April 19, 2011

United States Government Debt Outlook

Global preference to the dollar has helped America secure a stellar Credit Rating from rating agencies including Standard and Poor's and Moodys. As the world largest economy, the U.S. has long had an economic engine that provides trust and security when investors buy its government issued debt. Something happened yesterday however that has brought question to America's debt sustainability. Can the U.S. government pay interest on outstanding treasuries notes and treasury bills. On Monday, one of the major rating firms in the world - Standard & Poor's - lowered its outlook on the united states rating to negative. This does not mean the U.S. has lost or been downgraded from its actual rating of AAA, but it's the first time since Standard & Poor's started issuing outlooks for countries in 1989, that its outlook for the U.S. was something other than "stable." The three U.S. major indexes which are the Dow, Nasdaq, S&P 500, were all down more than 1% after the news was announced. Here's an Editorial from the NY Times About it: Good Advice from S&P.

United States National Debt Lowered by Stand and Poors
Treasury yields - the interest the U.S. government pays on its debts - spiked on the announcement. The U.S. has more than $9 Trillion outstanding in government debt to the public. When the Treasury Yield goes up like that, it means the interest payments that are going to be made towards paying the United States National Debt, increase. This effectively increases the debt burden because interest payments to debt holders cost the government more money to pay. Since interest rates are so extremely low right now, whether its the 30 year mortgage rate of 4.87 or the 60 month car loan of 5.97 (I remember when this was 6.17 several months ago) rates in the short to midterm, will eventually go up. This increases the debt the government pays out or issues because it becomes more expensive for them to borrow. Good economic policy in which the economy is once again firing on all cylinders, is what is needed here in my opinion. The U.S. would have to borrow less if its tax receipts and economy were strong and showing promise of sustainability, bringing investors off the sidelines. Of course more money in the Treasury, means the ability to pay off debt, preventing a potential downgrade in near future. The U.S. must focus on Economic growth and tax reform right now.

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