Now That Our Credit Rating Is Downgraded, What Does It Mean?

Tonight Standard and Poors reduced the credit rating of the Untied States from AAA to AA+. Their main reasoning (see report here - PDF) is that our spending is still high and we are not increasing revenue. As matter of fact the report really unleashes on the revenue part:

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

No one knows exactly what this will cost U.S. taxpayers, but moderate estimates put it in the $100 billion/year range:

A U.S. credit-rating cut would likely raise the nation’s borrowing costs by increasing Treasury yields by 60 to 70 basis points over the “medium term,” JPMorgan Chase & Co.’s Terry Belton said today on a conference call hosted by the Securities Industry and Financial Markets Association. Standard & Poor’s, which has given the U.S. a top ranking since 1941, reiterated on July 21 that the chance of a downgrade is 50 percent in the next three months and may cut the nation as soon as August.

“That impact on Treasury rates is significant,” Belton, global head of fixed-income strategy at JPMorgan, said during the call held by the securities industry trade group. “That $100 billion a year is money being used for higher interest rates and that’s money being taken away from other goods and services.”

So not only must we either cut spending or increase revenue to increase our credit rating back to where it was, but now we must do it to the tune of an additional $100 billion per year (estimated). This is Pandora's Box in economic terms and it was ripped wide open tonight.

Reading the rationale for the downgrade and hearing these estimates, it's no wonder why the GOP leadership is mum right now. Of course other Republicans, like Newt Gingrich, wants to lay the blame clearly on the President:

The Obama disaster continues. Highest food stamp level and lowest credit rating in history in the same 24 hours.

However just a couple of weeks ago S&P warned that the Republican plan would lead to this, while the Democratic plan would secure our AAA rating. These are the people who make the decision, yet Republicans acted like they had no idea what they were talking about. This shows the severe disconnect from reality the right has had during this debate.

In short, every one of us can not expect to pay more money because the politicians in Washington surrendered to the dangerous ideologies of the Tea Party. That might be the best news as the world economies react to the news. We could end up seeing the world markets drop the dollar as its currency and that will further prolong any recovery.

One Final Note:

With a Presidential election a little over a year away and given this horrible economy, one of the biggest shocks should be that the right has not produced a formidable candidate to challenge the incumbent President. That indicates more than anything that the people of this country are against the GOP economic policies, but only a little more than they are against the policies of the left. We really need a new direction in this country to pull our economy back from the brink. Perhaps it's time to go to more of an extreme and finally listen to people like Paul Krugman. The old decision makers aren't cutting it, so we need new ones.