What does the U.S. Credit Rating Reduction mean?
On Friday, Standard and Poor (S&P) reduced the United States’ credit rating from an AAA to a AA+ score. Now, what in the world does that mean? Comparing that to how we evaluate individuals’ credit scores, it’s like going from an 850 (perfect) to a 775 (above average). Doesn’t sound horrible, right? I have a 761 currently, which is the best I’ve ever had (If you’ve been reading awhile, you probably remember me sharing about when my score was in the 500’s).
S&P’s main competitor, Moody, has actually resolved to keep their rating of AAA for the United States, but with stipulations. The federal government must be on track to getting to 75% debt to GDP (i.e., the GDP must be 75% of the debt cap) by 2013. If not, then the U.S will get knocked down to AA+ by them too.
Now, as usual, you’re probably wondering what in the world this all means, right? Four different entities are affected by the reduction in the U.S’s credit rating.
- The Federal Government. The federal government will obviously be affected by a lower credit rating. Even though their rating is still decent, the subtle decrease in rating will do the same thing that happens when a consumer’s credit rating drops: Higher interest rates and more difficulty in getting loans.
- The World Stock Market. Because of the perception of weakness that is portrayed by a lower credit rating (countries like the UK and France now have higher ratings than the U.S.- and they’re struggling too!), the stock market, which is volatile and based on psychology, is going to struggle. The country that was once considered the strongest is now weakened. Our country’s economy is going to suffer, and in turn will cause the overall world economy to do so as well.
- The American People. Overall, we’re going to be affected. Because it’s harder for the government to get money from borrowing, we’re going to carry the burden, making it harder for us to get loans, our interest rates to rise, and our taxes to be higher. Overall, the American people are going to carry the burden of the raising of the debt ceiling, and the government needs to resolve it to prevent some other issues.
- Government officials. With elections coming up next year, is this going to affect President Obama running for re-election? What about other political candidates. I’m really not sure, especially because he’s going to be remembered for being the President who finally killed Bin Laden, who was the biggest public enemy of the United States for almost a decade. That’s all up for speculation, but I do know that all federal government officials shouldn’t be too secure in holding their seats with this hanging over their heads.
This affects everyone. The government has to get on top of resolving it, or they’re going to lose their rating with Moody’s too. The good news in all this? Countries like Japan, who’s rating was dropped in 1998, have seen economic improvement since their downrating. Maybe this is the push the government needs to get this mess straightened out too? I hope so. Until tomorrow, spend smart, save smart!
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