So it’s happened — right or wrong: a downgrade of Uncle Sam’s credit for the first time in history.
Overnight, in reaction to the credit downgrade, Asian and European stocks dropped significantly. Here’s a quick primer based on ABC News’ extensive reporting on the possibility of a downgrade — five easy to understand effects:
1. The interest rates the government pays to finance the growing national debt will almost certainly rise as a result of the downgrade. That increases the amount of money Uncle Sam has to spend each year on “debt service.” General market discussions have turned on an increase in rates that would up the annual tally by about $10 in the short-term and go up to $75 billion in additional costs in the coming years.
2. The interest rates YOU and YOUR EMPLOYER pay will go up. Basic credit facilities — like mortgages, student loans and credit cards — are all at least loosely tied to the rates the government pays. A half a percent increase in mortgage rates could increase the total cost of the average traditional mortgage by $19K (on a $172K home). Businesses would have to spend more money to finance expansions. Costs for borrowed money goes up, effectively raising the price of anything you’re not paying for with cash.
3. Needless to say, increasing costs for consumers and businesses tends to slow their economic activity. Some estimates put a downgrade like this as likely to shave 1 percent off GDP. This slowing certainly increases the risks that the U.S. will have a second dip into recession. It also means less tax revenue, so the potential for additional debt increases.
Read more at ABC.com