Friday August 5, 2011, the United States lost its triple a credit rating for the first time. This prestigious rating allowed the country to borrow money at very low interest rates. This is important to all consumers because those interest rates are carried into other financial lending rates that will affect the average person and their ability to get credit at low rates. Many lenders look to Moody's Investor Service, Fitch Ratings and Standard & Poor's when they make loans and base interest rates according to a country's credit rating. The United States Congress struggled recently until the last minute to avert a downgrade of the United States credit rating.
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Moves to raise the debt ceiling and deal with a $14 trillion dollar debt load moved along at a snail's pace. While there finally were some agreements and a new debt ceiling limit, many feel that spending cuts and revenue increases signed into law by President Obama on August 2, 2011, did not make adequate changes in spending and debt management.
Much of the US debt is currently held by China. China has its own credit rating agency controlled by the state. It had already decided to make the first move to downgrade their U.S. credit rating. The effects of this downgrade will mean that China may fail to purchase U.S. bonds. In response to this action, investors will lose confidence in those same U.S. Treasury bonds and stop purchases. In a snowball effect, this will negatively affect the stability of the debt and further tighten credit. The cost of credit on all fronts to everyone will rise. The Stock Market is also very reactive to negatives.
Any downgrade of the United States credit rating status is estimated by JP Morgan Chase & Company to cost an additional $100 billion per year to the U.S. The snowball effect of the U.S. credit rating may increase consumer costs for mortgages, vehicle loans, and other loan products tied to Treasury bond interest rates. Some think that raising the debt ceiling only creates a false security in the minds of some people, but not for the lenders. This huge debt load is passed along to future generations and may negatively impact their lives.
The Federal Reserve decided to keep the historically low interest rates for at least the next two years. Lower house prices and low interest rates makes it easier for some Americans to purchase an affordable home. This is a relief for many.
The current debt ceiling plan doesn't go far enough to reduce overall debt, according to many. The deal Congress came up with only lasts until 2013, when the haggling over spending cuts and new revenues begins anew. A congressional committee will be formed to make additional recommendations before the end of 2012. Standard & Poor's and others wanted to see a package that would bring deficit reductions of $4 trillion, instead of the projected $2.4 trillion of this package. S&P was the first agency to downgrade the U.S. credit rating for lack of confidence.
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