Fitch’s Warning About America’s Fiscal Future

The eventual cost of a U.S. downgrade

Markets are pointing down this morning after Fitch Ratings downgraded the United States’ AAA long-term credit rating, citing the “steady deterioration in standards of governance over the last 20 years” that have eroded confidence in fiscal management.

It’s unlikely that the move — only the second downgrade in American history — will dent investor appetite for Treasury notes. But the decision is another sign that Wall Street is worried about political chaos, including brinkmanship over the debt limit that is becoming entrenched in Washington.

Fitch cited “repeated debt-limit political standoffs and last-minute resolutions” in cutting the rating to AA+. The move came two months after Washington narrowly avoided a U.S. default, following a prolonged argument over the debt ceiling. The agency also cited rising federal deficits and increased spending on Social Security and Medicare.

Yet the U.S. economy is performing strongly, with many analysts expecting the country to avoid a recession as it recovers from rapid inflation and the highest interest rates in decades. (That said, some on Wall Street remain skeptical that the country is headed for a so-called soft landing.) Fitch’s own model shows the U.S. economy deteriorating during the Trump administration and recovering under President Biden.

The Biden administration and others pushed back. Treasury Secretary Janet Yellen called the downgrade “arbitrary,” noting that Fitch had shown U.S. governance deteriorating as far back as 2018 but hadn’t moved until now. “​​The American economy is fundamentally strong,” she added.

Paul Krugman, the Times Opinion columnist and Nobel laureate, said the move was “bizarre.” And Larry Summers, the former Treasury secretary, told Bloomberg, “I can’t imagine any serious credit analyst is going to give this weight.”

What comes next? Some investors who are required to put money only in AAA-rated securities may need to look elsewhere — though the number of other countries that still have the top rating is dwindling — potentially nudging up interest rates. But most economists believe that what the Fed does at its next rate-setting meeting will have a bigger effect on U.S. borrowing costs.

The wider significance is the growing concern about political polarization, particularly over federal spending. The repeated standoffs in Washington threaten to cause more impasse over the debt limit and, potentially as soon as this fall, another government shutdown.

Future downgrades by Fitch or other agencies could eventually threaten America’s fiscal health. But it’s unclear that this one will change the thinking in Washington: “Our base case expectation is that Fitch will be pilloried by most members of Congress,” Henrietta Treyz, director of macroeconomic policy research at Veda Partners, told The Times.

HERE’S WHAT’S HAPPENING

Hollywood writers and studios move to restart talks. The Writers Guild of America told screenwriters that the studios’ negotiator had requested a meeting on Friday “ to discuss negotiations” to resolve a three-month standoff. A meeting would be the first sign of movement after talks fell apart in early May, leading to a nearly complete shutdown of movie and TV production.

Arm reportedly seeks to be valued at as much as $70 billion in its I.P.O. The chip design giant, which is owned by SoftBank, is aiming to go public in New York as soon as next month, according to Bloomberg, in one of the most eagerly anticipated initial stock sales of the year. The company is hoping that soaring interest in A.I. chips will propel interest in its offering.

Starbucks’s latest results paint a mixed picture of the economy. The coffee chain said that its sales in the most recent quarter were up, thanks to the popularity of cold espresso and other drinks, but its profits were under pressure from increased wages and costs for ingredients. Same-store sales in China, Starbucks’s biggest international market, were up 46 percent despite that country’s economic struggles.

U.S. consumers can no longer buy most incandescent light bulbs. Energy efficiency rules that took effect yesterday mean that most bulbs based on technology that Thomas Edison patented in the 1800s are now off-limits. That is expected to propel sales of LED bulbs, but the move has drawn pushback from Republicans.

What to know about the Trump indictment

The indictment of Donald Trump over his efforts to overturn the 2020 election thrusts the nation into extraordinary territory: A former president who is dominating the race for the Republican nomination in 2024 faces federal charges for trying to subvert democracy, adding to his string of legal troubles.

Here’s what you need to know.

Mr. Trump faces four counts: a conspiracy to violate civil rights, a conspiracy to defraud the government, the corrupt obstruction of an official proceeding and a conspiracy to carry out such obstruction. He has been summoned to appear in a Washington federal court tomorrow and has denounced the indictment.

Mr. Trump now faces an array of state and federal charges, with these being possibly the most serious. And it means that the former president may face at least three criminal trials next year.

The additional indictment will weigh on Trump’s 2024 campaign, given how he has used his political action committee to help pay the legal costs for himself and some associates.

It also raises questions about whether donors would be willing to pay for his bills, though the latest Republican poll shows that Trump appears to have unshakable control over at least one-third of the G.O.P. voting electorate.

Moreover, Mr. Trump is using the latest charges as a fund-raising tool: His campaign website called the new indictment “nothing but an egregious act of Election Interference and a final act of desperation” from President Biden, before asking people to give money.

His rivals are in a bind. Ron DeSantis’s campaign has tried to score political points by noting Trump’s troubles, but the Florida governor hasn’t seen any improvement in his standings in the polls or with donors. Some top Republican donors have begun backing away, The Times reports.

At least one G.O.P. contender appears to be gaining steam, however: Senator Tim Scott of South Carolina now counts as supporters financiers like Marc Rowan of Apollo and Stanley Druckenmiller of Duquesne Capital Management. They will host a fund-raiser for Mr. Scott next week in the Hamptons.

Whether that signals the start of a shift to Scott as the clear Trump alternative — and whether that’s enough to overcome the former president’s formidable lead — remains to be seen.

The A.I.-media divide

Artificial intelligence has divided media companies. Some moguls, like IAC’s Barry Diller, have threatened to sue A.I. companies for using copyrighted content to train their large language models, and News Corp has said it wants compensation for its content being used in similar ways. But other news organizations, like The Associated Press, have made agreements to use the technology in their journalism.

Ziff Davis, the owner of outlets including Mashable, PC Magazine and IGN, has struck a $25 million deal with the A.I. company Xyla that puts it in the latter camp, The Times’s Ben Mullin reports for DealBook.

Ziff Davis will use OpenEvidence, a tool developed by Xyla that allows doctors to stay up-to-date on the latest medical research by parsing tens of millions of medical journals. Visitors to Ziff Davis’s health-related websites, including MedPage Today, will get access to OpenEvidence for free, and the media company is betting that it will be able to sell more advertising by attracting more doctors.

Ziff Davis is buying a minority stake in Xyla in a cash-and-stock deal. “I know that many digital media companies are seemingly apprehensive about A.I.,” said Vivek Shah, the C.E.O. of Ziff Davis, “but we’re embracing the opportunity full-on.”

Daniel Nadler, Xyla’s founder, will advise Ziff Davis on its A.I. efforts, and Mr. Shah said he believed that the technology can augment other Ziff Davis businesses. These include Speedtest, an app that allows users to test their data connections. The app has a vast reservoir of information on wireless connectivity that could be mined to help data providers improve their network performance.

Many media executives are taking a more cautious approach. Big newspaper and magazine publishers, including The Times, are reportedly discussing how to collectively find ways to protect themselves from the rise of generative A.I.

Mr. Shah said that those problems will be resolved, and that media companies should find moneymaking opportunities in the meantime. “That’ll have to get sorted out, but it’s going to take some time,” he said.

Tiger Woods steps up

Tiger Woods has moved to center stage in a battle for the future of golf. The PGA Tour said yesterday that it had agreed to add the superstar to its board, a day after more than 40 players demanded an overhaul of how the sport is run following a tentative deal involving the Saudi-backed LIV Golf league.

The PGA Tour may be looking to rectify a big misstep: failing to first get player support. But the appointment of Woods means players will hold six of the board seats, outnumbering the five independent directors. Alongside a string of other concessions by Jay Monahan, the PGA Tour’s commissioner, the new arrangement adds another set of hurdles to closing the blockbuster deal.

The players sent a letter to Monahan calling for significant governance changes. They said that the secret negotiations had contravened the tour’s core principle that the tour should be committed to players and run by them. Mr. Monahan and two PGA Tour directors, Piper Sandler’s Jimmy Dunne and Wachtell Lipton’s Ed Herlihy, crafted the agreement without informing most other board members, and many players found out about it only when it became public. Any agreement will now require the players’ approval.

An adviser to the players will also have more say. Colin Neville, of the merchant bank Raine, will be allowed to review documents and the terms of the deal. Mr. Neville previously worked on the Premier Golf League, a Saudi-supported project to compete with Europe’s main professional golf tour. After that effort fizzled, he continued to informally advise PGA Tour players.

Will the concessions be enough? What Mr. Woods, one of the richest and best known players in the world, wants out of a final agreement could differ from what other tour professionals want. (Recall Michael Jordan’s friction with other players during the 2011 N.B.A. lockout.)

And separate obstacles, including regulatory scrutiny and criticism from LIV players, like Phil Mickelson, remain. The deal itself is just a framework, and one of its few binding provisions — a promise not to poach each other’s players — was scrapped last month.

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