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With a looming US credit downgrade, times are uncertain in the United States. Governments at various levels – most notably the Federal Government – are facing a downgrade from their AAA rating. Such action will have adverse consequences on governments and businesses that rely on a strong credit rating to finance their expenses. However, the average citizen may be wondering “How will this affect me”?
It is speculated by JP Morgan, Chase and Standard & Poor’s that a credit downgrade will add $100 billion in interest payments to the Treasury debt. This means that the Federal Government will have to make up this money somehow. As the Federal Government does not actually create wealth on it’s own, they will have to get it from taxpayers. Effectively, a credit downgrade would be a tax hike on your federal income taxes.
Depending on the financial situation of your state and local governments, there could be significant impacts at these levels as well. The costs of borrowing for cities and states will be raised as a result of such an event. Moody’s has indicated that it will reduce the bond ratings of 7,000 US cities if the Federal Government’s rating is downgraded. As a result, you will either pay higher taxes or receive reduced services at the state and local levels, particularly if you live in 1 of these cities.
If the country’s credit is indeed downgraded, it will result in higher mortgage rates. For an already struggling housing market, this would be a significant blow. Those with mortgage-related investments will likely suffer losses as well.
Decline in Purchasing Power
A US credit downgrade will likely result in a decline in the value of the US dollar. For the average person, this means that any foreign items or services will cost more money. Those cheap products from China will become a little more expensive. That dream vacation to Tahiti will get a bit more expensive as well. On the positive side, if you work in or own a business that depends on exports, foreign demand for your product or service will likely rise, creating better job security and profits.
Increased Costs of Borrowing in General
A decline in US creditworthiness may also trigger higher interest rates across many other levels. The rates for credit cards, auto loans, and other debt may increase. This means that you will be shelling out more money to buy items with debt than you do at this time. Effectively, the price of everything that is bought with debt could increase.
While the present situation seems gloomy, not all experts agree that this will have drastic impacts. It is all but certain that a credit downgrade will have at least a noticeable ripple effect on the economy. However, it is unclear whether this will be just a bump in the road or if it will be the doomsday scenario that some are suggesting. Time will tell as to who is correct. Your best bet is to weather the storm and keep a close eye on your debts so that you may react to any changes as quickly as possible.