Billionaire VC's View on Fitch's U.S. Credit Rating Downgrade

Billionaire VC's View on Fitch's U.S. Credit Rating Downgrade

August 6, 2023

Recently, Fitch Ratings, a globally recognized credit rating agency, downgraded the United States’ Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘AAA’ to ‘AA+’. The decision was driven by concerns about the U.S.’s fiscal health and governance standards, including an anticipated fiscal deterioration over the next three years, an escalating general government debt burden, and a decline in governance standards. Fitch also warned of a potential mild recession in the U.S. economy in late 2023 and early 2024 due to tightening credit conditions and weakening business investment.

However, not everyone agrees with Fitch’s assessment. One such person is Chamath Palihapitiya, a billionaire Sri Lankan-born Canadian and American venture capitalist. Palihapitiya shared his thoughts on the downgrade during the most recent episode of the “All-In Podcast”.

According to Palihapitiya, the downgrade by Fitch is irrelevant. He pointed out that S&P Global Ratings had already downgraded the U.S. credit rating 13 years ago, suggesting that Fitch is either late to the game or simply reacting out of anxiety. He also questioned the significance of Fitch as a credit-rating agency, implying that its decision might not carry as much weight as some people believe.

Palihapitiya’s main argument, however, revolves around the concept of relativism. He believes that many people misunderstand the relative nature of these economic conversations, treating them as absolutes instead. He pointed out that Japan’s debt to GDP ratio is 270% and growing, which is significantly higher than the U.S.’s ratio. In his view, this makes the U.S.’s fiscal situation look much better in comparison.

Furthermore, Palihapitiya emphasized the U.S.’s status as the most important economic force in the world. He argued that, on a monetary basis, other countries are struggling more than the U.S. He believes that this trend will continue, with the U.S. maintaining its economic dominance.

Palihapitiya also addressed the issue of central banks’ foreign reserves. He questioned what alternatives central banks could realistically turn to if they decided to move away from the U.S. dollar. He suggested that doubling down on the euro or the yuan (which he views as a proxy for the U.S. dollar) might not be viable strategies.

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