As far as long-term trends go, it’s no coincidence that as U.S. debt levels rise, bank certification of deposit rates are in decline.
Believe it or not, things could actually change, even if our nation’s debt picture gets worse.
Here’s what’s up. Rumors are floating up and down the I-95 corridor from Pennsylvania Avenue to Wall Street that the U.S. debt could be downgraded from its current AAA level to an AA rating. Right now, U.S. debt levels sit at $12.4 trillion, or $40,260 for every American (child or adult) and that’s just for starters. Left unchecked, that number will almost double by 2020.
Of course, you can only put so much stock in rumors. But what’s fueling the whispers among our political and financial classes is more than just a rumor — it’s a prediction by Moody’s Investors Service (Stock Quote: MCO), the well-respected credit ratings giant. Moody’s came out last week with a warning that the U.S. government’s bond rating was in jeopardy unless significant steps were taken to cut the deficit.
A credit downgrade would be terrible news for the U.S. economy. Financial experts say that a downgraded U.S. debt rating would lead to a triple-threat in economic trouble for America, including higher interest rates, rising inflation and a massive outflow of investment money leaving the U.S.
Granted, the government doesn’t seem worried about the prospect of its credit rating being slashed. The White House trotted Treasury Secretary Tim Geithner out on the Sunday morning talk shows last weekend, where he told ABC News that there was no way the U.S. could lose its AAA rating.
Of course, these are the same guys who promised an 8% unemployment rate if taxpayers agreed to a $787 billion “stimulus” package, and that hasn’t exactly panned out. In addition, the U.S. debt level already sits at 98% of domestic gross domestic product. As a combined Harvard University/University of Maryland economic study estimates, debt ratios above 90% of GDP cause GDP rates to fall by 1% — and average GDP growth falls even further.