9 Reasons to Not Panic About the Debt Downgrade

The Silver Lining in the US Credit Downgrade

Photo by Eric E Proimos on Flickr

 The US has had a AAA rating since 1941 and certainly in my lifetime, it was unthinkable that we could ever lose this coveted rating. But the unthinkable happened last Friday and one of three credit rating agencies (S&P) stripped the US of the AAA rating and downgraded us to AA. So…what does this mean and what are implications? 

1. Only S & P chose to downgrade, that means that Moody’s and Fitch still have confidence in our AAA status. Two out of three ain’t bad!

2. Insiders at the rating agencies and many large companies believe that the S&P move was super cautious because, remember, that they gave AAA ratings to all the companies that held all the toxic assets that brought down the economy in 2008. They were severely chastised by Congress for being asleep at the wheel and they lost a lot of credibility in the process. Payback time??? 

3. The downgrade is more a function of the political impasse in Washington and concerns that our political system cannot chart the necessary course to reduce our deficit and have a balanced budget. 

4. Warren Buffet’s perspective (and I value his commentary far more than the “talking heads” of the media) is that there's no question that the United States' debt is still AAA and that he's not changing his mind about Treasurys based on Standard & Poor's downgrade. "If anything, it may change my opinion on S&P," the legendary investor said. 

5. Japan lost its AAA rating many years ago but has had no problems borrowing money at super low interest rates despite a Debt-GDP (gross domestic product) ratio about where we will be in 7-10 years.

6. Rates are a function of supply and demand. Our supply isn’t changing, so a downgrade would tell us that the demand will now change. Really folks? Where will the money go? China is a huge purchaser of our debt and might like to park it somewhere else but where? No other country has the liquidity and the size to store their cash reserves. And no other country is safer. 

7. The new rating does not mean we are heading into a recession. While our economy is still struggling (Pimco calls it a “hobble through” economy) there is room for cautious optimism. 70% of the S&P 500 companies have exceeded earnings estimates this year. The unemployment figures look bad but if you drill down, the governments (cities, states, counties, US govt) are the ones shedding jobs while the private sector is adding jobs. Isn’t this what we hoped for and expected to happen as our infrastructure shrinks? 

8. The silver lining is that this is a wakeup call to Washington. It is a loud and urgent signal that we can no longer kick this can down the road. We have to deal with our burgeoning debt, our not so balanced budget, our entitlement programs such as Medicare and social security and we need to do it NOW. Both parties need to put aside their agendas and do what is right for our country and the world as we are still the Super Power. I was encouraged by President Obama’s speech today because I think that our politicians (both parties) now realize the damaging effects of the past 4 weeks. It was a humiliating picture to the world of how partisan and childish we have become. There will be enormous pressure on the bipartisan committee of 12 to get the job done and come up with a plan to show the world that we are serious about putting our country back on the path to financial soundness.

9. I, for one, am almost elated that this happened. We needed a kick in the butt. If I had a boatload of cash lying around, I would be buying every good US Company that I could. Ahhh… if only I had a small portion of Warren Buffet’s fortune!