S&P Downgrades United States To AA Rating - Let The Turmoil Begin

The old cliché of thank god it is Friday ran aground today. Why? Standard & Poorer’s downgraded the United States credit rating from triple A to double A.

No Surprise

After a weak that saw an inept Congress make an ass of itself, we were confronted with economic figures that were for the most part grim and a Europe financial system that is falling apart. Now, we have the downgrade of the U.S. credit rating. The really sad thing about all this is that like President Obama’s 50th birthday party, all of this was predictable.

What Downgrade Means

So, what does this downgrade mean for the United States? We might see the stock market wobble more on Monday, but probably not much. This downgrade is hardly a surprise given our huge debt load. When the S&P previously lowered our outlook to negative, the markets reacted with a collective yawn, so all is no lost per se.

As the months pass, however, things could become much more interesting and not in a good way. How so? Well, this is the first marker against the United States as an economic power. The AA rating now means that countries like Canada and the United Kingdom are considered better economic bets than we are. Frankly, they are.

Practically speaking, this downgrade will hit us in the wallet. It is a credit rating after all. The pummeling will be in the form of interest rates. As a country is viewed as being a more risky bet, investors want a higher rate of return in exchange for buying that country’s debts. This means that the bond market and treasury auctions are going to have to come in with higher interest rates, which means the Fed is going to have a very hard time keeping its rates at near zero.

The Lowdown

The Fed did all it could to keep us out of a depression in 2008-2009. In doing so, it essentially tried a move of last resort where it flooded the banking industry and companies with money to keep them afloat. You probably are angry about what it did with the banks, but few realize the Fed loaned companies like Verizon and McDonalds money to make it through that brutal time. Without doing this, we would have seen a complete economic collapse.

While this was a good move, the problem now is the Fed is pretty much out of ammunition. It can’t lower rates anymore because they are at zero. It can print more money, but the stuff is damn near worthless as it. You’ve probably noticed the devaluation of the dollar when you go the grocery store.

The Great Recession showed us a number of stark facts. When the crap hit the fan, the truth came out. The Federal Reserve Bank runs this country from an economic point of view. Unlike the Great Depression when it did nothing, this time it stepped in and did everything it could to stop an implosion. Unfortunately, the implosion was only put off, to wit, it didn’t work. Higher interest rates are going to suffocate the economic recovery. Think about it. How many people are barely holding on to their homes? What is going to happen as their rates and payments start going up? What if rates go to, say, 8 percent? It will be truly scary.

The S&P downgrade of the United States credit rating is another coffin nail for this recovery. For an economy teetering on the edge, it could well be the additional wait that sends us over the edge. Unfortunately, the Federal Reserve Bank is not in a position to catch us this time.

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