What Will The Standard and Poor’s bond rating affect?

19 04 2011

Standard and Poor's outlook for US downgradedThe news from The Standard and Poor’s site is, “On April 18, 2011, Standard & Poor’s Ratings Services revised its outlook on its ‘AAA’ long-term sovereign credit rating on the government of the United States of America to negative.”

These are some of the items at stake in the USA: home values and the ability to buy and sell, credit card interest rates, business loans, pension or 401k values, checking or savings account values, life insurance long term values, annuities, college savings …. and so on and so on.

Ok, here’s the big news.  The Obama Administration and the folks in Congress are not stupid (well, most of them).  They are just political cowards or are intent on destroying the United States fundamental economy.  President Obama has said he wanted to fundamentally change the USA and is doing an effective job.

If anyone in Congress says what needs to be said, they are attacked as executioners of senior citizens and pre-school children.  Everyone wants the other guys golden egg.

On my previous post in 2009, I noted that the famous Julian Robertson’s words in 2008 that inflation could hit 15-20%.  Things have not improved since then and have gotten worse.

Depending on who’s doing the math, the US spent more than $400 billion in interest on the approximately $13 Trillion debt in 2010.  The  deficit spending was and still is out of control.  The interest rates paid are at historic lows.  The average interest rate paid on the debt was around 3%.  Most of that debt is short term treasury bills and those historic rates will not last.

Here is what will most likely happen. If the bond rating of US treasuries are downgraded by  Standard and Poor’s 6 months to 2 years from now, interest rates on new Treasury bills or bonds will skyrocket to around 8-12% within 3 months, no matter what Moody’s says.  The overnight bank to bank interest rate will skyrocket.  Rates on loans to businesses will shoot through the roof.  Loans to home purchasers will go sky high causing real estate prices to crash.  The ability of people to move or transfer will be severely hampered.  Those who are upside down on their homes will default and foreclosures will rise again.  The speed of all financial transactions will slow down as will economic growth.  Unemployment rates will go up and either hyper inflation or deflation will kick in full gear.  We could have another round of deflay-inflation, where real estate crashes and commodities prices inflate.

The ability of the USA to pay it’s bond obligations will not be able to be met.  Over a 4 year period the interest on the national debt will average 6-8%, depending on how high the downgrade interest rate on new bonds will be.

By that time, the national debt will be $20 Trillion at least.  But lets say for whatever reason, that the deficit gets reigned by January 2012  and caps out at $16 Trillion (very unlikely before a new election cycle).  If the average interest rate on the debt is 6% instead of 3% in 2010, the interest payment on the debt would be just $40 billion shy of $1 Trillion dollars per year.

Current folks in power are talking of slowing the growth of the debt over 10 years.  Six months to 2 years doesn’t allow for that luxury.  The solution is to radically cut or eliminate spending on all welfare programs including Medicaid/Medicare and Social Security.  The nation is not taking this seriously

Hang on for a wild ride because we are sitting on a time bomb.  The golden goose egg has been replaced with a rotten one about to explode.

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