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Sunday, August 21, 2011

Seriously, can Uncle Sam repay its loans?

With so much going on in the news over the past few weeks, I've decided that I wanted to make sure I understood what exactly was going on when I heard that the U.S. credit rating was downgraded. Luckily I got this really great e-mail from DailyWorth that happened to explain it and answer questions. Here are some of the tidbits:

What is a “downgrade” exactly?
It’s similar to when your credit score takes a hit; lenders question whether you’re going to repay your debts.

Similarly, the credit rating of the U.S. was knocked down from AAA to AA+ by Standard & Poor’s, a credit rating agency. That downgrade sends a signal that maybe the U.S. will be less reliable in paying back its debts.

What U.S. debt are you talking about? Mortgage debt? No, consumer debt and government debt work differently. You might take out a car loan, and agree to pay it back at, say, 7%.

U.S. debt is considered an investment. Investors (e.g. you, your mom, China) loan money to Uncle Sam in the form of government bonds (including U.S savings bonds, Treasury bills, notes and bonds)—and Uncle Sam agrees to pay back that debt, depending on its maturity, at a certain interest rate.

Now the downgrade is raising a question, for the first time in financial history: Can Uncle Sam repay its loans?

This is a historic event and will have a huge impact on the future of America. It will be very interesting to see how the stock market reacts. Overall, it might just be a good time to take advantage of low prices and good interest rates!

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