USA Loses AAA Credit Status on Debt Downgrade

[Treetop]

So what happens now? Anyone have any ideas? how does this play out?

Most pension funds are mandated by their prospectus to only invest in AAA graded debt. So if this plays out, you can expect a MASSIVE divestment of bonds this coming week... and most likely insufficient buyers to prevent a Bond Market meltdown.

Ouch! that doesnt sound good at all.... So what about our interest payments?

[barrytrot]

It means more of our $$$ will be used to pay for an increased interest rate.

The interest rate on the existing debt is set, it doesn't change. Perhaps new debt may be changed, but the old debt is at a fixed rate.

That's assuming by "our" you mean the United States debt.

This could result in the rate people pay for new loans being changed for the higher, of course.

Again, it is only NEW loans of any kind, unless you have a variable rate loan. (NOTE: Never take a variable loan, it's too much risk for the reward. In most of them you end up losing out in the long run.)

[argent_pur]

There need not necessarily be a huge sell-off of US Treasuries...only S & P downgraded our credit rating. Fitch and Moody's have kept it at AAA for the time being. The chief economist over at Moody's, Mark Zandi, said "U.S. Treasuries are still the gold standard." I had to choke back that last part, but for now Treasuries still dwarf the gold market.

[TXBullion]

What a week to be busy and not be able to keep up with things! Very interesting stuff here!

[TXBullion]

It means more of our $$$ will be used to pay for an increased interest rate.

The interest rate on the existing debt is set, it doesn't change. Perhaps new debt may be changed, but the old debt is at a fixed rate.

That's assuming by "our" you mean the United States debt.

This could result in the rate people pay for new loans being changed for the higher, of course.

Again, it is only NEW loans of any kind, unless you have a variable rate loan. (NOTE: Never take a variable loan, it's too much risk for the reward. In most of them you end up losing out in the long run.)

I did not know it was fixed. Is that for the life of the debt, does it readjust? I assumed it was prime plus x% or something.

[argent_pur]

Every Treasury bond sold has a fixed interest rate that doesn't change over the life of the bond. But, new bonds can be issued that have different rates. Unlike Savings Bonds, Treasury bonds are negotiable (they can be bought and sold on the secondary market). So, when interest rates rise, anyone holding onto older bonds that pay less interest have to sell them at a discount to attract buyers, which is why we always hear that interest rates and bond prices move in opposite directions.

[Treetop]

Every Treasury bond sold has a fixed interest rate that doesn't change over the life of the bond. But, new bonds can be issued that have different rates. Unlike Savings Bonds, Treasury bonds are negotiable (they can be bought and sold on the secondary market). So, when interest rates rise, anyone holding onto older bonds that pay less interest have to sell them at a discount to attract buyers, which is why we always hear that interest rates and bond prices move in opposite directions.

Interesting. Many articles I have recently read said if our credit rating was downgraded our interest payments on current debt would be going up to reflect the rise in interest rates.

[theo]

Every Treasury bond sold has a fixed interest rate that doesn't change over the life of the bond. But, new bonds can be issued that have different rates. Unlike Savings Bonds, Treasury bonds are negotiable (they can be bought and sold on the secondary market). So, when interest rates rise, anyone holding onto older bonds that pay less interest have to sell them at a discount to attract buyers, which is why we always hear that interest rates and bond prices move in opposite directions.

Interesting. Many articles I have recently read said if our credit rating was downgraded our interest payments on current debt would be going up to reflect the rise in interest rates.

Because we are issueing new debt plus we have to keep rolling over old, maturing debt. I don't know the exact number, but I think we'll have to issue/rollover about 3 trillion in debt over the next year.

[argent_pur]

It sounds like a wording issue. Interest payments will increase because the gov't has newfound borrowing capacity, AND we may see higher interest rates, but those rates will only apply to newly-issued bonds.

Heck, I read the AP article written by the Economics writer, and he said the debt-ceiling deal struck in congress was "a cut of 2 trillion dollars in the debt." WHHHAAAATTT!!???! Really, the Econ writer, who should know his terminology better than the average bear, has NO excuse for mis-information like that.

[aristobolus]

QE3 to the rescue!!!

[Lemon Thrower]

first, folks should have seen this coming a mile away. the only reason it had not been lowered sooner was that uncle sam in a technical sense can never default because he can always print the money he owes you. but at some point people don't want it.

moodys has us at their best rating but with a negative watch.

uncle sam knew this was coming. we recently had the 1-year anniversary of dodd frank. one section of that huge law required federal agencies to amend their rules to eliminate references to or reliance up the ratings agencies.

going forward,this should mean higher interest rates but those have been manipulated well for a while so i wouldn't assume that will happen.

its certainly not good news so you will have panic selling.

as someone said, it reinforces the notion that the dollar is falling and makes people consider alternatives, like gold. this is especially true for folks who manage large amounts of money and need academic criteria to back their decisions.

[Tourney64]

Most of the US debt is short term (less than 6 months) debt, so interest rates for the US will rise immediately. Silver and gold will not go up. The economy will slow further due the increased interest rates. People will move money out of the market and put their money into US treasuries, which boosts the dollar and decreases PMs..

[68Camaro]

Slept on this; I was emotionally and physically wiped out yesterday (the market only part of it).

The points above are all true (at least the valid ones, but I won't go into every one).

a) I don't know what happens when only one agency downgrades, and the others don't. Good point. However, S&P is an important one. (And Zandi is in the pocket of the government; one of the reasons Moody has delayed downgrading.)

b) Yes, this was inevitable, but the timing really sucked. Not the time of day, but given that it was at the end of a sell-off week.

c) To a question on this - major financial announcements are always made after market close, so as to not disrupt the market.

d) The greatest near-term impact is psychological - investor confidence. It also could stimulate or embolden an economic take-down move on the part of another government with ill-well toward us. Russia, China, etc. It will further simulate interest in finding a new reserve currency. Or creating a new global currency.

e) Yes, this only affects new debt. But the amount of new debt we will borrowing in the next 10 years is nearly equal to our total old debt. Plus the old debt revolves - it has various terms, short, middle, long. And as pointed out above, all the shorter-term debt will have to be re-borrowed, now at higher rates. Which has the "knock-on" effect of further increasing our debt, since the cost of borrowing will now be higher.

f) I would expect interest in the dollar to be related to this, so near-term I expect the dollar to fall. Whether that continues depends on whether or not the other major current reserve currencies do better or worse than the dollar, so that may not be saying much. The Euro is in a world of hurt, as is the pound and yen. So the dollar index may not stay down as long as the rest of the world (at least those involved in the major indices) sucks as bad or worse as we do. If the Germans hadn't gone with the Euro and still had their mark, they would be the safe haven currency. As it is, the Swiss Franc is looking better and better, such as that is.

g) If things go down badly all over, then PMs may go "down" as well. But here's the thing. The really important measure is - what will PM buy, in real goods? That may take some time to shake out and mature. Keep reminding yourselves that all these reported financial measures are in terms of fiat currencies that have no current ties to anything solid. The dollar is the keystone to this ponzi scheme. Yank it out, and the whole thing comes falling down. (And they know this, so TPTB will be doing all the can to prop it up near-term.) But no matter what these fiat currencies do, it's what PMs buy in real goods that matter.

[Treetop]

e) Yes, this only affects new debt. But the amount of new debt we will borrowing in the next 10 years is nearly equal to our total old debt. Plus the old debt revolves - it has various terms, short, middle, long. And as pointed out above, all the shorter-term debt will have to be re-borrowed, now at higher rates. Which has the "knock-on" effect of further increasing our debt, since the cost of borrowing will now be higher.

Anyone have any idea how much of our debt will be rolled over over the next year? how about over the next 5 years?

this issue still sticks out to me because we have many issues to face. Such things take capitol, as all here know were already need deep cuts which will already cause major ripples as we execute them. Assuming we ever do. so the more capitol taken up by interest makes this all the harder...

[Lemon Thrower]

this should result in increased interest rates, but with the fed buying about 70% of what's offered i would not assume it will immediately.

timing - the sell off this past week was probably due to people selling who had advance knowledge. there are very few coincidences.

if we felt OK letting S&P do this now, then things must be really bad in europe. except some more shoes to fall over there, soon.

[neilgin1]

i still cant get this bad taste out of my mouth, i ACTUALLY feel ashamed...and then i pop open (on computer) the newspaper and see that a Chinook with our guys on a "kill/capture" mission in Afghanistan, eastern part, got blown out the sky, 31 dead, and these were Special Forces, which makes the loss even more grievous...i dont mean to say if they were from the 10th Mountain, the big Red One, or the 101st, it would be any less terrible, but 31 JSOC guys can do the work of 2 companies of regular INF...just sucks, miserable f###ing jihadis...we should just get outta there, its like Nam all over again...we dont know what "victory" looks like, hasnt been spelled out, Karzai's like Ky, just a crooked dope smuggling pos, the bad guys can creep back into sanctuaries, this time its the Frontiers Agencies of Pakistan, and we've whacked 12,000 jihadis on "kill/capture" in the past 12 months and i can guarantee you theres 10 to 20 times more of this f###ko's ready to take our boys on...oh do i hate chickenhawks. i'll shut up now, i'm buying silver today.

[henrysmedford]

You can read the S&P report here.--http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8

[68Camaro]

a Chinook with our guys on a "kill/capture" mission in Afghanistan, eastern part, got blown out the sky, 31 dead,

Oh man, I hadn't heard, so I go open up the news and see it. I had a head-ache starting this morning; this made it worse, just took 4 ibuprofen...

[cesariojpn]

China is now pissed at us. The french are "Yeah, they'll survive."

http://finance.yahoo.com/news/China-fla ... 2.html?x=0

[neilgin1]

China is now pissed at us. The french are "Yeah, they'll survive."

http://finance.yahoo.com/news/China-fla ... 2.html?x=0

hell with the Peoples Republic of China, i'm so sick of them, i'm sick of looking at every piece of consumer goods i HAVE to buy, saying, "Made in China"....i actually GO OUT of my way, NOT to buy chinese...only when absolutely pressed against the wall, me and buds got a shorthand word we use when referencing this tool or that tool..or anything, we ask, "was it 'rice"?" ...meaning was it made in China, and we are getting hard core about not buying "rice".....

watch out for the PRC, they got this strategy called "The String of Pearls" (http://en.wikipedia.org/wiki/String_of_Pearls_(China) ).....while our middle class is getting killed, you got a billion Chinese all wanting to be "middle class"....and their cyber units been hacking defense contractors, the Pentagon, a lot of companies BIG TIME, stealing technology...we should set some cyber "bait" out there for them...load the STUXNET virus in there...give them a nasty surprise, but the hellish bastards would probably try and crash our electrical grid in retaliation.

[Mossy]

This is going to drive inflation up as the politicians demand more money be printed to allow them to keep spending. Gotta keep kiting those "checks".

[cesariojpn]

watch out for the PRC, they got this strategy called "The String of Pearls" (http://en.wikipedia.org/wiki/String_of_Pearls_(China) ).....while our middle class is getting killed, you got a billion Chinese all wanting to be "middle class"....

LOL, what "middle class?" They don't have enough middle class to fill their malls and apartments!!

http://www.youtube.com/watch?v=rPILhiTJ ... r_embedded