Greetings!   

 
Even if Congress increases the US debt ceiling, credit agencies like Standard and Poors, Moodys and Fitch are threatening to downgrade US debt from the safest level to the second-best level. What does this mean for Coloradoans?

The US Government enjoys the best credit rating in the world and has not lost that rating since Alexander Hamilton first took out a loan, promising to pay the debts of the 13 colonies after the Revolutionary War. Not since the founding of our country have we been in greater risk of default than we are today - yet the risk is very small.

Two things could happen. Interest rates could rise or interest rates may not rise much at all. Let's look at what this means for Coloradoans in both possible situations.
 
Interest Rates Rise

If we were not talking about the USA, interest rates should rise after a credit downgrade. Interest rates normally rise as risks increase, and this affects many parts of our daily lives.
 
Credit cards, banking and other lending activities become more expensive and decrease in frequency as interest rates rise. Consumers feel like we have less money - some folks liken it to paying more in taxes - because the money we have doesn't go as far.

The US dollar might decline in value relative to foreign currencies. Things cost more. Inflation threatens.

Bonds and other fixed-return investments decline in value, with the longest bonds declining the farthest. Municipal bonds are less appealing. Denver and other local governments may have to do a lesser number of smaller size projects and they have greater difficulty borrowing money. Could we hit more potholes than we have today?

Stocks decline in value. Companies now take on more risks. Now they have to pay more on their loans. Companies have trouble getting loans. Customers have trouble paying, and companies feel a squeeze on their margins.

Real estate suffers. Homeowners with floating rate mortgages see their payments increase. New mortgages decrease in number. And, as fewer folks can afford to buy, home prices decrease.

Unemployment may not improve and might worsen. Companies have less money to pay for new staff, and the unemployed may have more trouble looking for work.

BUT . . . this is the USA and the Rules are Different!

Because this is the USA, interest rates might not rise. The three major buyers of US Treasuries, China, Japan and the US Federal Reserve, have their own agendas. They do not need to worry about credit agencies. The Federal Reserve isn't restricted to only buying triple-A bonds, as we've seen during the recent crisis, they might even buy more junk loans. The other two major buyers of US Treasuries, China and Japan, have a vested interest in keeping Americans' buying power at a maximum, so that they can export as many goods as possible to us. As long as the big 3 keep buying, interest rates are likely to stay low.

Right now, any US Treasury that comes due in less than 2 years pays the buyer next to nothing. If you're willing to wait 30 years for your principal back, then they only pay about 4.5%.  At these historically low rates, any move up is a big percentage move. However, in the long view, it is a blip on an economic graph.

The United States is still the world's safe choice for investments. It's easy to get frustrated by politics. The world gauges the risk of almost every other investment against the safety of US Treasuries. If US Treasuries are no longer a "risk free" investment, then what is? On a relative basis, still nothing compares. I'd hazard a guess, in fact, that this does not bode well for the few (mostly European) countries who still enjoy the highest credit rating. (1)