Friday evening, while I was filling in for Mark Levin on his nationally syndicated radio show, the news broke: Standard & Poor’s had downgraded the credit rating of the United States of America. We declined from AAA to AA+.
In the history of this great nation, we have never experienced such a revision.
Now, in simple terms, allow me to explain what this downgrade means and how it will impact all of us.
We’re all familiar with the concept of a “credit score.” Your credit score is determined by a number of factors that include how much debt you hold, how reliable you are in making timely payments on that debt, how quickly you payoff debt, etc.
Banks and landlords will use your credit score to determine what kind of risk you present should they do business with you. Additionally they will also look at your debt to income ratio—too many bills and not enough income will increase the risk they’re taking in engaging with you. Thus if your credit score is high, the interest rate a bank charges you will be lower than if your score is not so great. As a landlord I do the same thing with my renters; if their credit score is not the best I will often require a higher deposit.
Bond ratings are essentially the credit scores of companies. Firms like Moody’s and Standard & Poor’s rate the company’s ability and willingness to repay their debt. Those ratings are used by financial institutions and private investors to determine which bonds to buy and which ones to sell. Higher bond ratings are important since they translate into more security for investors and lower interest costs for bond issuers.
Since the United States keeps spending more than it takes in, our nation relies on selling bonds to other countries to keep us afloat. In return for their money we pay these countries interest—about $250 billion a year. To date the interest we charge them has been very low, because we posed no risk in terms of being able to pay them back. Now the game has changed. With the downgrade from AAA to AA+ those lending us their money will want a slightly higher return on their investment. That will mean the federal government will be responsible for shelling out ten of billions more each year in interest payments on our debt.
Also, the credit rating agencies have said other downgrades will follow like falling dominoes.
For example, Fannie Mae and Freddie Mac, the huge mortgage companies that are backed by the federal government, will likely be downgraded, thus raising rates on home mortgage loans for borrowers. Credit cards will follow.
All of this could have been avoided if the “leaders” in Washington were not content in spending more money than we take in. Prior to the downgrade, Standard & Poor’s warned that the government needed to reduce its debts by about $4 trillion. That didn’t happen.
As for “we the people,” we need to reign in our personal spending and payoff debt. Also, if you need to purchase a big-ticket item do it now, with cash, before the next wave of trouble kicks in: major inflation.
Brian,
Always enjoy listening to your show. That said, it’s worse than you write. The annual interest we pay is closer to $400 billion and countries are refusing to buy our debt like they have in the past making the Federal Reserve, our money printer, the buyer of last resort. Major inflation would be the lesser of two evils. The other being hyperinflation. What happens when the only buyer of our debt is the Federal Reserve? That’s the path we’re headed. We’ve been set up for QE to infinity. This is a great article I just came across. I hope you take time to read and share with your audience: http://www.zerohedge.com/news/guest-post-bread-circuses-spending-cuts-unicorns-and-appearance-wealth
Regards,
John Montoya