Tuesday night Aug 1st, after the markets closed and in a surprise move, Fitch downgraded the US credit rating to AA+.
The downgrade marks the second cut by a major rating agency, and this is huge news.
The first cut took place with Standards and Poor’s, who still currently has the U.S. credit rating set at “AA+” and is still holding to that rating.
And Fitch being the second with a rating of AA+.
The biggest reason for Fitch’s move is due to the U.S. rising debt and a “deterioration in standards of governance”.
This in turn caused the current administration as well as democrats as a whole to protest this cut in credit rating.
In fact, White House Press Secretary Karine Jean-Pierre said Fitch’s decision “defies reality” when the US had the “strongest recovery of any major economy in the world”, while accusing Republicans of being a threat to the economy.
Uhhh… yeah right Ms. Press Secretary.
So, even when the current administration has been saying how great our economy is doing, those who look at the real numbers have said otherwise.
The lower credit rating, which gives investors somewhat of a guide regarding risk when comes to investing in debt of a particular country, could raise borrowing costs for the U.S. government.
Another point that Fitch cited was the growing polarization around spending and tax policy. The Republicans want to cut spending and democrats a want to continue to spend like a drunk sailor.
This in turn created “repeated debt limit standoffs and last-minute resolutions”, as a key rationale for the downgrade.
Fitch stated that …“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance.”
The most interesting part of the explanation is the part about “erosion of governance.” Here is how the section reads…
“In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.”
So, I know some of you are asking…
What are the ramifications to the U.S.’ credit rating being dropped?
The credit rating being dropped can have significant ramifications for the country’s economy and financial standing.
Credit rating agencies assess a country’s ability to repay its debt obligations and assign a rating accordingly. The major credit rating agencies include Standard & Poor’s (S&P), Moody’s, and Fitch.
Now, both Fitch and Standard & Poor’s has dropped the U.S. rating to AA+.
So, some of the ramifications of the U.S.’ credit rating being dropped include…
Increased borrowing costs – A lower credit rating tells investors that there is a greater risk associated with purchasing debt. This in turn leads to higher interest rates on U.S. government debt. This means the U.S. government would have to pay more in interest on its outstanding debt, resulting in increased borrowing costs.
Possible impact on the stock market – A credit rating downgrade can create turmoil in the stock market. The market is already afraid of its own shadow and anything that could cause turmoil will cause investors to possibly sell off U.S. assets, causing volatility and potential declines in the value of stocks and bonds.
Reduced investor confidence – This is pretty much a given, because of the lower credit rating this can erode investor confidence in the U.S. economy and the stability of its financial system. As if we don’t have enough problems already. This gives incentive to countries wishing to join BRICS another reason to jump on board that ship and leave the U.S. high and dry.
Currency depreciation – A downgrade in the U.S. credit rating can lead to a the U.S. dollar losing even more buying power. Having a weaker dollar will possibly increase the cost of imports, leading to higher inflation.
Impact on interest rates – Consumer loans, mortgages, and business loans may become more expensive, affecting spending and investment.
Reputational damage – because of the credit rating downgrade, it is just adding fuel to the fire damaging the reputation of the U.S. as a reliable borrower and raise concerns about the country’s fiscal management. In other words, if we borrow, do we have the means to pay it back?
Policy constraints – Because we now have a lower credit rating, this could may limit the government’s ability to create positive fiscal policies or stimulus measures during times of economic downturn, potentially prolonging recessions or hindering recovery efforts.
Now because we are still a very strong nation with the world’s largest navy, the U.S.’ credit rating being drastically dropped is pretty low.
Nevertheless, it is essential for the U.S. government to maintain responsible fiscal policies to ensure a stable credit rating and economic health.
The problem, in my humble opinion, is that this current administration is incapable of doing that. In fact, almost to the point that they want to see our nation go down and become a socialist communist state.
How will the U.S.’ credit rating being dropped personally affect me?
The personal impact of the U.S.’ credit rating being dropped can vary depending on individual circumstances.
BUT… Here are some potential ways it could affect you…
Increased borrowing costs – If you have loans or credit card debt, a credit rating downgrade for the U.S. could lead to higher interest rates across the board. This means you may end up paying more in interest on your existing debts, making it harder to pay off loans and credit card balances.
Mortgage rates – If you are planning to buy a house or refinance your mortgage, a lower U.S. credit rating could lead to higher mortgage rates. This would increase the cost of homeownership and potentially make it more difficult for you to qualify for a mortgage.
Consumer loans – Auto loans, personal loans, and other types of consumer loans may also become more expensive as interest rates rise in response to the credit rating downgrade.
Savings and investments – If you have investments in the stock market or bonds, a credit rating downgrade could lead to market volatility and potential declines in the value of your investments. It may also affect the returns on bonds and other fixed-income securities.
Cost of living – A weaker U.S. dollar resulting from a credit rating downgrade can lead to higher inflation. This means that the cost of goods and services may increase, reducing your purchasing power.
Job market and wages – A credit rating downgrade could have broader impacts on the U.S. economy, potentially leading to slower economic growth and a more challenging job market. This might affect job opportunities and wage growth.
Retirement savings – If you have a 401(k) or other retirement savings accounts invested in the stock market, a credit rating downgrade could impact the performance of these investments, affecting your retirement savings.
I bet that right now you are not feeling to good about the future.
Am I right?
So, what do we do about it?
How can I better hedge myself with a U.S.’ credit rating being dropped?
If you are concerned, then here are several strategies that you might want to consider to better protect you and your family.
NOTE – I am not a financial advisor. I am someone who has studied history and I look at the mistakes we have made in the past, and I try to learn from them.
So, do your own research and see what you can do, but in the meantime, here are some pointers.
Diversify your investments – If you have a portfolio account, tell you your advisor and see what you can do to spread your investments across different asset classes, such as stocks, bonds, real estate, and international investments. Diversification can help reduce risk and limit the impact of a credit rating downgrade on any one asset.
Build an emergency fund – Having an emergency fund with enough savings to cover several months’ worth of living expenses can provide a financial safety net during uncertain times. I know that this can be hard and so tempting to dip into, but if you pull just $5 – $10 a week and stick it under the mattress, or wherever, you will be amazed at how fast you can grow this rainy day fund.
Reduce your debt – I know that this is a no brainer, but aim to pay down high-interest debts, such as credit card balances or personal loans. Reducing your debt burden can help you better manage higher interest rates that may result from a credit rating downgrade. Remember a penny saved is a penny earned. Stop sending your money away to pay high interest.
Fixed-rate loans – If you’re considering taking out a loan, opt for fixed-rate loans rather than variable-rate loans. Fixed-rate loans will lock in your interest rate, protecting you from potential rate hikes. Variables are hazardous because the going interest rates is what will control that loan. People are losing their homes because they have a variable rate loan. It sounded good at the moment, and it was really cheap to get into, but with rising rates creates rising mortgage payments.
Consider inflation protection / Tangible assets – Inflation can erode the purchasing power of your money. The best way to do this is to put your money into tangible assets that will hold their value. This could be precious metals, bottles of whiskey, garden tools, even art and antique toys. You want to look at things that historically performed well during inflationary periods. Once you have identified these sort of tangible assets, you want to work hard at acquiring them so that they can help you sail through the coming storm that our nation is facing.
FOLKS with all this economic issues taking place, our economy is going to tailspin. Get my book – Survive The Coming Storm: The Poor Man’s Guide To Preserving Your Wealth In an Economic Collapse – https://amzn.to/41RzgFy
Create your personal supply chain – This is something that I have been speaking on for some time now. Tangible assets, beans – bullets – band aids, grow a garden, learn new skills, tap into your local community and build alliances. Identify now where you would be able to get your every day goods when Walmart and the other big box stores shelves are empty.
Cynthia and I are no longer buying our daily consumer goods at Walmart or any of the other big box stores. We are now supporting American Made, Family Owned shopping club and we love everything they have to offer. We have made the switch and we will be glad to show you how we have created our own personal supply chain. When you fill out my contact form, look for an email in about 24 hours (odds are it is in spam) and I will follow up with a text as well to see if you got my email.
Let’s Talk – https://patriotswitch.com/thekiltedprepper
Stay informed – Keep an eye on economic news and developments. Staying informed will help you stay ahead of the mobs. The more you can educate yourself about government policies and actions that could impact the economy and financial markets the better. I can help you with this by tuning into my daily show “Coffee With Ray” on YouTube. I do this daily at 9AM EST. I also help keep people informed with my Kilted Prepper News on Telegram. I am posting all sorts of news and information to this channel.
The Kilted Prepper YT Channel – https://www.youtube.com/@thekiltedprepper
The Kilted Prepper News on Telegram – https://t.me/thekiltedpreppernews
The biggest take away is that there is no single strategy that can completely eliminate all risks, but if you plan and prepare using some of the suggestions I gave, it couldn’t hurt and possibly put you in a much better position than your neighbors around you.
The key is taking baby steps and doing something daily to better prepare your families “ark” so that when the coming storm hits, you will be able to help weather that storm.
If you have any questions of comments, please feel free to contact me at [email protected]
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NOTE – I am not a financial advisor. What I am giving is what we do and just an opinion. If you have financial issues and questions then ask your personal financial advisor.