?

Log in

The · Psychohistorian


Don't panic.

Recent Entries · Archive · Friends · Profile

* * *
I made a post yesterday in another forum about the debt ceiling deal and downgrades. I'm going to quote it here. Yesterday it may have seemed alarmist; now it can actually be read as reassuring.
aghogday wrote:
The risk was that the credit rating of the United States was in jeopardy. If the credit rating was lowered everyone's interest on loans would have likely risen. We are not going to see interest rates rise for no reason.

While Obama may have believed that, it isn't actually true. There are two major misconceptions involved.

First off, the reason the U.S. credit rating is in doubt is mostly because of the long term debt and deficit problem, and that has not gone away. In fact, if the debt ceiling had not been increased, but the U.S. continued to pay the interest on its bonds, that would have been the best result from a credit rating standpoint. With no debt limit increase, the deficit would have been eliminated, which is the main thing making the situation worse from a ratings perspective.

That's not to say there wouldn't have been a lot of pain - there would have - but it wouldn't have been pain for the bond holders, and thus it wouldn't have been a credit rating issue.

Secondly, just because the government is paying a higher interest rate doesn't mean that everyone pays a higher interest rate. Even if the government did default on its debt, that doesn't mean a homeowner would default on his mortgage. If the government actually defaulted, their interest rates would increase, but individuals might see their interests rates decrease as banks found it safer to lend to individuals than to lend to the government. We've already seen that happen in California, where the state has to pay higher rates than individual homeowners do there - we'd just see the same thing on a national level.

I hope my last paragraph is as correct as the rest of it.

My post:
http://www.wrongplanet.net/postp3902430.html&highlight=#3902430

US debt downgraded today:
http://www.bloomberg.com/news/2011-08-06/u-s-credit-rating-cut-by-s-p-for-first-time-on-deficit-reduction-accord.html
* * *