Answer to Question #11952 in Management for John

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

The issue of stable American economy has gotten the attention of the whole world. The continuous discussions on raising the debt ceiling and deficit reduction of US finally resulted in the Budget Control Act of 2011, which the Congress voted on August 2. It would reduce the federal budget deficit by at least 2.1 trillion dollars over 10 years. The U.S. Congress had until August 2 to raise the bar of public debt; otherwise the United States would have been forced to default because the US debt reached 14.3 trillion.
On the night of August 1 United States President Barack Obama announced that a compromise had been reached between Republicans and Democrats in the Senate and U.S. House of Representatives.
Under the terms of the compromise plan proposed to the Republicans and Democrats, in addition to raising the debt ceiling by 1.2 trillion dollars, a package of measures aims to reduce the same amount of government spending over ten years. Tax increase will not happen as insisted by Democrats.
Although US prevented the technical default, but on August 4 US credit rating (for the first time since 1860) was downgraded by Standard & Poor’s rating agency with the maximum "AAA" to "AA +" due to "negative forecast against the background of the problems with public debt and increasing the budget deficit". This collapsed world's stock markets and the price of gold set a new world record, surpassing $ 1,700 an ounce.
Under "Operation Twist", named after a similar measure launched in the 1960s under President Kennedy, the US Federal Reserve said it would buy $400bn (£258bn) of long-term Treasury bonds by June 2012, funding the purchases by selling shorter-term debts. The measure is aimed at driving down long-term interest rates across the economy, helping to cut the cost of borrowing for debt-burdened homeowners and struggling firms.
But in this turn of events, there is a plus, as lower U.S. ranking may stir U.S. politicians to take advantage of this collective shock to get back on the path to economic growth, job creation and prudent financial system.
Most probable long-term consequences of the US credit rating downgrade 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) Probable relocation of American production facilities from South-Eastern Asia back to homeland;
4) Social payments reduction;
5) Lower government expenditures on capital-intensive sectors (e.g. exploration of space, military operations, such as complete withdrawal of US troops from Afghanistan) or even shutdown of unprofitable sectors of economy.
There were forecasts about global transactions shifting to other currencies such as Swiss franc or euro, however the eurozone crisis has brought all the prognosis to an end. As of July 2012, there are 14 countries that have their government bonds rated AAA by S&P, for instance, Canada, Australia, Hong Kong and Germany.
Over time, the weakened status of financial markets and the U.S. dollar as reserve currency will accelerate the transition to a multipolar system. However, in the near future, no country can, and does not want to occupy a pivotal place of the U.S. in the global system.