America’s current predicament is that it borrows money from countries or individuals to finance many of its expensive obligations, including financing the $862 billion stimulus bill as well as the wars in Iraq and Afghanistan. But what would happen if America had to pay higher interest rates on all future borrowing? This is the question that some people in the federal government have to ponder, as influential rating agencies such as Standard & Poor’s and Moody’s have both recently voiced their view that America’s AAA rating is not guaranteed or in fact even assured. The massive and growing debt obligation makes some professionals question whether this country’s rating may soon be lowered.
A downgrade in America’s credit risk would mean paying higher interest on additional borrowing, thus making borrowing much more expensive. Just as importantly, it would signify a change in perception of quality about the American economy and by extension of the world economy.
Moody’s softened the impact of their statement by being clear that a downgrade is not likely but just a possibility, and similarly Treasury Secretary Timothy Geithner has said that he is confident that that will not happen. The purpose of talking about this unpleasant possibility is to remind policymakers in Washington that it is important to address America’s fiscal deficit and debt. However, the fact that this possibility is being talked about and discussed should be seen as a warning, if not an ebbing sign for concern.
Although the federal government has trillion dollars of debts to pay off and for the last couple of years America has had a budget deficit, it is difficult for Americans to imagine U.S. debt as being anything but totally risk free. Yet this just might be the reality America may one day face if politicians in Washington continue to spend with reckless abandon, seemingly funding everything in sight, and with little regard for how much money they actually have to work with.
Aleksey Gladyshev currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/About/Internships-Young-Leaders/The-Heritage-Foundation-Internship-Program