S&P cuts US credit rating by one notch
Expectations of such a move after Friday's close helped pummel stocks in morning trading. Here's what it could mean.
But others thought a downgrade was inevitable, particularly after S&P placed the country's perfect AAA credit rating on "CreditWatch negative" on July 14. That status generally means the agency will make some ratings move within 90 days. The rumor was resonant enough that it helped punish stocks in early trading Friday.
Now that the downgrade has taken place, here's how the country and its consumers could be affected:
Interest rates: The previous top-notch AAA credit rating meant the U.S. pays lower interest on its $14.4 trillion in debt. With a downgrade, the country would likely pay slightly higher interest rates on its debt.
That would also hold true for consumers, as interest rates on consumer loans generally pace government debt (often the 10-year Treasury). Home mortgages, car loans, bank loans and other debt would likely carry higher rates.
Stock market impact: More observers are starting to think there wouldn't be much market response to a downgrade. That's because U.S. pension funds, insurance companies and other large investors are generally not required to hold AAA-rated debt, Reuters reports. They have some flexibility and likely wouldn't be forced into action.
It's generally expected that investors would pull $40 billion out of U.S. Treasurys if the downgrade takes place. That's practically nothing, considering there are about $10 trillion in tradable U.S. bonds, experts say.
Global response: Well, not much. Even S&P executives say global markets have already discounted to the potential risk of a U.S. downgrade.
Political impact: No politician wants to see a credit downgrade on his or her watch. It would be a source of embarrassment for President Barack Obama and members of Congress. And a downgrade would add more pressure on lawmakers to cut the deficit, which Fortune says will stall economic growth.
Dollar: There's a reason people worldwide buy the dollar and store their savings in U.S. dollars. It's widely been considered the safest option, a stable currency in any event.
That would change. People wouldn't be as keen to buy the U.S. dollar, and already they are turning to Australia, Germany, Austria and other countries for haven investing. The dollar could lose its status as the world's reserve currency.
At any rate, some Americans are taking a rather defiant stand. Go ahead and downgrade the U.S., they say. It will survive. We don't need to quiver in fear as the ratings agencies threaten us. Who even needs ratings agencies, anyway?
U.S. economist Zachary Karabell put it this way: "The best possible outcome would be for them to downgrade the U.S. -- and for the world to shrug, with rates set by the multitude of buyers and sellers. That would at least demonstrate that these emperors, clothed though they are, wear very frayed robes."
Another economist, Tyler Cowen, says he's not sure how the markets will respond and he doesn't think an alarmist reaction about the market is appropriate. "A letter grade is a letter grade and the facts on the ground did not change today," he writes. "It may or may not lead to a major sell-off. Still, years from now today may well be seen as a turning point of significance."
40 million workers in this country pay NO taxes. Zero, zilch, nada. I'm so tired of hearing that we need to raise taxes on the "millionaires and billionaires". BTW, in Obamaland, Millionaires are those who make $250K per year or more. A flat tax, on a percentage basis, with no deductions would solve a lot. The more you make, the more you are taxed, but it's the same percentage for everyone. That is the only fair way to tax people, and it gets rid of thousands of IRS employees, thereby cutting costs.
Next, make all politicians participate in the same programs we are forced to. Medicare, Social Security, etc. No more "special privileges" for Congress. No more retirement benefits when they serve only one term. Make them participate in a 401K just like the rest of us do. Getting elected to office shouldn't mean a lifetime entitlement.
Ground the government jets, with the exception of Air Force One. Everyone else rides on a commercial airplane, just like the rest of us. No more taxpayer funded trips to raise money for re-election or birthday parties. Only truly government business. Everything else is paid from personal funds. Just like the rest of us. Cut the spending!
A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned - this is the sum of good government.
1. Term Limits.
12 years only, one of the options below phased in over 18 years.
a. Two Six-year Senate terms
b. Six Two-year House terms
c. One Six-year Senate term and three Two-Year House terms
Those members with greater than 12 years service are relieved after their next six year, or less term, with the more senior leaving first up to a maximum of one third of each legislative body.
2. No Tenure / No Pension. A Congress Member collects a salary while in office and receives no pay when they are out of office.
3. Congress (past, present & future) participates in Social Security.
All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system. Congress participates with the American people.
4. Congress can purchase their own retirement plan, just as all Americans.
5. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.
6. Congress loses their current health care system and participates in the same health care system as the American people.
7. Congress must equally abide by all laws they impose on the American people.
8. No employment, directorships, consultancies, lobbyist positions or anything like the aforementioned, with businesses previously regulated by any committees a Congress Member served on/with.
9. All contracts with past and present Congress Members are void effective 1/1/12. The American people did not make this contract with Congress. Congress made all these contracts for themselves.
Serving in Congress is an honor, not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home, try to get a job and get back to honest work.
This is a MAJOR ANNOUNCEMENT. For first time in SEVENTY YEARS the USA does NOT have a TRIPLE-A credit rating....Obama, Senate, House: Get America's House in order without further delay. The American people knew the "deal" of the last week was a non-deal. This S&P action confirms that.
Vote out ALL incumbents in 2012.
Incredible world we live in where credit rating agencies destroyed the housing market and cheated investors by rating CDO's (collateralized debt obligations = packages of worthless subprime mortgage loans) AAA just 3 years ago when they should have been junk bonds (BBB) and now they have the gonads to again threaten the world economy by downgrading US treasury bonds. Absolutely incomprehensible to me that Standard and Poor and other bond rating agencies have never been sanctioned for the falsly inflated ratings for CDO's. I wonder who paid them off to make CDO's so attractive so Goldman Sachs and Lehman Bros and Deutchbank could make a fortune selling them, and now who is paying them off to sabotage the credit standing of the US, although in this case our government has been so irresponsible i hardly blame them. THis problem will never be solved until campaign finance reform is passed prohibiting wealthy individuals and corporations from buying congress and senate campaigns so that congress actually represents the American PEOPLE as our founding fathers intended.
We need an austerity program that includes both increases in revenue and spending cuts to reduce our deficits, stop borrowing, and stop adding to the national debt. The Federal government budget can not be balanced with revenue increases alone, and it can not be balanced with spending cuts alone. The impact on our national security, economy, currency, ability to trade, and our well being would be impacted so severely we would never be able to recover.
Higher interest rates, and the potential devaluation of the dollar, will kill our feeble economic recovery, will put us back on a double dip recession, and will exacerbate the unemployment situation.
I am real interested to know why this is such a shock to everyone? We have been over extended for years and it has finally caught up to us and now it needs to be deal with. And like a person who lives beyond their means the day has come where it can't just can't keep up with the payments anymore. We are sunk and it's time to put the house back in order - hard choices need to be made...the question is who will have the cahones to get the ball rolling.
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US markets were able to rally hard and largely trim the day's losses. Meanwhile, a bounce in crude oil could be in the offing.
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