Uncle Sam’s Credit Rating

Standard and Poor’s has stated that there is a one-in-three chance that the United States could face a downgrade on the rating of its Treasury bonds by 2013.  If this news prompts a yawn, let me give you a moment to finish and then I will explain why this matters.

Ready?  When you and I go to get a loan, the bank wants to know the chances of us being able to pay it back, with interest.  That determines how much interest they want and whether the risk is worth it.  If we run into trouble, the bank fails to get its money back.

When the government gets a “loan,” it does so by issuing securities.  They give an investor a piece of paper (or its electronic equivalent) for which the investor gets more back than they paid for it at a later time.  You and I can lend to the government, as can institutional investors.

The thing that makes the government different from you and me as borrowers is that you and I cannot create money out of thin air.  If we try it, we may soon experience a non-consensual relationship in jail for counterfeiting.  If the government does it, it has the effect of ensuring that it can always pay its debts.  You’d think that a good thing, right?

Well, not really.  You see, when the government borrows and borrows and borrows, it has more and more interest to pay.  That interest has to be paid on time or the government is in default, just as you or I would be if we were late on a mortgage.  If they choose to “print” more money (again, most of this process is electronic these days) it means that there is more money swirling around the economy.  The more money that swirls around the economy, the less each dollar is worth.  That is called inflation, and when it spirals out of control, it is devastating to an economy.

S&P has fired a warning shot over the bow that our government’s current attempts to rein in the deficit, reduce the debt, and make good on unfunded liabilities are, well, lacking.  No matter what our leaders do, it is the market that has the final say.  A lower rating means that S&P does not believe the US to be the impeccable borrower it once was.  That in turn means that the US would have to pay more interest on loans, just as you or I would have to do if our credit were dinged in some way.

OK, so why does this matter today, right now?  It matters because no matter what Bernanke says, no matter what the President says, and no matter what Congress says, the dollar is in serious trouble.  Investors are losing confidence that the US will be able to pay its debts, that the dollar will be sound in the future.  They are putting their wealth into a form that has proven reliable for storing value for 5000 years–gold and silver.  Take a look at gold and silver prices over the last few months if you still need convincing.

That green piece of paper you carry around is worth only what it will buy.  If our government does not put an end to its insane spending habits, our philosophical arguments about what the government should do will become moot.  The unvarnished truth is that it will be unable to do anything.  Same for you and me.  If the dollar crashes completely (becomes worthless), you and I will be the proud owners of nothing.  I am not anxious to find out how people behave when they find out that all the money they have won’t buy so much as a candy bar.

If you are inclined to support the idea of government providing a social safety net, providing health care, and the million other things it has started doing in the last few decades, ask yourself honestly how long it can last.  You are not bad people, but you are misinformed.  We can’t have those things.  Reality precludes it.  Let’s all get together, left and right, to force the imbeciles in Congress to stop the insanity.  If we don’t, no one will be able to help anyone through public or private means.  We will be thrown rudely back to an state in which survival is actually in question and no power on Earth can save us.  Let’s not go there.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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