In a long expected move, the U.S. government’s credit rating has been downgraded from AAA to AA for the first time by a Western entity. The German credit rating agency Feri announced today that it has downgraded the U.S. government by a full notch.1 This comes on the heels of the news last week that the Chinese have dumped 97% of their holdings in short-term U.S. government securities over the past year.2 The slow motion trainwreck of the U.S. dollar and financial system continues to move ahead. For decades, the U.S. government has financed its huge deficits through selling bonds and other forms of debt, much of which was purchased by foreigners and foreign governments. However, as the U.S. financial situation worsens, there will be fewer and fewer buyers willing to invest in U.S. treasury bonds and other debt. Eventually the U.S. government will face the decision either to be unable to pay their obligations and consequently default, or to raise interest rates to attract more buyers and torpedo what remains of the American economy in the process. Neither option will have pleasant results, yet the Germans and Chinese have made it clear that we cannot simply keep plunging into debt indefinitely, because they will not buy it (even if interest on the debt would not eventually drag us under anyway). We could, of course, attempt to balance the budget and pull out of the tailspin, but, aside from Sen. Rand Paul and a handful of others, no one in the District of Corruption has the political backbone to do that.
Footnotes
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