What will credit downgrade mean to you?

I waited a week to pass to the let the media frenzy subside around the recent credit downgrade.    All we needed was Tiger Woods to miss the cut at the PGA Championship this past week to make the credit downgrade seem like any other TMZ story of the week.    The Standard & Poor’s rating agency downgraded the United States Credit Rating from Aaa to Aa+.    While the other major rating agencies Moody’s and Fitch have left us at the very highest level, you have seen what the recent downgrade has done to the stock market making it look like a Six Flags roller coaster ride.

As painful as this decision was (and it is kind of so 2011 media to begin doing an investigation into whether the math by the S & P was correct) to our country, we desperately needed a wake-up call.    I run a business and I continue to wonder how many politicians have ever even had to make a payroll.    If you think about our situation like a business, there are four directions we can go with fixing our problem.  Although the political decisions are challenging, the options seem fairly straightforward to me.   What’s likely to happen is some combination of these alternatives.

  • Declare bankruptcy –   Although this is now vogue among American citizens, it is highly unrealistic to think we will default and declare bankruptcy.   We have to make sure that as a country we begin holding people accountable who think they can just walk away from credit card debt, auto loans, and home mortgages.   It’s not like this debt just disappears down a black hole.   It ends up just adding to the pile of debt we have already.   Declaring bankruptcy as a country would have much more far reaching issues than the small drop in the stock market you saw in the past couple of weeks. It just simply isn’t an option in my opinion to just try to walk away from this debt.
  • Raise revenue –   When you run a business, profit and loss, or a budget, raising revenue is always one side of the equation.   The speculation is that we will raise revenue strictly from income taxes, but I believe you will see much more of an acupuncture type approach from the Government.  Since, we have an election coming up next year, this will be especially true.    This means that I think you will see a much more broad level of taxing because no politician can win the election on just a higher taxes strategy on the wealthy and across the board.   You could see higher federal income taxes, higher capital gain and dividend tax, getting taxed on the health insurance your employer pays for, higher income levels being taxed on social security, higher gas tax, higher sales taxes at a state level, and much more.   The real acupuncture will come from lowering deductions which won’t be spun politically as higher taxes.  This may mean lowering the mortgage deduction, charitable contribution deductions, and phasing out itemized deductions as at lower income rate.   The bottom line is that to make this ‘business’ work of running the federal budget and get out of debt, we will have to significantly raise revenue.  Pay very, very close attention to the math when it all comes out because most of us just focus strictly on federal income taxes.
  • Lower Expenses –   If you were $100,000 in credit card and couldn’t file bankruptcy, how would you make it go away?   With an annual deficit of 1.5 trillion in the budget, we will have to decrease expenses.    We run the budget of our country today like we are buying some mattress on a lay-a-way plan from Sears.    Invariably, there are going to need to be major cuts including shrinking the amount of people that work for the Government, reducing departments we don’t need, and potentially thinking about how we pay people who work for the Government.   If you work for a company that misses Wall Street numbers for a couple of quarters in a row, what do you think happens to stock options, bonuses, travel expenses, and the size of the organization?    Lowering our expenses has to be a key part of the equation.
  • Refinance our debt – Refinancing becomes a more scary word to me the more I hear it as I get older and wiser.   While the positive connotations of refinancing are often bandied about due to getting a better interest rate, refinancing runs under the premise of setting new terms for your debt.   This means unless you are more discipline to add money to pay down your debt, you will be stuck with a new longer time frame to pay off your debt.   Over the next twenty years, we will see the ramifications of people refinancing their homes as they retire with still having a large mortgage payment.   The United States could go about refinancing some of this debt, but it really depends with which country and what the terms of the debt will be.  For example, the Chinese would probably let us refinance at a great rate if we just spent a lot less on military.   We need to make sure we are solving both the annual budget issue and paying down more than just interest on our ‘credit card’ of 15 trillion dollars.

There are still a number of countries that carry the Aaa rating from Standard and Poor’s rating agency.

  • Australia
  • Austria
  • Canada
  • Denmark
  • Finland
  • France
  • Germany
  • Guernsey
  • Hong Kong
  • Isle of Man
  • Liechtenstein
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Sweden
  • Switzerland
  • United Kingdom

Some of the countries on this list remain strong while others on this list may not be too far behind the wake-up call we received as a country.   The credit downgrade will likely make you see a choppier stock market, increased interest rates on loans, and less money available from the federal government going forward in addition to the things I mentioned in the article.    What we need now is to start deploying some common sense without a left or a right to the equation.  The middle of this says its time to stop spending, cut expenses, begin raising revenue, and run this country like it is the best business in the world!

Written by:

Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®

Co-CEO and Founder oXYGen Financial, Inc

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About the author  ⁄ Ted Jenkin @ Your Smart Money Moves

Ted Jenkin @ Your Smart Money Moves

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Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.

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