Answer to Question #6017 in Economics of Enterprise for LaMarcus Streeter

Question

Discuss the impact of Standard & Poor’s downgrading the U.S. credit rating in 2011. Address current and likely future impact on U.S. business, individuals, the global economy and current financial practices. Provide specific examples to support your response.

Answer 1

It was August 2011 when Standard & Poor’s downgraded the long-term credit-rating of the U.S. bonds from highest “AAA” to “AA+” with negative outlook. The reason for such dramatic turnabout was escalating budget deficit and public debt that accounted for almost $15 trillion in mid-2011. Current debt-to-GDP ratio equals 102% by CIA estimate.
Despite the criticism that felt upon S&P for belated and vague prognosis, this incident undermined a position of the U.S. as a world’s leading economy. Most probable effects that it is likely to entail are:
1) redistribution of government spending to real sector of economy rather than to financial markets;
2) more profitable conditions for home producers for entrepreneurship;
3) relocation of production facilities from South-Eastern Asia back to United States of America;
4) social payments curtailment;
5) lower expenditures on capital-intensive sectors (e.g. exploration of space, military operations) or even shutdown of unprofitable sectors of economy.
& Global economy may shift to other currencies, such as Swiss franc, for some time, as U.S. dollar’s role as a world currency is argued these days. As of January 2012, there are 14 countries that have their government bonds rated AAA by S&P, for instance, Canada, Sweden and Germany.