Tuesday, December 07, 2004

Downgrade of US Debt???!!!

In a Wall Street Journal Article today, there was some discussion of degrading the rating of the US Government debt from AAA to AA. Only a short time ago, there was talk of panic because people thought the US Government might pay off its debt. What a long way we have come.

If debt is downgraded (which would be the first change since 1917, when the government first earned AAA status), interest rates can be expected to increase. While the US Government can certainly pay off its dollar-denominated debt by resorting to inflation (the functional equivalent of printing money), there may be a time when the government will have to borrow in a foreign currency, most probably the Chinese Yuan or Euro. This would eventually plunge the US into a third-world like currency crisis, with unknown implications for the world economy.

While unlikely (much as paying off the federal debt was unlikely a few years ago), its now possible that the US could loose much of its status as a world economic power in only a few short decades.