Another government shutdown would have dire consequences, Moody's warns

Moody’s has warned that another U.S. government shutdown would harm America’s credit rating, with both sides of Congress having until October 1 to arrive at a spending agreement.

It wouldn’t be the first time. Two months after the last debt ceiling crisis, Fitch did just that when it lowered America’s rating from the highest level AAA to AA+.

Though subtle, the downgrade essentially sends the message that the U.S. government isn't as creditworthy as it once was.

Uncle Sam's tumbling "credit score" isn’t a blow only for the government; it could also potentially hurt the U.S. dollar, which in recent history has owed much of its strength to Washington’s ability to repay what it owes creditors.

If the dollar falls in response to a lowered government debt rating, American households and businesses are likely to suffer in turn, with potentially serious consequences for the economy and stock market.

Americans have grown highly accustomed to the dollar being the world’s reserve currency; Anything less would have a serious effect on their spending power.

Another standoff on U.S. government debt

In a note to investors published on Sept. 25, Moody’s suggested that a government shutdown would not only be a negative for America’s credit rating but could also result in another downgrade.

“If there is not an effective fiscal policy response to try to offset those pressures [...] then the likelihood of that having an increasingly negative impact on the credit profile will be there," said Moody's analyst William Foster, speaking to Reuters. "And that could lead to a negative outlook, potentially a downgrade at some point, if those pressures aren't addressed.”

Unfortunately, federal government shutdowns are hardly a new thing these days. A shutdown is defined as the federal government halting non-essential operations as a result of Congress being unable to agree on a budget for the coming fiscal year.

In fact, America has experienced shutdowns on 22 separate occasions in its history, with all of these happening since 1976.

Five of these occurred during the presidency of Donald Trump, while the Biden administration has been threatened with shutdowns in every year of its office.

Some of these averted Biden-era shutdowns could have been very serious, with this year’s showdown in May running the risk of the U.S. actually defaulting on its debt.

Because the showdowns are becoming more frequent, rating agencies like Moody’s and Fitch have taken notice, with the increasingly dysfunctional Congress harming the U.S. government’s fiscal reputation.

Why a U.S. government shutdown matters

Another downgrade of U.S. debt carries a couple of potential implications.

First, it could weaken the dollar, the world’s default reserve currency. And while Fitch’s downgrading in August didn’t significantly harm the dollar, it did slow its growth against the euro and other major currencies.

A weaker dollar could also raise the costs of imports and, by extension, consumer prices.

Admittedly, it may take years—and numerous shutdowns—for U.S. debt to be downgraded to the point where the dollar is significantly weakened, but the latest threatened closure could just be the start of a long process of decline.

Perhaps the biggest problem is that shutdown threats have become entangled with the political fiber of Washington. They’re usually resolved with “massive, year-long spending packages,” but the solutions aren't always in Americans’ best interests.