What it Means: The United States AA+ Rating
Many people have been in a situation where they maxed out their credit cards. Once this happens, those people are not able to get any more credit if their income is not high enough to warrant an increase. It is not possible for a person to go to a credit card company and ask for the same APR for $100 down and then just give the company $50 down. Basically, this is what happened to the United States. The S&P had warned the U.S. of an inevitable downgrade if the deficit was not decreased – a warning that is now a reality with a downgrade from AAA to AA+. The S&P has been attempting to get the U.S. to reduce the deficit by $4 trillion as a gesture of good faith.
The Aftermath of the Downgrade
There was much debate and discussion between elected officials about the deficit and eventually it was cut to $2 trillion – half of what was requested by the S&P. Of course, this was not enough for the S&P. An S&P spokesman gave a statement saying that the downgrade represents their opinion that the decrease in the deficit was not sufficient enough to stabilize the government’s debt situation. Ultimately, the downgrade has one significant consequence – a higher rate is now required to borrow money.
This works much the same way that the APR on credit cards does as it will cost U.S. companies, consumers and the government more to borrow. One simple solution to this problem is to borrow less money just as people would do when the APR on their credit cards increases. As it stands, it is unclear if the U.S. will be able to accomplish an additional decrease in the deficit, particularly because of political gridlock.
The Long-Term Consequences of the Downgrade
President Barack Obama has approved legislation that is designed to lower the deficit by $2.1 trillion over the next 10 years but some worry that this may not be enough. While bipartisan efforts in the United States tend to allow for better representation for what the people want, it does slow the political process. Economic growth in the U.S. is slowing and the government must devise a plan to work more efficiently while still properly representing the people of the country.
The downgrade lead to a dismal week in the U.S. stock market after the announcement as the S&P 500 fell nearly 11% in 10 days. In addition, U.S. Treasury bonds, once considered to be the safest in the world, have been rated lower than bonds of France, Britain and Germany. It is true that these changes may be influenced by a number of factors but it is hard to dispute the fact that this coincided with the downgrade. In reality, the long-term effects of the downgrade are more troubling and will likely have a greater negative effect on the U.S. economy than any short-term effects.
China holds approximately $1 trillion of the U.S. debt and has pressured the U.S. to protect its dollar investments by working on the budget issues – a task that has yet to be tackled by the U.S. SIFMA, a securities trade group says that in the long-term, the downgrade will increase the costs of funding for public debt by $100 billion. The U.S. has not successfully decreased the deficit but has added over $1 trillion to it and the deficit now stands at 9% of the gross domestic product. In a time of an economic crisis, the U.S. and countries all over the world must be diligent in managing debt to protect their financial well-being from a struggling global economy.
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