In a world already rattled by economic uncertainty, geopolitical instability, and fiscal fragmentation, the U.S. — the world’s most powerful economy — just amplified global anxiety. The catalyst? A “big, beautiful” tax bill backed by former President Donald Trump, which threatens to further bloat America’s debt and deficits at a time when warning lights are flashing across the Treasury market and credit agencies alike.
This week, the U.S. entered a new fiscal chapter, one marked by growing fears over the sustainability of its borrowing spree. Moody’s downgraded the country’s credit rating from AAA to Aa1, stripping it of its last pristine badge of fiscal reliability. The move brings Moody’s in line with S&P and Fitch, both of which had earlier lowered the U.S. rating due to political brinkmanship and growing deficits. But this downgrade was different: it came just as a congressional committee advanced Trump’s proposed legislation to make permanent his 2017 tax cuts — a decision that could add over $3.3 trillion to the federal debt by 2034.
The plan includes steep reductions to Medicaid and food assistance, but what worries investors most is that these cuts may be insufficient to counterbalance the immense revenue loss. The non-partisan Committee for a Responsible Federal Budget forecasts that under the proposed law, the debt-to-GDP ratio would surge from 100% today to 125% by 2034 — outpacing even current law projections of 117%.
Also read: How Trump’s Trade War is Shaking the Global Economy
The Inflection Point for Treasuries
U.S. Treasuries, long considered the safest asset in global markets, are now under siege. Yields on 30-year bonds surged to 5.04% — the highest since 2023 — following Moody’s announcement and the advancement of Trump’s tax bill. Investors, once eager to park capital in dollar-denominated assets, are now demanding higher returns for the same risk. The bond market, as some experts put it, is ready to “discipline” Washington.
“We’re at an inflection point,” said Tim Magnusson, CIO at Garda Capital Partners. “Unless we see serious efforts to rein in the deficit, yields will rise, borrowing will get costlier, and the market could turn hostile.”
Edward Yardeni, a veteran strategist, put it more dramatically: “The bond vigilantes have saddled up.”
Ray Dalio and the Call for Course Correction
Billionaire investor Ray Dalio painted a bleak but direct picture. “It’s like being on a boat heading for the rocks and having those running the ship arguing over which way to turn,” he said. His plea was simple: “I don’t care whether they turn left or right as much as I care that they turn to get the ship back on course.”
Dalio’s prescription is sobering — the U.S. must cut its deficit to 3% of GDP, either by raising revenue, cutting spending, or lowering real borrowing costs. But with Trump’s bill pushing in the opposite direction and political consensus nowhere in sight, that looks increasingly unlikely.
Why the Downgrade Matters Globally
While the downgrade won’t spark an immediate crisis — the U.S. still issues the world’s reserve currency — the broader implications are stark. A loss in confidence in U.S. debt means higher borrowing costs, a weaker dollar, and more expensive capital globally. Emerging markets like India are particularly vulnerable. For instance, Indian IT stocks took a hit following the downgrade, with the Nifty IT index falling 1.3% due to concerns over U.S.-linked revenue.
Moreover, gold prices surged to $3,239.77 an ounce as investors sought safe havens. This reflects a growing unease: when U.S. bonds, the bedrock of the global financial system, no longer feel “risk-free,” money flees to hard assets.
What’s Fueling the Debt Spiral?
The roots of America’s debt crisis lie in structural imbalances. Trump’s 2017 tax cuts — particularly the corporate rate reduction to 21% — already contributed nearly $2 trillion to deficits. Now, by making those cuts permanent without robust offsets, the latest bill risks adding another $3.3 to $4 trillion in debt. All this comes against a backdrop of rising entitlement costs, stagnant revenue growth, and ballooning interest payments, which now consume over 16% of government income.
Karoline Leavitt, White House press secretary, claimed the bill “does not add to the deficit,” insisting it will spur growth. But markets — and Moody’s — are unconvinced. Historical data suggests tax cuts rarely pay for themselves, especially when paired with increased spending.
Implications for India and the World
For India, the impact will likely be felt through currency volatility, changes in capital flows, and tighter global liquidity. As U.S. yields rise, investors may divert funds away from emerging markets, putting downward pressure on the rupee and raising borrowing costs. Moreover, trade tensions could resurface if Trump returns to power and revives tariff-based policies, particularly against countries with significant U.S. trade surpluses.
In the long term, America’s fiscal path will influence everything from dollar dominance to global risk appetite. If confidence erodes further, we could see a gradual, structural shift away from U.S. assets — a trend already visible in central banks diversifying their reserves into gold and other currencies.
A Wake-Up Call, Not a Collapse
The U.S. is not on the brink of default. But the downgrade is a shot across the bow — a warning that even the most creditworthy nations cannot ignore fiscal reality forever. The combination of political gridlock, rising interest rates, and relentless spending will test America’s credibility in the years ahead. For global markets, the time to brace for higher volatility and tighter financial conditions is now.
