The US saw a drop in its AAA credit rating on October 12th, with the rating falling to AA+. Now, AA+ is still a respectable rating, but the trend is disturbing. It isn’t like we didn’t see this coming. Since 2008, we have been getting warned about this. From the October 12th announcement:
“You can see an indication of concern about the easing course the Fed is likely to continue on,” said Sean Egan, who runs the Egan-Jones credit rating agency in Haverford, Pa. “There’s a number of items that are going to be difficult to reverse as we get down that road, starting with the dramatic underfunding of state pension funds.”
The government has run two straight budget deficits of more than $1.4 trillion, with more to come for the foreseeable future. Meanwhile, the Fed is making noise about printing more money to pay down the debt, which will have the effect of devaluing the dollar. Paying the debt with devalued dollars is certainly a way to get rid of debt, but if you are a creditor, this is not good news.
Comments by the Fed have sent the dollar tumbling and helped increase gold prices by over $125 an ounce in the last month. Gold is currently selling at $1378 an ounce, almost double what it was on Obama’s inauguration day.
With this development, it is safer to lend to Warren Buffet than it is to lend to the US Government.What this means is that there will be considerable pressure on the interest rate that the government will have to pay in order to attract “lenders.” People traditionally buy savings bonds and treasuries, which pay relatively low returns, in exchange for the security offers. As the risk you are taking gets closer to the odds of winning at a Vegas roulette table, the payoff must increase to compensate for that risk.
This means that interest on the debt will begin to take up more and more of the budget, as the cost of borrowing increases. This will increase deficits, and cause the rating to be reduced at an increasing rate. Anyone who has ever gotten into credit trouble can tell you that your credit score goes down as your credit card balances increase.