The downgrade of the US's credit rating, by relation of the currency, downgrades the credit worthiness of every corporation, business, organization and person in the country.
(Reuters - United States loses prized AAA credit rating from S&P
http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-idUSTRE7746VF20110806)
In a mostly debt based economy like the US's, credit worthiness is a big deal. That's why so many people with credit cards and people who are trying to get a home loan (or any kind of loan for that matter), obsess about their FICO score (their personal credit rating). A downgrade of credit worthiness makes it much harder to get loans and harder to pay off existing loans.
Here's how the some of the cascading affects of a national credit downgrade costs us all.
There are other AA+ rated countries in the world who have a much, much lower debt-to-income ratio than the US. That low debt-to-income makes those other AA+ (and the AAA) countries more attractive to global investors.
If you were a global investor, who would you feel more secure about lending money to - a nation that is bankrupt and governed by dysfunctional politicians or a nation that has very little debt and is governed sensibility?
(Hint - The US lost its AAA rating because of too much debt and incompetent politicians.)
Since America's economy is based mostly on debt, the country depends on cheap loans from foreign investors (lenders).
Other countries that have a stable currency, low debt, and positive economic growth are far more attractive to investors than the US. To win back those investors the US has to sweeten the pot by paying the investors (lenders) higher interest rates to get the loans and credit the US needs to function.
Higher interest rates for the federal government will result in higher taxes for the rest of us in order to pay for the rate increases.
Here's the double-whammy. A lot of interest rates on consumer credit and debt are based on the federal interest rates. The higher the federal interest rate goes the higher the consumer interest rates will go.
Higher taxes and interests rates for the general public could be enough to push the nearly flat-lining US economy into a full-fledged economic depression worse than the Great Depression of the 1930's.
The only way now for the US government to afford higher interest rates is to print more money in addition to the trillions of excess that have already been printed. This has a very high risk of triggering hyperinflation.
We're not just getting hit by the federal government debt; we're also getting smacked hard from all levels of government debt all the way down to local, small-town-USA debt.
Now with the best infomercial announcer voice you can image, "But wait... there's more!"
It's not just interest rates on government debt that's going up, it's also the interest rates on any bonds that businesses issue. You know, the places were people work?
Might explain why you haven't gotten a meaningful raise, if any at all, in such a long time.
Any time a government or a business sells bonds they are taking out loans, going into debt.
A bond is a type of loan, to paid with interest. Governments and businesses issue bonds to raise more money to pay for things.
For example; a city council votes to approve a bond issue to build an addition to the school so the school can handle the growing number of students. Investors give the city money in exchange for IOUs (bonds) to be paid back with interest by the city over a specified period of time.
The interest rate of many bonds is based on the interest rate for US federal bonds. If the interest rate for federal government bonds go up so will the interest rates on many other bonds throughout the country.
Higher interest rates make it more expensive for bond issuers (like the city in the above school bond issue example) to get the money they need for growth (more classrooms), maintenance (bridge repair), disaster recovery (flooding) or anything else they need loans for.
When bond issuers can't afford to pay the higher interest rates bond buyers (investors/lenders) are demanding (interest rate hikes) then the bond issuers can't get any more credit. This is a form of credit freeze. A credit freeze in a debt based economy means a lot of things come to a grinding halt - for everyone.
By losing it's AAA credit rating, the US government now has to pay higher interest rates on its debts. Taxpayers have to pay higher taxes to pay for those higher interest rates on government debt as well as paying higher interest rates on their own debts because those interest rates are based on the federal interest rates.
This compounding of interest on all debts, both public and personal, are costing us all dearly.
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Related Links:
Reuters - United States loses prized AAA credit rating from S&P
http://www.reuters.com/article/2011/08/06/us-usa-debt-downgrade-idUSTRE7746VF20110806
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