Christian Debt Recovery

National Debt Solutions

February 14th, 2010 |

Author: Gavin

national debt solutions

What Downgrade in Credit Rating of United States Would Mean For National Debt

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The political process in Washington, D.C. is current attempting to come up with a solution to the short term debt ceiling issue facing the federal government. Pressure is being applied by rating companies that are threatening to cut the credit rating of the United States should a deal not be reached. So, what would a downgrade mean for the national debt as well as you and me?

Credit Rating

The United States currently carries a triple “A” rating ["AAA"], the highest possible rating. Given our overall debt situation and annual deficits, this is a bit of a surprise. The federal government certainly hasn’t earned such a loft rating and now a number of rating companies are waking up and realizing as much. This could be a disaster for the United States.

Downgrade

As a person with credit, you can understand how this process works fairly easily. The credit rating used for countries is akin to the FICO scores we each have. Currently, the United States has the highest rating, the equivalent of an 800 plus FICO score. If this is downgraded, the United States would see its rating cut down to the equivalent of a high 700 FICO score or so. It would still be a positive rating, but more risk would be assigned to the country.

Practical Effect

So, what happens when you and I see our FICO score fall? The answer is simple – we have to pay higher interest rates. In some cases, we may be unable to get a loan for a car or whatever because we are viewed as too risky a bet by the loaning entity.

A similar development would happen with the federal government. The first problem would be the cost of borrowing money to fund our annual deficits would increase. This means we would be paying more money just to interest on our National debt, money that would be taken away from other programs like education, infrastructure, the military and so on.

A second problem would also arise. A far more serious problem. Many investors in United States Treasure Notes are restricted to investing in only triple A rated securities. If the United States saw its rating downgraded below this level, not only would these entities not buy new treasury notes but they would have to sell their current holdings. This would flood the market with treasure notes and require the federal government to massively increase the interest rates on debt just to entice anyone to buy it. Such a development could well take down the government.

Individuals

What about individuals? Well, the answer is a bit more indirect, but just as painful. Any of the above events would result in further weakening of the dollar. Instead of gas costing $4 at the pump, it might cost $7 or $10 or whatever. The cost of oil would not have gone up; it would just take more dollars to buy it.

Most people believe the politicians in Washington will come up with a solution prior to the government running out of money. They better. If they fail to act, the entire system could implode.

About the Author

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For more information about National debt , please visit http://www.currentusanationaldebt.com/

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