Is the USA Still AAA?

With large budget deficits, our country's top-notch bond rating risks being downgraded.

Is it possible that the U.S. Treasury could default on its bonds? Earlier this year, Standard & Poor's and Moody's, the two largest bond-rating agencies, rattled the investment world by declaring that U.S. Treasury bonds might be downgraded from their coveted triple-A rating because of large budget deficits. That means the two agenciesbelieve there's a chance that Uncle Sam will not pay all the interest or principal on his debt in a timely manner.

But the rating agencies are wrong. No matter how big the deficit, the U.S. will be able to pay interest and principal on its bonds. The reason is simple: Subject to the national debt ceiling, the Treasury can always go to the Federal Reserve and borrow an unlimited amount to pay off its debts.

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Jeremy J. Siegel
Contributing Columnist, Kiplinger's Personal Finance
Siegel is a professor at the University of Pennsylvania's Wharton School and the author of "Stocks For The Long Run" and "The Future For Investors."