Economic Watch: U.S. Credit Downgrade Could Have Myriad Consequences

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The United States could be headed for another credit downgrade. If that occurs, there could be ripple effects from consumers to the White House.

Leading credit agency Moody’s on Nov. 10 lowered its U.S. credit rating outlook to “negative” from the previous “stable” citing large debts and political gridlock, which is widely seen as a step closer to an actual downgrade.

In August, major rating agency Fitch downgraded the U.S. long-term credit rating from AAA to AA+. More than a decade ago in 2011, a debt ceiling standoff in Congress prompted the Standard and Poor’s to drop its score for the United States to AA+.

The rating agencies “have good reason for becoming concerned about the U.S. government’s triple A bond rating,” Desmond Lachman, a senior fellow at the American Enterprise Institute and a former official at the International Monetary Fund (IMF), told Xinhua.

“The government is now running (a deficit of about) 8 percent of GDP at a time of cyclical strength, when it should be at least running a budget balance,” Lachman said. “This is now putting the public debt on an unsustainable path.”

According to the nonpartisan Congressional Budget Office, by the end of the decade, the U.S. government debt to GDP ratio will be at a record level, similar to levels immediately after World War II.

An added reason for concern is the political dysfunction in Washington and the lack of any real political consensus to address the budget issue, Lachman said.

Clay Ramsay, a researcher at the Center for International and Security Studies at the University of Maryland, told Xinhua, “eventually Moody’s will join the other two major services in moving the rating from AAA to AA+.”

IMPACT ON CONSUMERS, GOVERNMENT

A credit downgrade could have a significant impact on consumers. Ordinary Americans could see higher interest rates for myriad loans, including those for credit cards and mortgages.

Government treasury bills and bonds, which have always been the safest investments for average Americans, could become riskier if the United States sees a credit downgrade.

Banks have always used the 10-year treasury yield to determine mortgage rates. If demand drops, rates could increase.

Moreover, a credit downgrade could make it difficult for the government to borrow as much money as it does now.

The government could also be forced to borrow at a higher interest rate. That could impact the government’s ability to pay federal employees or pay Social Security – payments to retired individuals.

POLITICAL IMPACTS

A credit downgrade could be bad for the White House in the lead up to next year’s presidential election.

“A credit downgrade would be bad news for the Biden administration because it would suggest a lack of confidence in America’s long-term financial situation,” Brookings Institution Senior Fellow Darrell West told Xinhua.

“Opponents would use a downgrade to criticize Biden and say his policies have not produced the desired results,” West said.

Christopher Galdieri, a political science professor at Saint Anselm College, told Xinhua a downgrade would be a piece of bad economic news that would contribute to voters’ negative assessments of the U.S. economy.

A GOP House would be unlikely to cooperate with any remedies the White House proposes during an election year, Galdieri said.

“People tend to blame the president for most economic news,” Galdieri said.

Ramsay said the public, however, will not focus on the credit rating. The public evaluates the economy by looking at the rate of inflation through their own experience of prices, including whether their wages or salary are increasing, not just keeping up.

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