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Implications of the US Downgrade

August 7, 2011, by Ken Jorgustin


This short video from the Cato Institute is a quick, basic, and precise explanation of the consequences that will result from the recent United States credit rating downgrade by Standard and Poor’s (one of the Big Three credit rating agencies – Standard & Poor’s, Moody’s Investor Service and Fitch Ratings).

In short, it means higher interest rates, more expensive loans (for those that need to borrow money), and higher US government debt to pay back the interest. It means that ‘things’ will generally cost more money than they did before the downgrade.

In addition to the U.S. sovereign downgrade, Standard & Poor’s downgraded the ratings of government-sponsored enterprises Fannie Mae and Freddie Mac Monday (lowered to AA+ from triple-A.), citing their reliance on U.S. government. The Federal Home Loan Banks were also cut to AA-plus. S&P also cut ratings for several of the main arteries of the US financial system—the Depository Trust Co., National Securities Clearing Corp., Fixed Income Clearing Corp. and the Options Clearing Corp.—were cut one notch to AA-plus.

From the Cato Institute: