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Downgrade hurts but USD no Ruble. Always BeFrugal

by jon on August 11, 2011

Standard and Poor's recent downgrade of US government bonds from the highest AAA rating to AA+ is painful. Because the downgrade is like having our "credit score" lowered, it may mean that we will have to pay a higher interest rate on our borrowings. Or that we may not be able to keep increasing our borrowings.

Today, US government expenditure is only covered in part by tax collections; the rest is financed by borrowing. We have continued to spend, because our creditors, including foreign ones such as China, Japan, and Russia have been fantastic enablers so far – but for how long? Will this downgrade serve as a warning that we cannot continue our profligate ways forever? Probably, but it is important to note that despite the downgrade, we are still rated higher than the countries who lend us money (S&P rates China's government bonds AA-, Japan AA-, and Russia BBB).

Also, in the current panicky reaction to the downgrade, we must not forget that the USA’s worldwide credibility, and the US Dollar’s value as the worldwide reserve currency, remains strong. In short, the USD is no Russian Ruble.

The American consumer has been forced to be frugal, watch their income vs expenses, and manage their debt very carefully for some time. Now it is time for Washington to do the same.

Time to be frugal. In fact, always Be Frugal.

List of countries whose bonds are rated AAA by Standard and Poor’s
Australia
Austria
Canada
Denmark
Finland
France
Germany
Guernsey
Hong Kong
Isle of Man
Liechtenstein
Luxembourg
Netherlands
Norway
Singapore
Sweden
Switzerland
United Kingdom

List of countries whose bonds are rated AA+ by Standard and Poor’s
Belgium
New Zealand
United States of America

Definitions of AAA and AA+ Ratings
Standard and Poor's rates borrowers on a scale from AAA to D. Intermediate ratings are offered at each level between AA and CCC (e.g., BBB+, BBB and BBB-). For some borrowers, the company may also offer guidance (termed a "credit watch") as to whether it is likely to be upgraded (positive), downgraded (negative) or uncertain (neutral).

AAA: The borrower has extremely strong capacity to meet its financial commitments. 'AAA' is the highest credit rating assigned by Standard & Poor's.

AA: The borrower has very strong capacity to meet its financial commitments. It differs from the highest-rated borrowers only to a small degree. Includes: AA+: (high quality, with very low credit risk, but susceptibility to long-term risks appears somewhat greater)

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