KUSA - The U.S. Government lost the highest credit rating in the world, joining the ranks of Belgium, New Zealand and many European countries.
Not since Alexander Hamilton first took out a loan, promising to pay the debts of the 13 colonies after the Revolutionary War, have we been in greater risk of default than we are today - yet the risk is very small.
The immediate reaction was a dramatic sell-off in stocks around the world. The long-term ramifications could be more profound, causing trouble in almost every other type of investment. However, the rules are different for the U.S. than for other countries.
We are truly in uncharted territory.
Two things could happen: interest rates could rise or interest rates may not rise much at all. Let's look at what this means for Coloradans in either situation.
If we were not talking about the USA, interest rates should rise after a credit downgrade. Interest rates normally rise as risks increase, and this affects many parts of our daily lives.
Stocks have already, and suddenly, declined in value.
Companies now take on more risks. Now they have to pay more on their loans. Companies have trouble getting loans. Customers have trouble paying, and companies feel a squeeze on their margins. Plus, the biggest effect over the very short-term is increased fear felt by investors everywhere.
Bonds and other fixed-return investments could decline in value, with the longest bonds declining the farthest. Municipal bonds are less appealing.
Denver and other local governments may have to do a lesser number of smaller size projects and they have greater difficulty borrowing money. Could we hit more potholes than we have today?
Credit cards, banking and other lending activities become more expensive and decrease in frequency as interest rates rise. Consumers feel like we have less money - some folks liken it to paying more in taxes - because the money we have doesn't go as far.
Over the long term, the US dollar might decline in value relative to foreign currencies. Things cost more. Inflation threatens.
Real estate could suffer over the long haul. Homeowners with floating rate mortgages may see their payments increase. New mortgages decrease in number. And, as fewer folks can afford to buy, home prices decrease.
Unemployment may not improve and might worsen. Companies have less money to pay for new staff, and the unemployed may have more trouble looking for work.
But, this is the USA and the rules are different.
Interest rates may not rise after all.
Because this is the USA, interest rates might not rise. The three major buyers of U.S. Treasurys, China, Japan and the US Federal Reserve, have their own agendas. They do not need to worry about credit agencies. The Federal Reserve isn't restricted to only buying AAA bonds, as we've seen during the recent crisis, they might even buy more junk loans. The other two major buyers of U.S. Treasurys, China and Japan, have a vested interest in keeping Americans' buying power at a maximum, so that they can export as many goods as possible to us.
As long as the big three keep buying, interest rates are likely to stay low.
Right now, any U.S. Treasury that comes due in less than two years pays the buyer next to nothing. If you're willing to wait 30 years for your principal back, then they only pay about 4.375 percent. At these historically low rates, any move up is a big percentage move.
However, in the long view, is a blip on an economic graph.
The United States is still the world's safe choice for investments. It's easy to get frustrated by politics. The world gauges the risk of almost every other investment against the safety of U.S. Treasurys. If U.S. Treasurys are no longer a "risk free" investment, then what is? On a relative basis, still nothing compares.
So what's an investor to do?
This article was written for 9NEWS by Certified Financial Planner Karl Frank.
For a list of CFPs in your area, go to www.cofpa.org or http://www.cfp.net/search/.
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