For decades, the U.S. government has had a AAA rating. On the scales used by the big three credit rating agencies, that is the highest credit rating that a government can get. Moody's scale actually uses lettering that is a little different from the other two big agencies ("Aaa" instead of "AAA"), but you get the point. Right now, the U.S. government is closer than ever to losing its AAA rating. The threat of a rating downgrade is going to continue to grow regardless of how the political theater that we are watching unfold in Washington D.C. plays out. The truth is that the federal government has accumulated a debt that is so vast that it will never be paid back. In fact, we are rapidly approaching the point when this debt will no longer be serviceable. If the credit rating of the U.S. government is not slashed right now, it will be soon enough. In fact, the truth is that the U.S. government is such a financial mess that it should have been done long ago. But whenever the United States does lose its AAA rating, we could potentially see financial hell unleashed because it will also mean that there will almost certainly be a wave of credit rating downgrades from coast to coast.
As I have written about previously, government debt becomes more painful the higher that interest rates go. When the big credit agencies downgrade the credit rating of a government, that is a signal to investors that they should ask for higher interest rates on debt issued by that government.
This does not always play out in practice (just look at Japan), but nations such as Greece, Portugal and Ireland sure are going through financial hell right now as they deal with reduced credit ratings and soaring interest rates.
Right now, the U.S. government is able to borrow gigantic quantities of money at ridiculously low interest rates. This is the primary reason why the debt disaster predicted by so many in the past has not arrived yet.
If the credit rating of the U.S. government is downgraded, it could finally get investors all over the world to realize that the game is over and that they should be demanding much higher returns on debt issued by the U.S. government. The truth, as U.S. Representative Ron Paul put it recently, is that the U.S. government is already "insolvent" and at some point we are all going to have to face reality....
"Ultimately, the fundamentals show this country is bankrupt."
So whether or not it happens right now, the truth is that at some point the credit rating of the U.S. government is going to go down and interest rates are going to go up.
Unfortunately, it appears that this might happen sooner rather than later.
Earlier this week, Moody's Investors Service publicly announced that it would be reviewing our Aaa bond rating for a possible downgrade.
On Thursday, S&P actually went so far as to announce that there is a "50 percent chance" that it will downgrade the credit rating of the U.S. government within the next three months.
S&P has been warning of trouble for some time now. Back on April 18th, Standard & Poor’s altered its outlook on U.S. government debt from "stable" to "negative" and warned that a downgrade was likely at some point soon if nothing changed.
If the credit rating of the U.S. government gets slashed and if that results in higher interest costs on the national debt, that is going to make it much harder to balance the budget.
The U.S. government will take in somewhere around 2.2 or 2.3 trillion dollars this year. It will spend somewhere in the neighborhood of 3.5 or 3.6 trillion dollars this year.
Included in that spending is about 400 billion dollars that goes for interest on the national debt.
As I explained in a previous article, if our interest costs double or triple it is going to make it basically impossible to balance the budget under our current system.
If interest rates on U.S. government debt were to rise to moderate levels, we could soon be easily paying a trillion dollars a year just in interest on the national debt.
If interest rates on U.S. government debt were to rise to the levels that Greece, Portugal and Ireland are now facing, it would be beyond catastrophic.
But a reduced credit rating and higher interest rates would not just hurt the finances of the U.S. government.
Any financial institution that is linked to the U.S. government in any way would also probably be downgraded.
This fact was noted in the announcement put out by Moody's this week....
In conjunction with this action, Moody's has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks.
We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the government or the affected financial institutions.
Just think of the financial carnage that would cause.
Also, check out what one Bloomberg article had to say about the potential cascading effects of a credit rating downgrade for the U.S. government....
At least 7,000 top-rated municipal credits would have their ratings cut if the U.S. government loses its Aaa grade, Moody’s Investors Service said.
An “automatic” downgrade affecting $130 billion in municipal debt directly linked to the U.S. would occur if the federal level is reduced, Moody’s said yesterday in a report. Additionally, top-rated securities with no direct links to the national government will be reviewed for similar action.
But the nightmare would not end there. The truth is that the credit ratings of large numbers of state and local governments from coast to coast would likely be reviewed and downgraded as well. Right now, many state and local governments are scratching and clawing in a desperate attempt to survive financially, and a significant rise in interest costs would be enough to wipe many of them out.
The ripple effects of a U.S. government credit downgrade would be endless.
A lot of people argue that if the federal government ran a balanced budget from now on none of this would matter.
Unfortunately, that is not true.
At this point, a very high percentage of U.S. government debt is short-term debt. That means that gigantic amounts of debt must be "rolled over" each year in addition to any new debt that we take on. So even if interest rates rise significantly on just the existing debt that we have it is going to be a total nightmare.
And make no mistake, whether it happens now or later a collapse of U.S. government finances is coming.
David Murrin, the chief investment officer at Emergent Asset Management, recently told CNBC the following....
"It's inevitable that the U.S. will default—it's essentially an empire which is overextended and in decline—and that its financial system will go with it"
Right now it is being projected that the U.S. national debt will hit 344% of GDP by the year 2050 if we continue on our current course. We are on a runaway train that is heading straight for a brick wall.
Europe is also a complete financial wreck. The sovereign debt crisis over in the EU continues to grow worse by the day and there is no end in sight.
If the U.S. collapses, Europe is not strong enough to save it. If Europe collapses, the U.S. is not strong enough to save it.
We really are entering an unprecedented time in world history. We are on the verge of the first truly global financial disaster.
It is going to be interesting to see which major currency crashes and burns first. Some think that it will be the euro. Others think that it will be the dollar.
In any event, the reality is that the current global financial system is not sustainable. The folks that are in charge can try to keep things together for as long as possible, but at some point the dominoes are going to start to fall and the house of cards is going to crash.
We have entered a time when there is going to be financial crisis after financial crisis. Even if the EU and the U.S. government can somehow fix things for the moment, more problems are going to be just around the corner.
The world has become incredibly unstable and the entire globe is going to be shaken. Most people cannot even conceive of the kind of financial hell that is coming our way as a nation.
Yes, it can be a bit sad to think about what is happening, but it is much better to be armed with the truth than to be totally clueless and totally unprepared.
Wonder if anyone can give a guess as to when the US economy will actually fall? With the way the US is printing money and shipping it overseas, we appear to be in better shape than we look.
It just shows us what a big phoney production we are forced to live in. Obviously, the credit rating should have been dropped long ago. This is mere public theatre. The people who run things will do what they want, as usual. Anyone who believes there is any basis in fact for credit ratings must be a fool. The only basis for these things is playing the public. The best bet is to watch it with humor and cheer against the powerful and corrupt.
Enjoy your own life and you will already have them beat. That’s the real reason they want to control you – they can’t stand it if you have a good time, you wretched nothing!
Control Control Control – it’s what they crave. Feel bad and you give it to them. Feel good and maintain your dignity, and you beat them no matter what. You need very little to beat them, you see… It’s hard to believe, and yet true.
Mr. G
PS – It’s all about fear – no joking. Fear of not fitting in with your middle class pals, in particular. Beat all the fears and you beat the powerful, with all their money and influence. It is that simple.
Mr. G
Wont happen
The ratings agency will NEVER downgrade, they are largely based in the US & most of the board of directors are US citizens.
Because of this the US government are able to manipulate them easily.
I would be shocked if they werent covertly paying them off or applying some sort of pressure to these individuals.
I would expect all sorts of gov agencies from the CIA etc… to have “their guys” in there feeding back info & influencing things.
Financial hell is what we should all be preparing for. I’m encouraging everyone to start saving food. Until recently I was focused on paying off all debt, but then I found some information put together by a millionaire that said some things I’d never heard before, that there is a more profitable way to proceed than paying off all debt. This can help you too to prepare–
“How to Profit like the Ultra-Rich in Times of Economic Chaos”
Complimentary Video here-
http://theelevationgroup.net/presentation/register.php?a_aid=160667&a_bid=290b868b&chan=y
And stock up on clean drinking water, store-able food, vital medicine(s), vitamins, aspirin, durable clothing, hygiene products, toiletries, necessary tools…
Charlie Sheen is such a tragedy!
We are in for a meltdown people, I have been preparing for over 2 years now, and am now seeing the signs that I hoped i would never see. I have a strange feeling it will not be long now and am terrified, because i need about another 5000 dollars in food storage, medical supplies, water security, seeds, and ammo before i know we will be well prepared to weather the storm for as long as necessary. anyone have any creative ideas? i am young, with a wife and two children, so we have been paycheck to paycheck and saving up a sufficient stockpile has been slow, hard, and taken real dedication. i have a large run of chickens, been raising pigs, turkeys, rabbits, and goats and have a 11,000 sq ft garden in the ground. we have been blessed to have bought a property out in the country in rural indiana with 14.14 acres and a nice home that we have converted to all wood heat, and a mostly-selfsufficient farm. i just feel strongly that we only have a few more months before this spirals quickly.
Some group of thugs will come along and just take everything you have saved up. Rape your wife and kill you all…and I’m sorry to say, there won’t be a thing you can do about it.
The U.S. has to get to some of those credit raters and pay them off for us to keep our AAA status. What the hell, our political parties get paid off by special interests all the time! Everyone has a price and Im sure our government can find a way to corrupt them into giving the U.S. a good rating so that we can stay afloat for a little while longer.
Just cancel all debt.Keep your house car etc and start again. The greedy super rich can keep their house and learn to cook and maintain the pool.
Islam wants to destroy America, have a go. America just takes their oil goes on the gold standard and no zillion dollar wages for banksters and CEO’s. Bring back the family unit and no more fruit and nuts.
I disagree. If Goldman Sachs is too big to fail, then so is the U.S. Government. There will be no cataclysmic meltdown as everyone seems to predict. Uncle Sam will pay his bills because he has no choice but to pay his bills. So put this idea to rest about a default because it will not happen……………
I know it will be tough to lose our credit rating, but I will be somewhat glad when the markets and ratings acknowledge the reality of our debt. If interest rates rise because no one will loan money too us that will at least show the country the problem. Likewise, when the federal reserve prints the money to buy the government debt and it causes serious rampant inflation, they will have to stop it.
But as long as we can charge on the credit card with litte apparent consequences, the public will just keep going along with it. The system is falling apart, but it is moving so slowly the public hardly notices. A big dose of reality may be the best thing for the country.
Although, I doubt these credit rating agencies will do anything. They are so corrupt and vested in the current system, They won’t have the nerve or morals to rate our debt fairly.
With accrued debt we are at 600% of GDP and we have a AAA debt rating. What a joke.
If the US economy collapses no matter how much gold or silver and food you save. Some group of thugs will come along and just take everything you have saved up. I’m sorry to say, there won’t be a thing you can do about it.
Your best bet will be to be join one of those groups of thugs, carry a gun and take from those who have what you need.
And now we have a downgrade to AA+, lets see how close this prediction is.
The world has been goin’ to crap for decades…ever since America voted Ronald Reagan for President…They blamed Carter for Iran takin’ our people hostage and they let them go just in time for Ronald Reagan to be sworn into office, and now the Republicans want to bring the credit ratings down in America, just so they can blame O’bama…Republicans couldn’t get any dirtier but then they turn around and do other things. I can’t wait ’til America wakes up and notices what the two party system has caused.
I wish the economy would go ahead and just completely crash. At least then we can rebuild, and start a new with a level playing field.
We need a revolution our government has been trampling the constitution for years. The FCC needs reform to allow for real freedom of press and speech. The NFA needs to be repealed, and a better solution found. The FDA also needs reform, there is no reason other than greed for us to not be able to import affordable prescriptions. Antibiotics should be available over the counter.
We also need better trade policy. How can American businesses be expected to create new jobs, if they cannot compete with there foreign counterparts.
The banks, and the auto industry SHOULD NOT have been bailed out. All that has done is make things far worse for the country in the future.
Had the banks, and big 3 had been allowed to crash and burn, new replacements would have been born from the ashes. As long as there is demand there will be businesses grown to supply.
Minimum wage should be LOWERED – very unpopular opinion. However I would rather work for half the current wage, and have a job than sit around without a job. Local economics and the price of goods and services are primarily based on the average income of the local population.
2 political parties are not enough we need more choices in candidates. We are not a square or round society.
There should be no such thing as a “career politician”. How can a man do what is in the best interest of the country if he is worried about how it will affect his career?
I have met many political leaders, and they are ALL SPINELESS WEASEL’S.
The tree of liberty must be refreshed from time to time with the blood of patriots & tyrants. – Thomas Jefferson.
And yes I do know the original context of that quote. The people may be ignorant but they are being wronged, and unless someone takes a stand the spineless weasel’s will continue to do nothing.
Please feel free to flame this comment. I would much happier if someone could prove me wrong.