[Interview] "Moody's Is a Lagging Indicator, Treasury Market Is Alarming... U.S. Yields May Surge in 2-5 Years Due to Debt and Trump Policies"

Urgent Interview on Moody's Downgrade of U.S. Credit Rating
Barry Eichengreen, Professor at UC Berkeley
Chronic U.S. Fiscal Deficits and Debt Are Serious
Policy Uncertainty from Trump’s Tariffs and Tax Cuts Adds to the Risk
U.S. Credibility Declining, Treasury Yields Set to Surge
Urgent Need to Secure Fiscal Soundness and End Protectionism

"The downgrade of the U.S. sovereign credit rating by Moody's itself does not carry significant meaning or impact for the market. However, chronic debt risks, combined with the uncertainty of Trump’s policies and the potential undermining of the rule of law, are steadily eroding confidence in the U.S. economy. There is a high likelihood that U.S. Treasury yields will surge within the next two to five years."

Barry Eichengreen, a world-renowned scholar in international economics and finance and a professor at UC Berkeley, stated in an interview with Asia Economy on the 19th (local time) that Moody’s decision is a "side show to lagging indicators," adding, "We should be focusing on the Treasury market, and that assessment is not positive."

Previously, on the 16th, Moody's, one of the world's three major credit rating agencies, downgraded the U.S. sovereign credit rating by one notch from the highest 'Aaa' to 'Aa1' for the first time in 108 years. The main reason was the rapid increase in federal government debt. With this move, all three major rating agencies?Fitch, Standard & Poor's (S&P), and now Moody's?have stripped the U.S. of its top 'Triple-A' rating.

Professor Eichengreen explained, "Other rating agencies had already taken the same action, and Moody's simply followed suit," and added, "The new rating still qualifies as 'investment grade,' so it will not affect institutional investors’ investment decisions." In fact, on the first trading day after Moody's announcement, all three major New York stock indices closed slightly higher, and although U.S. Treasury yields briefly spiked, especially for long-term bonds, they soon stabilized.

However, Professor Eichengreen warned that the United States’ chronic fiscal deficit and debt problems are "quite serious." He noted, "A debt crisis will not erupt immediately," but diagnosed that "the moment when the market loses confidence in U.S. Treasuries and yields surge is approaching."

He also pointed out that it is important to note Moody’s cited 'policy uncertainty' as a reason for the downgrade. In addition to the federal debt issue, President Trump’s tariff hikes, large-scale tax cuts, and the undermining of the rule of law are sharply eroding trust in the United States.

Professor Eichengreen expressed concern, stating, "Every time Trump announces a tariff policy, the U.S. Treasury market weakens, the dollar falls, and the stock market contracts." He added, "The tax cut bill currently under discussion in Congress will only further increase the fiscal deficit and will not help fiscal soundness." He went on to criticize, "Describing Trump’s impact on the U.S. sovereign credit rating as merely 'negative' is an understatement."

He also warned that the ongoing clashes between President Trump and the judiciary, which has been blocking his executive orders, represent a crisis for the rule of law that is directly undermining market confidence in the United States.

He projected that if these factors accumulate alongside the government debt issue, "U.S. Treasury yields could surge within the next two to five years," and "the aftermath could shock financial markets worldwide."

Professor Eichengreen emphasized that the reactions of the Treasury and foreign exchange markets are much more important indicators than the credit rating agencies. He said, "The ratings from credit agencies are merely lagging indicators," and pointed out, "The recent weakness in U.S. Treasuries and the dollar, amid unexpected turmoil caused by tariff policies and other factors, signals that the status of dollar assets as safe havens is weakening."

He advised that, to restore market confidence, the U.S. government needs to strengthen fiscal soundness and also withdraw its tariff policies.

Professor Eichengreen stressed the need to abandon protectionism and mercantilism, noting that these approaches are in fact "producing unintended adverse effects on the U.S. economy and its credibility."

He also highlighted the necessity of reforming the tax system and social security. Professor Eichengreen said, "The United States still collects relatively low taxes among developed countries," and suggested, "For example, loopholes such as carried interest?where fund managers’ performance fees are taxed as capital gains at much lower rates than income tax?should be eliminated to increase tax revenue." He added, "For welfare programs, an asset test for recipients should be introduced. Providing pensions even to wealthy individuals is neither socially justifiable nor financially sustainable any longer."