What does the downgrade mean?

/ 6 August 2011

We woke up this morning to this question from Nate:

what does the down grade from AAA to AA+ mean? How will it affect us? just wondering

nate 🙂

How can I resist a question like this from my 13-year-old? I’m glad he’s thinking about the issue. Here’s how I responded. What would you say?

It’s kind of like a movie review. The rating is a review by Standard & Poors of America’s likelihood that we’ll repay the credit other people give us. Before we were three stars (the best), now we are 2.5 stars (pretty good). I think the impact will be not very large because I think most investors have their own sense of the USA and our credit worthiness. We are in the news all the time, and the news has been scary weird of late. Anybody with have a brain-cell should be worried about our future ability to pay back debt, so they’ve already gotten a bit jittery about buying that debt from us. In other words, I don’t think the movie review matters as much when everyone has seen the movie for themselves.

That said, the fact that smart investors will get jittery about our debt is a problem. It means we won’t be able to borrow as much, and since our lifestyle in the USA has been built on that borrowing, it means that tough times lie ahead. That, however, is not news. Where else can we get the money we need if we can’t borrow it? I think we have to face the fact that our taxes are too low and we each need to help pay for the services our government provides, or cut those services. Services we can cut should begin with the military. Taxes we should raise begin with those on the wealthy.

So, that’s the picture from my little brain,


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