Do we care if S&P lowers the US credit rating?

I’m hoping for it. The measures used to gauge a “good economy” have consistently proven themselves to be entirely the interest of the rich, and have little to no bearing on the poor working class and middle class.

A drop in rating means an increase in interest paid because the bond buyer includes a risk premium in the bid for more bonds. That is why the AAA+ rated US bonds are considered the bench mark.

Mutual Funds that invest in bonds are required to have a statement in the prospectus limiting the investment in bonds of a certain rating, or state explicitly that they may be buying junk bonds. If the rating for US Treasuries drop low enough, mutual funds/money market funds would have to divest, pushing the price lower (and the interest rate higher).

Another great economic answer today, @zenvelo !

I like the wording of the question: “Can we credit the credit rating agencies?”

Unfortunately for now, they’re the best (read: closest to impartial) way that we have of assessing the risk of paper floated by various institutions. And, no, I don’t think that we can give them too much credit, because they are too “politically sensitive”.

For example, judging by what I read of the unfunded liabilities of various American states – and never mind the ongoing budget battles in more than half the states, who are often required by their own constitutions to balance their budgets year by year (and now find it difficult to do that) – I’m surprised that states’ credit ratings haven’t started to drop.

When that happens, and the debt becomes less than AAA or AAA+ rated, then a lot of financial institutions are not allowed to keep it on their books. So that could result in a fire sale of debt instruments, and another huge loss of wealth (because many retirees’ savings are in the form of bonds, and if the bonds become “worth less” – prior to being made “worthless”) then their retirements get a whole lot grimmer.

Yes, for the reasons explained by @CWOTUS.

@incendiary_dan You think the poor and middle-class would be better off if the US defaulted on its debt? In the words of Michael Corleone, who’s being naive now?

S&P rated the CDOs from the subprime bubble AAA, and they also said their ratings are purely opinion when in front of congress. I do not care.

@bob_ I didn’t say better off. Personally, I don’t think it’ll matter in the long run. Look at how the “economic recovery” two years ago helped the unemployment and average earning. Oh yea, it didn’t.

And of course, all of that comes from the position that working in the economy is desirable, which I consider to be the biggest hurdle to our collective wealth and happiness.

@CWOTUS I bet I’ve got similar background on this as @Blackberry (in that I get the impression he and I have watched a lot of the same documentaries), so my personal view is that they actually aren’t impartial. AAA+ ratings can be purchased by way of not sending them business if they don’t give you the desired rating.

But for the reasons you and @zenvelo mention, on a macro scale it appears it will matter. Because people think it does.

@bob_ Did Michael Corleone really said that?

To answer the question, yes I do care. I started investing in a few stocks two years ago and if the S&P lowers the US credit rating that is one macro event that may sour what little investment I have there.

@incendiary_dan Fair enough. They call it jobless recovery for a reason.

@mazingerz88 Well, he said who’s being naive, Kay?

@bob_ oh yeah, right. lol. I like “Bring the cannoli, leave the gun.”

Its true that credit rating agencies are getting a lot of flack recently but people still trust them and invested heavily based on them. Until people start distrusting the rating agencies enough to make investment decisions independently (or more drastic changes of the type @incendiary_dan seems to be talking about) their “opinions” still matter.