Credit rating cut

Date posted: August 26, 2011

Recently one of the national credit rating agencies lowered the rating for the U.S. government.  N.C. State economist Mike Walden explains why this happened and what it means for both the government and the public.

“Well, the stated reason, reason by this one agency was that the debt ceiling deal did not do enough to address the long run physical issues in the country.  Now the impact in this is … sort of like what would happen with an individual’s credit rating.  We all have credit ratings that we use when we go borrow money.  And if that’s lower, that means we’re at a greater risk. And generally, that means we have to pay higher interest rates to acquire debt.

“Well, logically that would happen with the federal government.  You would’ve thought now that if the federal government has to go out and borrow money, they’re going to have to pay higher interest rates.

“But wait a minute: This is where economics gets interesting.  What we’ve actually seen since the reduction of the credit rating for the U.S. government was interest rates paid by the U.S. government have actually gone down.  And the reason is that one of the reactions possibly to this credit rating lowering was a big drop on Wall Street.  A big drop in stocks.  People were fleeing stocks.  And generally when people are scared, where do they put their money? They actually invest their money with the federal government.  And when they do that, that means the federal government has all these people coming to them wanting to invest, so they don’t have to offer as high of an interest rate.

“So, actually interest rates have gone down to about a four-month low.  It’ll be very, very interesting for all of us, especially economists, to see if that will continue.

“Now one silver line out of this is it may spur Washington eventually to do something very, very big with respect to addressing our physical affairs.”

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