Will A Decline In The Credit Rating Of U.S. Government Debt Lead To A Complete Financial Disaster?

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Most Americans know that individuals have credit ratings, but many of them don’t realize that countries have credit ratings too, and that even a small dip in the credit rating of a nation can have a huge economic impact.  For decades, U.S. government debt has had a very, very high credit rating.  U.S. Treasuries were generally considered among the safest, if not the safest, investments in the world.  But that is starting to change.  Just this past week, Moody’s Investors Service said that the U.S. government has been running up so much debt that there is actually a danger that the credit rating of U.S. government debt could be downgraded at some point in the future.  That would make it significantly more expensive for the U.S. government to borrow more money, and it would cause interest on the U.S. national debt to skyrocket even further.

 

So why should we be concerned?

Well, because even without a change in the credit rating of U.S. government debt we are already headed for a mess that is so horrific that it is hard to explain.

Democrat Erskine Bowles, one of the heads of Barack Obama’s national debt commission, recently stated that if we stay on the track we are on right now, the U.S. government will be paying out approximately $2 trillion just in interest on the national debt by the year 2020.

To get an idea of how horrific that would be, the entire budget for the U.S. government is less than 4 trillion dollars for the entire year of 2010.

So by 2020, we could have 2 trillion of our tax dollars going down the drain and not doing anything for us.  It would not be creating jobs or creating anything of value.  It would just be going straight down the toilet.

Can you imagine that?

By 2020, we will be spending a whopping $2 trillion on interest on the national debt.

And that is without a decrease in our credit rating.

Anyone who has ever had a mortgage or a credit card knows just how big a difference a couple of percentage points can make.

So if at some point the credit rating of U.S. government debt gets slashed and it gets more expensive for the U.S. government to borrow money we could be talking about a fiscal tsunami that is unimaginable.

The company that created the infographic below emailed it to me, and I think that it does a good job of summarizing where the United States is at now and what some of the implications would be if U.S. government debt got downgraded at some point….

Credit Ratings

I talk about the national debt so much in this column because it is the key to so many things.  Right now, unprecedented U.S. government spending and intervention is the only thing propping the U.S. economy up.

But right now most Americans don’t really care about the national debt.  Despite the warnings about government debt that people have been issuing for decades, the sky has not fallen yet.  Things are still going along pretty well.

But that is the way debt works.  On an individual level you can run up debt for years and everything will seem like it is okay, but then at some point you have run up so much debt that you are drowning in it.  Suddenly you lose your house, your car and you are forced out onto the street and are unable to feed your family.

And let there be no doubt – America is headed for a complete and total financial disaster.  Once the debt train has taken us off the cliff and we hit the rocks below we will not be able to put the U.S. economy back together again.

   
  • daveco

    Another good article.

    Again simple common sense and math.

    Every day the US borrows money at around 3% to pay its debt like social security payments, military pay becuase the US government does not take in enough money every day to pay these payments.

    Every day the federal reserve prints money and charges its favored borrowers like citi, sachs, bank of america around 1%.

    Soooooo every day citi, sachs, bank of america and others make around 2% on borrowing from the federal reserve and loaning it to the federal government on billions the federal goverment borrows or millions of dollars every day in profit …….. for nothing more than a few keystrokes on a computer.

    WOW!!!!!!!!!!!!

    That is the reason we have debt and that is the reason it is not going to go away any time soon.

    Again the only reason America is a great country is not because the earth is better here, it is not because our genes are better here it is because of our laws!

    Yes the laws of america are the reason for its greatness!

    Germany which is getting better laws every day has an economy which is growing for that precise reason BETTER LAWS!

    So get off the tv you dumb americans, start paying attention to laws that matter and vote and vote and vote somemore and stop watching dancing with the stars, who gives a shit about the kardashians it is all propaganda and feeding christians to the lions while rome(USA) is being invaded by the barbarians(foriegn corporations) and thinking things are ok, they are not.

    Again thanks for the post. The american dream is not dying it is withering because of lack of interest in the reason it came about in the first place which is a set of laws that were the best in the world and started with the constitution!

  • Mark …

    How much of the U.S. debt is in the hands of the Chinese? 60%?

    The Chinese government doesn’t want to pay off any debt that Chinese governments took on before the Communists took power in 1949.

    They simply refuse to recognize pre-communist bonds.

    The Chinese government created a presidence. According to their standards, if they ever go to war with the U.S. that should wipe out the entire debt the U.S. has with China.

  • srhardy

    We panicked in Australia & we paid off out debt & had none until the GFC when we borrowed a little for building schools & braodband. But i don’t think you can do that as you owe way more than you can ever repay so its inevittable that your going to loose your AAA+ rating.

    Whats amazing to me is that you still have it, how croocked is that?

    You need a devalued dollar (thats hard to do when you treat your currency as a reserve status) so your EXPORTS are cheaper. Yes it makes paying your debt harder but its better for your economey in the long run.

    Next you need better tax, we got a 10% GST that worked, got rid of loads of state taxs in exchange (which was good as they cost often almost as much as they raised).

    Lastly you need to stop spending, no more wars!

    Social security can be fixed by removing your upper cap so the rich pay more. Health can be fixed, copy ours – even your revised health changes are actuly worse than what you had before (that must have been hard to do but you did it)!

  • bro43

    Hopefully!