Saturday, September 19, 2009

What Happens When the US Loses Its Triple A Credit Rating?

Here's one to think about.

Investment rating services generally mark down the quality of AAA rated debt once interest payments exceed 10% of revenue.

Well, it turns out that subprime borrowers are not the only ones painting themselves into this well-known corner. Uncle Sam could be in this predicament as soon as the year 2012. That is, in 3 years!

Here's how the vicious cycle works.

Once you lose your AAA rating, you have to pay higher interest charges on debt - sometimes much higher. Then interest payments become an even larger component of your monthly expenses - and, of course, your credit rating drops further still. Then your interest payments rise again. Then your credit rating drops again.

You get the idea!

In its 19th century heyday, the US was a net creditor to the world. American savers funded international capital investment around the globe. This continued into the mid-20th century.

Now that situation is exactly reversed. American borrowers are paying ever higher interest payments on trillions of dollars of escalating debt and capital investment is withering.

Note: It is capital investment derived from savings that builds economic strength. Spending and borrowing breed economic weakness.

This is the road to ruin.

Mr Obama. Mr. Bernanke. Don't do it!

Our children and our grandchildren will pay for our mistakes - with devalued (or possibly non-existent) dollars!

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