US AAA credit rating downgraded

[Richard Hakluyt]

I was wondering when this would happen :

http://www.bbc.co.uk/news/world-us-canada-14428930

[Princesca]

Interesting. I was reading speculation earlier that S&P wouldn't do that because it was unlikely to go solo when the other two ratings agencies had already said they wouldn't downgrade.

I'm not sure how much impact this will have on the markets... I would think a large part of it has already been priced in, but I really don't know.

It makes sense to me that they would, though. They blew it on CDOs and subprime mortgage debt... I guess they don't want to make the same mistake twice. The only thing I find really annoying about all this is all the crowing that's going to come from countries like Russia. 

[Princesca]

"S&P said it was because the deficit reduction plan passed by Congress on Tuesday did not go far enough."

Does that mean that the Tea Party-aligned members of Congress should have kept pushing for more cutbacks and/or the BBA?

[Grallon]

Hmmm....




G.

[Admiral Yi]

"S&P said it was because the deficit reduction plan passed by Congress on Tuesday did not go far enough."

Does that mean that the Tea Party-aligned members of Congress should have kept pushing for more cutbacks and/or the BBA?

It means all members of the legislature, regardless of affiliation, should have agreed on deeper cuts and on raising taxes.

What's BBA?

[Princesca]

Balanced budget amendment in one of the various forms it was being discussed, like tied to inflation, cost of living or something, etc.

[Admiral Yi]

Balanced budget amendment in one of the various forms it was being discussed, like tied to inflation, cost of living or something, etc.

Ah.  Well bond markets don't care about the form deficit reduction takes.

[Princesca]

So if our rating is downgraded, that means, theoretically, that it'll cost the US more to borrow, right? How likely is that to go on to impact consumer debt borrowing rates? I would assume very likely, but is it a total given?

[grumbler]

So if our rating is downgraded, that means, theoretically, that it'll cost the US more to borrow, right? How likely is that to go on to impact consumer debt borrowing rates? I would assume very likely, but is it a total given?

I think it will have some short-term effects, as people over-react.  Long-term, I am doubtful, as banks need to loan more than consumers need to borrow, in this environment.  I got a call today from my business's bank, trying to entice me to borrow money at no interest.

[alfred russel]

So if our rating is downgraded, that means, theoretically, that it'll cost the US more to borrow, right? How likely is that to go on to impact consumer debt borrowing rates? I would assume very likely, but is it a total given?

It probably doesn't really matter. Ratings on more obscure debt can be important because the agency ratings may be the extent of research done by some investors. That won't matter for US debt, because the financial position of the US isn't unknown. Also ratings can matter for regulatory reasons: some regulated companies have to hold their assets in highly rated debt, so a downgrade may mean a bunch of debt needs to get dumped by these companies. Going to AA+ shouldn't make much difference.

I also don't understand what a rating really represents on a government with a fiat currency and the power to print money.

[Princesca]

Agree Grumbler and AR It doesn't matter to me as we don't have any variable rate debt and have no intention of taking on new debt anytime soon... but I have friends and family who've been asking me a lot about this, so I wanted to kinda check and make sure I wasn't totally off base.

[Neil]

"S&P said it was because the deficit reduction plan passed by Congress on Tuesday did not go far enough."

Does that mean that the Tea Party-aligned members of Congress should have kept pushing for more cutbacks and/or the BBA?

No.  It means that the Tea Party-aligned Congressmen should have been pushing for tax increases.

[Admiral Yi]

I also don't understand what a rating really represents on a government with a fiat currency and the power to print money.

Plenty of countries with independent currencies have defaulted on debt.  Russia defaulted on ruble denominated debt.  If I'm not mistaken the UK has defaulted on sterling debt at least once.  There are bound to be times when default appears to be a preferable option to hyperinflation.

[alfred russel]

I also don't understand what a rating really represents on a government with a fiat currency and the power to print money.

Plenty of countries with independent currencies have defaulted on debt.  Russia defaulted on ruble denominated debt.  If I'm not mistaken the UK has defaulted on sterling debt at least once.  There are bound to be times when default appears to be a preferable option to hyperinflation.

I'm not sure about your history if we are limiting this to fiat money without pegs or other ties to commodities or currencies, but it really doesn't matter. It seems to me that you are assessing a liklihood of a decision to default rather than an economic condition that will make default necessary. Countries have been known to go into hyperinflation too.

[Admiral Yi]

I'm not sure about your history if we are limiting this to fiat money without pegs or other ties to commodities or currencies, but it really doesn't matter. It seems to me that you are assessing a liklihood of a decision to default rather than an economic condition that will make default necessary. Countries have been known to go into hyperinflation too.

Well, if you're going to get all philosophical about it, all defaults are ultimately choices.  I've never heard of a country that defaulted because its debt service exceeded its GDP.