Downgrade in U.S. Debt Rating Could Have Grim Consequences
Corporations are doing a much better job of staying in the black than governments.
Editor's Note: This story has been updated since its original publication in the July issue of Kiplinger's Personal Finance magazine.
What if the unthinkable happens and U.S. government debt loses its coveted triple-A rating? After all, we're running trillion-dollar deficits without a plan in place to close the gap, entitlement spending is surging, and interest payments, much of it to foreign creditors, will balloon as rates rise. Voters say they want deficit reduction, but they also want low taxes and generally oppose cuts to expensive programs such as Medicare and Social Security. Of course, it's always possible that Congress will demonstrate courage, statesmanship and bipartisanship and agree on a dramatic budget deal. But how likely is that?
The effects of a downgrade could be dramatic. Stock markets could tumble, as they did briefly on April 18, when Standard & Poor's suggested that it might downgrade the U.S.'s debt rating (Moody’s Investors Service issued a similar waning on June 2). Interest rates would rise, both for government debt (ours and that of foreign countries) and for corporate bonds, which are generally priced in relation to Treasury yields. Bond prices, which move in the opposite direction of yields, would fall. In fact, a downgrade could negatively affect the prices of most assets, because financial models used to value everything from stocks to commodities and real estate use Treasuries as a proxy for the so-called risk-free rate of return. Downgraded Treasuries would no longer be seen as "risk-free."
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Ironically, the health of corporate America is improving as the finances of U.S., European and Japanese governments deteriorate. "The balance sheets of U.S. multinationals are stronger than those of many governments," says Noah Blackstein, manager of Dynamic U.S. Growth Fund. "Fundamentally, corporations seem like much better investments than governments."
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Andrew Tanzer is an editorial consultant and investment writer. After working as a journalist for 25 years at magazines that included Forbes and Kiplinger’s Personal Finance, he served as a senior research analyst and investment writer at a leading New York-based financial advisor. Andrew currently writes for several large hedge and mutual funds, private wealth advisors, and a major bank. He earned a BA in East Asian Studies from Wesleyan University, an MS in Journalism from the Columbia Graduate School of Journalism, and holds both CFA and CFP® designations.
-
IRS Names Its First CEO: But He’s Also Still Running Social Security
Tax News Will this new role make it difficult to address emerging issues like budget and staffing cuts and customer service concerns?
-
Ohio Property Tax Shock: Why Your New Assessment Is So High (And What Comes Next)
State Taxes Higher home valuations in Ohio have led to homeowner property tax relief. But is it enough?
-
Apple Readies for AI Upgrade with New iPhones
The Kiplinger Letter The tech giant has stumbled when it comes to artificial intelligence, but a new batch of iPhones will help it make headway.
-
Japan Enters a New Era of Risk and Reform
The Kiplinger Letter Japan has entered a pivotal moment in its economic history, undertaking ambitious policy and structural reforms to escape from decades of stagnation.
-
How Consumers Are Tinkering with Cutting-Edge AI
The Kiplinger Letter Companies launching artificial intelligence tools are jostling for consumer attention. Some products are already building a deep connection with users.
-
After Years of Stagnant Growth, Hope Emerges for EU Economy
The Kiplinger Letter Can a German fiscal push outweigh French political peril?
-
Small Businesses Are Racing to Use AI
The Kiplinger Letter Spurred on by competitive pressures, small businesses are racing to adopt AI. A recent snapshot shows the technology’s day-to-day uses.
-
How AI Puts Company Data at Risk
The Kiplinger Letter Cybersecurity professionals are racing to ward off AI threats while also using AI tools to shore up defenses.
-
AI Start-ups Are Rolling in Cash
The Kiplinger Letter Investors are plowing record sums of money into artificial intelligence start-ups. Even as sales grow swiftly, losses are piling up for AI firms.
-
What is AI Worth to the Economy?
The Letter Spending on AI is already boosting GDP, but will the massive outlays being poured into the technology deliver faster economic growth in the long run?