According to CNN, the Standard & Poor’s rating agency has told the Obama Administration that it plans to downgrade the U.S government’s AAA credit rating. The ruling has not been announced to the public and it is reportedly being challenged by the White House. The move would be unprecedented, for the United States has long been considered one of the most credit-worthy financial entities in the world.
Federal officials are arguing that S&P’s models of the U.S. government’s economic stability are off-base by trillions of dollars. A source says they are debating the ruling, but it is unlikely they will be able to change the decision. The announcement will likely send stock markets around the world into a tailspin and change the face of the global economic landscape.
There have been rumors all over Wall Street that S&P was considering a downgrade, leading to major dips in stock prices. The United States government has maintained a AAA credit rating since the founding of Moody’s in 1917.
When I was in graduate school studying for my PhD in Finance, it was effectively inconceivable that the United States government could ever have anything other than risk-free debt. The idea that we’re now on the brink of seeing such a cataclysmic change in the US government’s financial standing is the stuff that economic nightmares are made of.
The regime shift has begun, as the mighty economic power that the United States built during the 20th century is starting to be questioned. With debt spiraling out of control and the inability of politicians to raise taxes on the rich, it is hard to see any financial light at the end of the tunnel. All the while, American citizens are wealthier than those of other countries, so some degree of fiscal responsibility and political courage might go a long way toward protecting us from serious trouble.
The economic future of the United States is also grim for a few other reasons. The population is getting older, meaning that the nation is going to be less productive. Our children are poorly educated relative to the rest of the world, reducing their ability to compete. Most significantly, our political system has hit an unforeseen degree of gridlock that keeps politicians from being able to do the right thing, and they are instead doing what’s best for corporate America.
Consider the announcement by S&P to be the beginning of more interesting things yet to come. Buckle your seat belts, for it’s going to be an interesting decade.