Saturday, August 6, 2011

S&P Downgrades US Government Rating from AAA

Late this evening, S&P announced it is downgrading the US Government's credit rating to AA+ with a negative outlook.
If we learned anything from the financial crisis of 2008, it is that investors should do their own credit analysis and not rely on what the rating agencies say. That is why, to me, the downgrade itself is a non-event.

I'm not saying there won't be reaction in the the markets. There may be a reaction, but in my opinion, if people react to S&P's release, they are reacting to the wrong thing because all it does is state some things we already know about the country.

The only reason I see this as an event is the headline value. People who have never even heard of S&P are going to be treated to plenty of headlines about this downgrade (and chances are all they are going to read are the headlines). This could put fear into the markets. Political talking heads will blame both parties (Republicans: see what happened on the Democrats and Obama's watch?? Democrats: see what the GOP brinkmanship did to the country??) but it is the fault of both parties that we are in this current position.

It has been apparent for some time now that the US government is in an unsustainable financial position. We spend too much money. We spend more than we earn, so we have to take out loans. It is a basic problem that every person reading this blog can easily understand: if you spend more than you earn for a long period of time and borrow heavily to keep up your lifestyle, you end up with an ever-growing pile of debt.

Did you really need S&P to tell you that?

I don't see the S&P announcement as a bad thing. Maybe it will cause more people to investigate our government's finances and figure out how to fix them. We can do it the right way (cut spending/entitlements, IMHO) or the wrong way (increasing revenues, A.K.A. tax increases), but if we do nothing, it puts the future status of the USA at risk and as a US citizen, that is my least preferred outcome.

I'm not going to turn on the TV or read a financial news article this weekend and suggest you do the same. If you want, go to the us government website and read about what government expenditures look like and where the money comes from.

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