Skip to comments.If The U.S. Government Loses Its AAA Rating - Unleash Financial Hell Across The United States
Posted on 07/15/2011 4:35:31 AM PDT by blam
If The U.S. Government Loses Its AAA Rating It Could Potentially Unleash Financial Hell Across The United States
July 15, 2011
For decades, the U.S. government has had a AAA rating. On the scales used by the big three credit rating agencies, that is the highest credit rating that a government can get. Moody's scale actually uses lettering that is a little different from the other two big agencies ("Aaa" instead of "AAA"), but you get the point. Right now, the U.S. government is closer than ever to losing its AAA rating. The threat of a rating downgrade is going to continue to grow regardless of how the political theater that we are watching unfold in Washington D.C. plays out.
The truth is that the federal government has accumulated a debt that is so vast that it will never be paid back. In fact, we are rapidly approaching the point when this debt will no longer be serviceable. If the credit rating of the U.S. government is not slashed right now, it will be soon enough. In fact, the truth is that the U.S. government is such a financial mess that it should have been done long ago. But whenever the United States does lose its AAA rating, we could potentially see financial hell unleashed because it will also mean that there will almost certainly be a wave of credit rating downgrades from coast to coast.
As I have written about previously, government debt becomes more painful the higher that interest rates go. When the big credit agencies downgrade the credit rating of a government, that is a signal to investors that they should ask for higher interest rates on debt issued by that government.
This does not always play out in practice (just look at Japan), but nations such as Greece, Portugal and Ireland sure are going through financial hell right now as they deal with reduced credit ratings and soaring interest rates.
Right now, the U.S. government is able to borrow gigantic quantities of money at ridiculously low interest rates. This is the primary reason why the debt disaster predicted by so many in the past has not arrived yet.
If the credit rating of the U.S. government is downgraded, it could finally get investors all over the world to realize that the game is over and that they should be demanding much higher returns on debt issued by the U.S. government. The truth, as U.S. Representative Ron Paul put it recently, is that the U.S. government is already "insolvent" and at some point we are all going to have to face reality....
"Ultimately, the fundamentals show this country is bankrupt." So whether or not it happens right now, the truth is that at some point the credit rating of the U.S. government is going to go down and interest rates are going to go up.
Unfortunately, it appears that this might happen sooner rather than later.
Earlier this week, Moody's Investors Service publicly announced that it would be reviewing our Aaa bond rating for a possible downgrade.
On Thursday, S&P actually went so far as to announce that there is a "50 percent chance" that it will downgrade the credit rating of the U.S. government within the next three months.
S&P has been warning of trouble for some time now. Back on April 18th, Standard & Poors altered its outlook on U.S. government debt from "stable" to "negative" and warned that a downgrade was likely at some point soon if nothing changed.
If the credit rating of the U.S. government gets slashed and if that results in higher interest costs on the national debt, that is going to make it much harder to balance the budget.
The U.S. government will take in somewhere around 2.2 or 2.3 trillion dollars this year. It will spend somewhere in the neighborhood of 3.5 or 3.6 trillion dollars this year.
Included in that spending is about 400 billion dollars that goes for interest on the national debt.
As I explained in a previous article, if our interest costs double or triple it is going to make it basically impossible to balance the budget under our current system.
If interest rates on U.S. government debt were to rise to moderate levels, we could soon be easily paying a trillion dollars a year just in interest on the national debt.
If interest rates on U.S. government debt were to rise to the levels that Greece, Portugal and Ireland are now facing, it would be beyond catastrophic.
But a reduced credit rating and higher interest rates would not just hurt the finances of the U.S. government.
Any financial institution that is linked to the U.S. government in any way would also probably be downgraded.
This fact was noted in the announcement put out by Moody's this week....
In conjunction with this action, Moody's has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks.
We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the government or the affected financial institutions. Just think of the financial carnage that would cause.
Also, check out what one Bloomberg article had to say about the potential cascading effects of a credit rating downgrade for the U.S. government....
At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moodys Investors Service said.
An automatic downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moodys said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action. But the nightmare would not end there. The truth is that the credit ratings of large numbers of state and local governments from coast to coast would likely be reviewed and downgraded as well. Right now, many state and local governments are scratching and clawing in a desperate attempt to survive financially, and a significant rise in interest costs would be enough to wipe many of them out.
The ripple effects of a U.S. government credit downgrade would be endless.
A lot of people argue that if the federal government ran a balanced budget from now on none of this would matter.
Unfortunately, that is not true.
At this point, a very high percentage of U.S. government debt is short-term debt. That means that gigantic amounts of debt must be "rolled over" each year in addition to any new debt that we take on. So even if interest rates rise significantly on just the existing debt that we have it is going to be a total nightmare.
And make no mistake, whether it happens now or later a collapse of U.S. government finances is coming.
David Murrin, the chief investment officer at Emergent Asset Management, recently told CNBC the following....
"It's inevitable that the U.S. will defaultit's essentially an empire which is overextended and in declineand that its financial system will go with it" Right now it is being projected that the U.S. national debt will hit 344% of GDP by the year 2050 if we continue on our current course. We are on a runaway train that is heading straight for a brick wall.
Europe is also a complete financial wreck. The sovereign debt crisis over in the EU continues to grow worse by the day and there is no end in sight.
If the U.S. collapses, Europe is not strong enough to save it. If Europe collapses, the U.S. is not strong enough to save it.
We really are entering an unprecedented time in world history. We are on the verge of the first truly global financial disaster.
It is going to be interesting to see which major currency crashes and burns first. Some think that it will be the euro. Others think that it will be the dollar.
In any event, the reality is that the current global financial system is not sustainable. The folks that are in charge can try to keep things together for as long as possible, but at some point the dominoes are going to start to fall and the house of cards is going to crash.
We have entered a time when there is going to be financial crisis after financial crisis. Even if the EU and the U.S. government can somehow fix things for the moment, more problems are going to be just around the corner.
The world has become incredibly unstable and the entire globe is going to be shaken. Most people cannot even conceive of the kind of financial hell that is coming our way as a nation.
Yes, it can be a bit sad to think about what is happening, but it is much better to be armed with the truth than to be totally clueless and totally unprepared.
The reason everyone thinks Ron Paul is a Kook is because he is the only one willing to admit the Truth.
You want to be armed with a little bit more than the truth at this point.
Ron Paul and people like him are about the only sane ones left.
I know, and that is the definition of insanity. We are in big trouble.
For your further interest, from Ticker Guy’s wonderful blog:
Now, as to the more serious issue (Paul simply isn't serious): what happens if we default? Really, not a lot. Who do we default to? 1) U.S. bondholders. But a default doesn't mean you don't pay people ANYTHING, it can mean you pay them only some of what they are owed. 2) Foreigners. The Chinese, because of keeping their currency fictitiously low, have in essence increased our debt. This would partially restore real values in their case. In the case of the Euros, it would shift a transfer of wealth from Euro bondholders to American taxpayers---in essence, a reverse of the Marshall Plan . . . or a repayment of it.
What default really does is to remove one of the major sources of trust in the USA that other nations, no matter how much they hate us, have always had: that we are financially solvent. In essence, this would be a financial "nationalization" of foreign wealth (and some American wealth too). It would undermine Hamilton's great objective of making the U.S. always credit worthy.
Is it worth it if it puts us on a balanced budget and the road to fiscal responsibility? Perhaps.
Maybe Trump and Rubio have it right. To me they are the only ones making sense. At least I can relate to what they say.
It was Clinton that changed us to Short-Term Bonds.
i LOVE Rubio more and more!!
The article is filled with hyperbole and fear mongering. It gives few details about the causes or the consequences of a financial meltdown. What, for example, is the likely affect of a government default on the ability of the citizenry to pay income taxes?
He seems to make sense. So does Trump. We need to liberate the Free market from the central planners and socialist engineers. Also Obama is illegal and the GOP is full of a bunch of Stiffs. In addition to all the BAD DEALS we get in the world economy.. Those two would be a good team.
Yawn. The apocolypse card has been overplayed.
FINE BY ME~!
MUCH BETTER THAN GIVING ODOOFUS ANOTHER BLANK CHECK FOR $$$TRILLIONS
YOU ARE CORRECT
CLINTON STARTED THIS SHORT TERM BOND MESS
ROSS PEROT POINTED IT OUT AND GOT LAUGHED AT
A debt default by itself solves nothing, at most it buys 3 years of time.
The core problem is over-spending growing at a rate so fast that a full debt default won’t even be felt after a few years...the new debt from over-spending will eclipse it.
Obama is having a HUGE BIRTHDAY BASH on AUG 4!! HUGE FUNDRAISER!! Gonna look REALLY bad.
I was reading it earlier. Outstanding as usual.....scary reality check.
Bernie Madoff is right - the entire govt is a ponzi scheme.
Losing the worlds top credit rating would be unthinkable to conservatives just a few years ago now its considered no big deal a position the libs have held for years..the country is doomed by its own idiocy.
I have lived in a lot of third world countries, they don't control their own economies and destines because they don't have the credit standing in the world to do so.
This race to become a third world debtor nation spurred on by traitors in this country who call themselves patriots is utter madness. Incidentally these are the same folks who refuse to recognize the WOT and the fact that we are under attack on a variety of fronts by people who genuinely want to kill us all.
The Market Ticker
July 15, 2011
* 09:36 15Jul11 RTRS-S&P PLACES U.S. 'AAA/A-1+' RTGS ON CREDITWATCH NEGATIVE
* 09:37 15Jul11 RTRS-RPT-S&P PLACES U.S. RATINGS ON CREDIT WATCH NEGATIVE
* 09:38 15Jul11 RTRS-S&P SAYS AT LEAST A 1 IN 2 CHANCE IT COULD CUT RATING
* 09:38 15Jul11 RTRS-S&P SAYS POLITICAL DEBATE ON DEBT CEILING A SIGNIFICANT UNCERTAINTY
* 09:39 15Jul11 RTRS-S&P SAYS SEES INCREASING RISK OF POLICY STALEMATE
* 09:39 15Jul11 RTRS-S&P SAYS COULD LOWER U.S. RATINGS WITHIN 3 MONTHS
* 09:39 15Jul11 RTRS-S&P SAYS MIGHT CUT RATINGS BY 1 OR MORE NOTCHES IN AA RANGE
* 09:39 15Jul11 RTRS-S&P SAYS BELIEVES RISK OF PAYMENT DEFAULT SMALL BUT INCREASING
The danger is right there in the bold.
This is not about the "ceiling." It is about fiscal sustainability.
Here is the text of the salient section from S&P as reported by Reuters: -- We may lower the long-term rating on the U.S. by one or more notches into the 'AA' category in the next three months, if we conclude that Congress and the Administration have not achieved a credible solution to the rising U.S. government debt burden and are not likely to achieve one in the foreseeable future.
There it is.
Folks, it is time to cut the crap. We must cut the growth of government debt to below the growth in GDP. Since at present the government is providing ~12% of GDP via borrowing, this means we must cut federal spending by something closer to 15% of GDP, since GDP will contract when we do this (it's the math, and is inescapable) and debt must shrink faster than GDP does, or grow slower than it does.
Incidentally, that means we must cut federal spending approximately in half, double tax receipts (not rates), or some combination of the two that adds to the same figures.
And we must do it now, because the laws of exponents, which we cannot change, state that the longer we take to get to the above point the greater the cut in the federal budget will have to be.
In other words we will soon get to the point where it makes absolutely no difference what we do - default will become mathematically inevitable.
This sucks, and I understand it sucks. It doesn't matter if it sucks. It also doesn't matter if Congress likes this or not.
In blunt language it no longer matters whether there is political will to act as is required. Arithmetic does not care if you like the answer that it provides.
I have been warning of this outcome for four years, and saying that time, while available, is not unlimited.
We are now out of time.
Attempt to restructure the debt by all means but don't start blaming the lenders for your freely-chosen debt. The lenders didn't hold a gun to your head. Your debt was legally authorized, and 'may not be denied'.
Sell assets, cut spending, remove barriers to domestic wealth-production. This is how to deal with debt.
Or secede and let the Monkeys in the blue states pay for their own sh*t. Which also works.
Or default, lose your embassies and external bases and go five years without a penny of foreign money.
But whatever you do, stop blaming other countries for your spending habits. It's just unmanly.
Folk’s so what if we default. It only proves to all, that the demoncraps want cover for making the US a nation of deadbeats. Thank you local deamoncrap for doing such a wonderful job of spending, spending, spending!!! But you leaches who live off the Govt for your vote payoffs will need to seek a new country to live off the backs of those that work. Maybe you all could move to Ca and learn to live the life of a prevert.
That said, a government bond is promise to the bond-holder to tax the people at a later date. Is that too hard to understand?
No problem. We rural Americas still cling to our guns.
| I don't think it is possible for this country to have a more sorry bunch of losers running the show.
Cut, cut, cut!
Cut the spending, cut the government, cut the regulations, cut the taxes and get the hell out of the way!
Zer0 doesn't realize how lucky he is that so many people aren't paying more attention. Otherwise he'd have to call the moving vans and sneak out of the country in the middle of the night.
An arrogant Marxist was spending More money, without comprehending. The piss-stream media concurred Without saying a negative word At the Republic we knew was ending.
Barack Jackwagon's Campaign Agenda: More taxes, more debt, more unemployment, hello Marxist America. Employment is an impediment to any good Marxist's objectives.
If we allow these clowns a $2 trillion debt ceiling increase it will be quickly gone. And just like that, Congress will be back stealing more, in no time flat.
His administration's stimulus and its' 'recovery summer' put unions ahead of a healthy economy, and Americans are still asking the question, where are the jobs? Zer0 says he saved 'jobs' (read: union jobs - as in the UAW/auto bailout. The American people deserve some answers, but when it comes to this administration, it's clear that they don't have many.
It's your economy, stupid!
He is beyond toast in 2012.
Countdown until Obama leaves Office: 554 days as of July 15, 2011.
“You want to be armed with a little bit more than the truth at this point”
Yes at this point if you don’t have year’s worth of food and the means to seriously protect it then you have work to do. A little junk silver and fractional gold wouldn’t hurt either.
I’m not “blaming other countries.” I’m saying, it’s their tough luck that they loaned to a bad risk. Pure capitalism. And, yes, whenever there is a bad loan it’s both the fault of the lender and the borrower-—the borrower for lying by saying he would repay and the lender for poor judgment. Both should pay a penalty.
Not following what Trump and Rubio are saying. Please elaborate.
Rubio says the way out is to Liberate the Free Market from the collectivist central planners. Thus allowing American companies to create jobs and thus taxpayers providing revenue and growth again. Trump says our leaders are Stiffs. Not getting us good deals in the world economy. I think they make more sense than anything else I have heard.
This is the only thing that I disagree with. We are on the verge of a SECOND global financial disaster. The first one hit in the late 1920’s, early 1930's and affected every market place as neither Europe nor America could help themselves much less each other.
The impending financial disaster will differ from the 20th Century one by involving more markets but the end result will be the same.
Remember everyone, like it or not, we came out of the 20th Century financial collapse because of a world war not smart financial polices and increased governmental spending. And, I for one, have no desire to inflict that upon my grandchildren.
It seems to me that what the economics savants are saying is that whether or not Boehner and the Pres work a deal the US economy is so bollixed that American bonds will have to be downgraded sooner rather than later. If our economy is in such a mess that we, like Ireland, Portugal and Greece will soon have to take our medicine, let’s get it over with. Either attack the debt cieling as though there is no tomorrow, or sit back and suffer the consequences. Half measures at this moment in time simply will not do.
If our credit rating drops it’s not because we fail to increase the debt ceiling, it is because it is so high and we are slamming into it.
This time last year the jimfrees had $50K in credit card debt. Today that number is about $37K. Our FICO score has jumped up significantly. I expect another score hike soon when I retire a card. In October when we drop below $30K installment debt it will rise again.
The Dem offer of $2B in cuts is the equivalent of my cutting $111 from the jimfree family budget.
Ding! Ding! Ding! WE HAVE A WINNER!
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