On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.If the U.S. government isn’t AAA, then government-backed securities aren’t AAA, either. There’s a lot of them.
To begin with, there’s a $5 trillion market in “agency” mortgage securities, meaning Fannie/Freddie products.
Add to that Ginnie Mae securities and more than $1 trillion in student-loan debt, which is securitized and sold.
Beyond this, as I wrote a week or so ago: “The ten major holders of U.S. Treasury debt are, in order: 1. the Fed, which has more than doubled its holdings of U.S. sovereign debt in the past few years; 2. individual investors, mostly in the United States; 3. the Chinese; 4. the Japanese; 5. pension funds; 6. mutual funds; 7. state and local governments; 8. the Brits; 9. the banks; and 10. insurance companies.”
How will these financial sectors react? How many of them will rapidly pull out their money, assuming by 2012 we'll be a failed state? How low will the Dow go?
It's going to be a horrorshow. And if Obama gets up Monday morning, blames it on George W. Bush, and demands more taxes for green energy products, well...the rout will be on.
At least they have shelter, and heat....well, assuming they can afford $10/gallon gas...
ABC gives us five ways it will affect us directly:
1 - The interest rates the government pays to finance the growing national debt will almost certainly rise as a result of the downgrade... (in other words, blowing a whole in our already optimistic deficit projections)
2 -the interest rates YOU and YOUR EMPLOYER pay will go up. Basic credit facilities -- like mortgages, student loans and credit cards -- are all at least loosely tied to the rates the government pays...
3. Needless to say, increasing costs for consumers and businesses tends to slow their economic activity. Some estimates put a downgrade like this as likely to shave 1 percent off GDP. This slowing certainly increases the risks that the U.S. will have a second dip into recession. It also means less tax revenue, so the potential for additional debt increases.
4. As the economy slows, expect the stock market to react...The relative value of a share of anything will go down. Some experts predict a downgrade could force stocks to sell-off by 6 percent to 10 percent in short order. That's another 1,100 points on the Dow.
5. A slowdown in economic activity also means less demand for workers. The non-partisan group Third Way has published estimates that a simple 0.5 percent increase in interest rates could erase more than 640,000 jobs.
Don't worry, though - Barack, Michelle, and the kids will be just fine...