Well, it happened. What many analysts had thought was a fait accompli finally materialized and the US lost its AAA S&P rating. It fell by not one, but two notches. I have a couple of reactions to the downgrade. First, wow! S&P has really remediated its own credibility if we're paying attention to what it says. If I remember right, the company was assuring us that the CDO debt that defaulted and led to our mortgage debacle was bullet proof. What happened in the interim? Did S&P's credit analysts go to night school?
My second reaction is one of extreme disgust. This action costs us in several ways:
- Whatever exposure we have to Treasury debt (T-bills, notes and bonds) will lose value when trading begins on Monday. I've mentioned this before, but if you own any portion of a bond fund--which most of us do--you'll take a loss.
- The cost to fund our federal debt has risen. By how much? It's not clear, but even if it rises by only a handful of basis points, the increase will be burdensome. Remember, at our current debt levels, a one basis point (1/10,000) rise in rates will result in a $140 million increase in the cost of funding our debt. That could build several nice schools.
- Since all dollar denominated debt is indexed off of Treasury securities, our personal financial obligations will begin to reset at higher rates, too. That includes mortgages, credit cards, car loans and other kinds of personal debt.
- The cost of corporate debt will also increase, which will invariably get passed on to consumers. Not only that, but the rise will affect new investment, which will have negative implications on job growth.
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