From Planet Money's blog, http://www.npr.org/blogs/money/2011/07/27/138738198/3-reason...
The full podcast, "Would a downgrade matter?", is an excellent listen: http://www.npr.org/blogs/money/2011/07/28/138721364/the-tues...
The whole point of a rating agency is to provide you with research that you couldn't get based on your available resources. But every economist in the world is a resource on the U.S. Government's viability. You can turn on CNBC and get 24 hour coverage of it.
So the U.S. is a special case and the ratings agencies don't mean all that much in regards to it.
While that may have been true a couple of years or may be even months ago, I'd say that this is anything but certain. There are a lot of people and government through out the world who would like to see the U.S. weakened.
On Monday you can short every major company the downfall will be significant. This will be very interesting to watch the next world recession is on our doorsteps.
Money does not care who you are or what you do.
That's the problem. No one else knows either. Monday is not going to be a good day.
It's not a matter of how "people" treat it. Many funds are prohibited from holding anything other than AAA. Those folks will now be selling bonds.
For those that haven't looked at the math of bonds: When the price of a bond goes down (as it does when there are many sellers), the yield goes up. That yield is what the US Govt will be paying on future issued bonds, more or less.
Good luck to us all. We're gonna need it.
No. It also refers to the bidding process when the US Govt goes to initiate the sale of bonds.
Regarding the rest: Yes, that is why I included "more or less" in my original post. The bidding for new bonds and the pricing of old bonds is quite close in most circumstances. (If they are not close, then there is usually trouble.)
> With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.
Regardless of the details above, we both get to the same place.
Yes it does.
> It sells bonds to remove dollars from the system.
No. The Fed is in charge of the money supply, and when they sell bonds, dollars are removed from the system.
The US Govt selling bonds actually increases various measures of the money supply.
Which funds cannot hold anything lower than AAA, and are they really big enough to dump enough US bonds to make a difference?
That type of downgrade is very unlikely
If the U.S. falls back into recession we'll take everyone with us. Other countries know this. Banks know this. Institutional Investors know this.
Increase the interest rate on the U.S. and you'll trigger an increase on the U.S. consumer while exacerbating the U.S. debt crisis (which is the whole reason for the downgrade). That would guarantee a recession and would bring every investment down.
Finally everyone knows what S&P is up to. You said it yourself. They aren't happy with U.S. policy and they've been able to bully other governments into austerity in the past. So they think they can do it here. But S&P's opinion of U.S. policy isn't going to be enough to convince investors to willingly create another recession
(Please note I'm in favor of austerity and think we're already headed into a recession I'm just realistic about S&P's limited power)