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Marion Syversen Marion Syversen
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The Money Edge - What the heck happened?

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On Aug. 5, rating service Standard & Poor's lowered the credit rating for U.S debt. In the flurry of summer vacation, market turmoil and your job and family, this may seem like crazy white noise.

Let's break it down into yummy, bite-sized morsels.

What is it? Standard & Poor's (S & P) a credit rating agency, has said we are a higher risk than the AAA rating which had been ours since the rating agency began. The primary factor in determining the rating is the likelihood of default.

Why? As a country we spend more than we make and our recent fiscal consolidation plan, more commonly called the "debt ceiling" talks and subsequent agreement, "falls short" according to Standard & Poor's, of reducing our long term debt. The debt ceiling plan increased how much we could borrow, isn't cutting enough future spending, and continuing on this path isn't an encouragement to S & P.

The rating agency also said that the slow U.S. economy meant less taxes into the U.S. coffers. An aging population figures in the growing concern that we haven't really planned well for Social Security and Medicare as those supposed "lock boxes" are merely filled with government IOUs.

And politics was another concern. A robust debate is an important element to a strong country - after all, even at your house, you probably disagree with loved ones about all kinds of things. But effective decisions need to be made, and in S & P's view, "elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden."

What does it mean for the US? Practically speaking, the downgrade was expected to mean what it would mean at your house if your credit rating went down: higher interest rates, which would translate into higher expenses when borrowing money.

Except that, in a move that surprised financial folks, Federal Reserve Chair Ben Bernanke stated that he will continue to use monetary tools to keep interest rates low for two years. All kinds of concerns resonated in the geek community of the financial world with this announcement, one of which was the message behind the time set for maintaining the low interest rates.

In stating a two-year time horizon, Bernanke's comments confirmed the nagging concerns many have about slow growth for the economy in the short term.

What does it mean for me? If the U.S needed to reward people who lent us money at a higher interest rate, that higher rate of borrowing would mean higher interest rates across the board, on credit cards, mortgages, etc. If Bernanke's take on slow growth for two years is correct, unemployment may continue to be high for a while.

What happens next? Concerning the downgrade, S & P says it will re-evaluate the U.S. debt load in 6 - 24 months for a potential additional downgrade. How do we dodge that bullet? We need to cut our spending. One way may be to trim our expenses, which means cutting jobs and or services, or slowing budget growth. Like any household or small business facing tighter financial times, we need to become more efficient. In an interview, an S & P managing director gave the chances for a second downgrade at 1 in 3.

Standard & Poor's did say that if recommendations by President Obama's debt commission - whose official name is the tongue-twisting Congressional Joint Select Committee on Deficit Reduction - are accepted, the U.S rating "could stabilize" at the new, downgraded, AA+ rating. The work and findings of the commission were reported in one news report to be marked by "unexpectedly strong" bipartisan support.

Whew. That's a lot of meaty info about agencies over which you have no control and elected officials whose continued public service is determined at the ballot box.

My forecast for your personal world: It's all going to be OK. Hard-working, determined people sit in my office every day and discuss their investments, goals and dreams. My friends and clients care about their kids, their businesses or jobs. They care about being productive and happy and taking control of what they can control. Other people's choices and decisions do little to deter them from doing everything they can to advance their personal goals. It makes me very optimistic about the future.

Last modified on Wednesday, 07 December 2011 13:18


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