The S&P downgraded the United States credit rating from AAA to AA+ on Friday with a warning of potential future downgrades. The downgrade was unprecedented but certainly necessary. America has over the years built up its 14 trillion dollar debt and cannot repay it. America has simply printed money in order to maintain its cash flow, without investing in new development.
The S&P credit rating is supposed to reflect America’s ability to pay its debts. China, Japan and other countries are heavily invested In America and suddenly the value of their investment has dropped. Why is this important to the American economy? Because the economy is based on borrowing money and other nations will stop lending because it is a poor credit risk. Indeed, US debtors are likely to call in their debts rather than to wait and watch the value of the American currency deflate and loose its value.
The economy is slowing down and entering a recession. The usual treatment for recession is government stimulus spending. However, government spending is not stimulating the economy. America’s unemployment rate is officially over 9 % and the GDP is under 2% and in reality is probably much worse than those figures. The government has provided no stimulus measures such as jobs programs or stimulus to business. All it has done is agreed to raise the debt ceiling and print more money. Currently, America pays $250 billion interest per year on its debt.
The weakening of America’s economy is something that people with financial and economic backgrounds could have seen coming if they were willing to face it. Now it is becoming clear to everyone that America will be forced to make difficult concessions to repay its debts and to repair its economy.