Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.
Friday night the Standard & Poor’s credit rating service lowered the U.S. government’s credit rating from AAA to AA+. This means there are about 18 other countries with a higher credit rating than the U.S., including France, Switzerland, Austria and the United Kingdom.
For decades the U.S. has not only been AAA-rated, it’s been considered the highest-rated of the AAA countries. Now, from a credit rating perspective, we lag behind countries like the UK and France, which have their own set of financial problems.
Here’s what all this means from a practical point of view. The U.S. has been like a household with a perfect 850 credit score. Now, because our “debt to available credit” limit is so high, our credit score has been cut. This means it may be a little tougher to borrow money, and those loans may come at higher interest rates.
What does this mean for you, the consumer? Theoretically, it should mean higher interest rates for everything you need to finance. Because if a near-perfect borrower like the federal government, which has its own money printing press and the ability to boost revenue by raising taxes, will be charged higher interest rates, every other borrower in the world is going to see its rates jump too — from corporations to city governments to credit card users. But that’s not a certain outcome. Japan’s credit rating was lowered from AAA in 1998, and its interest rates are lower today than before the downgrade.
What about the stock market? There are two recent examples I can point to — Japan and Canada. When Japan lost its perfect credit rating, its market was up 15 percent a year later. Canada was downgraded in1993, and its stock market was up 25 percent a year later.
What about our government? S&P made it clear that the bickering and last-minute deal-making between the political parties in Washington was one reason for the downgrade. The other reason: spending cuts were not deep enough and revenue increases (i.e. tax hikes) were not included in the deal.
This means that the conversation about balancing the federal budget is just beginning. Both Democrats and Republicans must give up more ground in this debate. That means deeper spending reductions and changes in the tax code in the coming years. After being stripped of its AAA rating in 1993, Canada was fully restored to AAA by 2002 thanks to steep budget cuts and increases in tax revenue. The country is now considered to have the best credit in the world.
The S&P downgrade is troubling news, and financial markets today will undoubtedly be extremely volatile. It also doesn’t help that last week the Dow lost nearly 700 points. But after the initial shock, the market will at some point return to focusing on the fundamentals of what companies earn. And, based on the August earnings reports, those are hovering near an all-time high.
– By Wes Moss, for Atlanta Bargain Hunter