So, there is zero probability of default.”  By stating the obvious, that the U.S. can just print more money, Greenspan hurt the stock market and helped gold by saying the Fed’s “emperor” has no clothes.

And now back to 2025 …

Moody’s Downgrade May Have Helped
Kick Congress Into Cost-Cutting

There may be some politics involved in the timing of Moody’s downgrade, since they downgraded the “outlook” for U.S. debt to “negative” a year ago, during President Joe Biden’s term, but didn’t downgrade their credit rating until now. This appears to reflect some political bias against President Donald Trump and his administration.

But there’s one ray of hope in the timing, in that the Moody’s downgrade came during the weekend in which the House was debating the “one big, beautiful bill” on cutting taxes and spending. The problem is that they were cutting some taxes without cutting much spending, so a few Republican conservatives were against voting for the bill since it didn’t contain enough spending cuts. The Moody’s credit rating cut serves as a “wake-up call” to Congressional leaders that they better get more serious about reducing spending.

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A few outsiders agreed. Andrew Brenner at NatAlliance Securities said, “Moody’s is trying to send a message to Congress to get their act together.” And Jamie Dimon, CEO of JPMorgan Chase & Co., said that our deficits create higher risks of higher long-term rates and inflation during his company’s annual Global Markets Conference in Paris, adding that high deficits could even create a return to stagflation.

Somebody had to shock Congress into cutting spending since any small or large cost-cutting by Elon Musk and his DOGE team was met with outrage, picketing and even violence by the recipients and/or the established bureaucracy. Voters gave the Trump administration a mandate to cut costs but the vested interests won’t retire peacefully; they must be forced out. Perhaps this debt downgrade will help to send the necessary message to Congressional members that they better get serious about making some spending cuts.

As of Friday, May 23^rd gold has risen above $3,350 so maybe more people are waking up to the long term implications of our excessively high national debt. I certainly hope so!

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Mike Fuljenz, president of Universal Coin and Bullion, taught classes on grading and counterfeit coin detection for over 20 years. He has also assisted the Texas Attorney General with drafting consumer alerts on coins and on counterfeits. He has lectured and conducted training for law enforcement with the Numismatic Crime Information Center. He has been a member of the National Anti-Counterfeiting Task Force, as well as assisting the Federal Trade Commission with their consumer alerts on coins.