How Will Standard and Poor’s U.S. Credit Downgrade Affect Me?

blr-editor | August 6, 2011 | Comments (0)

Don't panic, prepare

Many woke up this morning to hear about the first-ever credit downgrade of the United States from the sterling AAA rating to AA+ by the Standard and Poor’s rating agency.

This could not have come at a worse time for the United States, stuck with a faltering economy, high unemployment, bickering politicians, a swooning stock market and long-term budget deficits.

Of course, our website visitors will have read past articles stating the inevitability of the downgrade and the suggestion that both Fitch and Moody’s will follow suit sooner or later, despite their protestations to the contrary today.

We pointed out that the smaller, but more accurate Egan-Jones ratings agency already downgraded the US credit rating weeks ago and that the majors would follow.

The question on the minds of many readers is how the lowered rating will affect them individually in the coming weeks and months. We’ll try to outline a few effects of the downgrade and suggest ways that the average person can protect themselves in these times. We’ll also point to things that you should look out for, but are out of your control.

The key word surrounding this downgrade is confidence, or the lack of it. Fewer people have the confidence that the U.S. will be able to successfully address its financial problems. They see the U.S. as having a dysfunctional political system, where even the simplest of decisions cannot be made without a bruising battle.

The U.S. is also perceived as being a very corrupt society at the top, where laws are purchased by lobbyists on behalf of big corporations. These corporations are then free to pollute the environment, pay less taxes, export jobs, and circumvent financial regulations.

One may argue about how corrupt the U.S. really is, but that’s not the subject of this article – but the country’s predicament speaks for itself.

The downgrade means that the U.S. will be paying more interest for the billions it borrows on a daily basis. Up to 46% of America’s borrowings comes from foreign buyers and given that there are now other safe havens like Australia, Canada, Singapore and Switzerland, the U.S. has already started paying a higher rate for Treasury Bills.

To you, this means inflation is on its way. It also means a likely end or a stretching out of our fragile economic recovery. So here’s a list of things you need to do.

1. Run a lean budget and conserve cash. This is not the time for reckless spending, but for saving and watching every expenditure. Why? Because in a new recession, jobs will be lost. With inflation, prices are likely to begin rising again, and soon. It’s time to cut coupons and not plan the family vacation to Aruba (unless of course, you are a multimillionaire with no debt.)

2. Pay down existing debt. You want to pay down your debt as fast as you possibly can, especially debt that is linked to the Prime Rate. Inflation is coming and those variable rates will be going up and will catch many by surprise. Focus on paying off debt.

3. Be careful in selecting a job. If you have two job offers – one with an established company with good financials and another with a higher salary at a startup with a speculative future, choose the former. If there is a fresh recession, new businesses or businesses in tough competitive sectors will be dropping like flies.

4. Find local substitutes for foreign products. The dollar will soon be dropping even further as Treasury will likely print more money to pay bills and reflate the economy (QE3?). That means many imports will be more expensive, foreign vacations will also cost more. So if you consume a lot of foreign products, watch them carefully for price increases.

4. Be careful with your investments, but don’t panic. Read my previous article here.

We are going to pass through rough waters in the next few months and years. It is less a fundamental problem with America’s economy than it is a failure of political leadership. But it is what it is. Your responsibility is to protect your family from the troubled economy. The political demagogues er..leaders are busy taking care of themselves so don’t get carried away by politics.