What does the S&P debt downgrade actually mean?

Want the short answer?  Not much.

(Author’s note:  I changed the title from the snark-intended “OMG!  Our debt is worthless!  Or downgraded!  Or something!” to comply with FDL rule 2 about Diary posting “Do not use ALL CAPS or exclamation marks in titles. It is poor form and annoying.”  The hyper abundance of exclamation marks in the body are similarly intended to be snark.)

There are plenty of people here who know plenty about the debt downgrade.  They have degrees and plenty of professional experience.  Me, I’m a high school dropout who likes to read.  But I thought that some of you might like an explanation of the S&P debt downgrade that was simple enough for me to understand.

The US government sells debt to pay it’s bills.  Since we currently spend a lot more than we take in, we sell a LOT of it.  So Uncle Sam puts the word out that they want to borrow a lot of money.  Loaning money, even to a government, is risky, so people demand interest in return for tying up their money.  How much interest you – or a government – has to pay depends on how risky lenders feel about that loan.  Will the debt plus interest be promptly repaid – and will it still have value after inflation?  How those questions are answered determines the interest rate paid by the borrower.

If the answers to those questions are shaky, interest rates can be 100% per month or more.  The longer the term of the loan, the higher the interest rate will be.  Things can change a lot in 10 years, and really change a whole lot more in 30.  Ronald Reagan had just become president 30 years ago.  Interest rates were around 15%.

So things change.

Now our debt has been downgraded because it is so risky.  We owe too much and aren’t willing to tax the people who can afford to pay taxes to pay off our debt.  And just after the downgrade, we had a huge auction of ten year notes, asking the savviest investors in the world to loan us money that we could keep without interference at a fixed rate of interest for ten years!

What a disaster, right?  So what exorbitant rate of interest did those savvy investors demand we pay?  Uh…2.14% it says here.  That is actually less than before the downgrade.

But WAIT!!!  The worst is still to come!  As a matter of fact, as this CNBC link supplied by a resident troll moans, “Bonds Plummet(ed) After Dismal 30-Year Bond Auction”!  (Sorry folks, I can’t figure out how to post the link and make it link:  http://www.cnbc.com/id/44102133)

 

The end is near, folks.  So what exorbitant annual interest rate are investors now demanding from us to lock up their money for 30 years?  3.75%!  TAKE TO THE SHELTER!

Uh…wait a minute.  The US government can borrow virtually unlimited amounts (there were twice as many bids as bonds to buy) of money for 30 years at a whallop for an annual rate of 3.75%!

Historically and actually, that is extraordinarily low.  This is why liberals are saying that it is a perfect time to borrow tons of cash and use it to put everybody back to work.  Because it is.  And there will never be a better one.  If we don’t, there is an increasing likelihood that the economy will crash, contract and really ruin our credit.  Richard Nixon, Gerald Ford, Jimmy Carter and Ronald Reagan would have danced naked on Pennsylvania Avenue to get these rates.

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