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Asset Based Loan

If more credit downgrades force the Government to raise interest rates

Ensuing is an instruction review of whether further credit downgrades will force the Government to significantly raise interest rates, and other consequences.

If there is another, or more than one credit downgrade by Moody’s and Standard and Poors in the next year or two, there is an elevated risk investors of Government treasuries will demand higher interest rates.   If this very real prospect occurs, the consequences are enormous.

Once higher rates are demanded, the government will be forced to spend a greater percentage of it’s revenues on interest, causing it to spend less on other normal budget items.    Further, the longer the government continues to deficit spend at this point, the percent the government spends on interest on debt will accelerate more quickly.

There will be much greater pressure at this point to reduce deficit spending because of higher rates.   In order to accomplish lower spending, Government will be under intense pressure to cut spending.

The problem at this point is that due to the size of the deficit, spending cuts will not be enough & if the government even attempted to solve the problem with spending cuts,  the cuts would be so massive, they would likely cause a severe recession.    Therefore, significant revenue increases would have to occur.

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Asset Based Loan

Why interest rates may rise next year

Interest rates have remained the same for several years.   The Federal Reserve has sent signals that this will come to an end and they may raise interest rates.   This did not happen at the last Federal Reserve board meeting.  Current indications are the Federal Reserve will raise rates at the next meeting.   Markets reacted favorably that rates did not increase at the last Fed meeting.   The Market full expects the Federal Reserve will raise rates during the next meeting and is reacting to it as a certainty.

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If the Federal Reserve does not raise rates, the Markets may believe that the Federal Reserve has lost it’s way and it’s nerve to do what is necessary.    Raising rates have always been thought to be a hedge against inflation.   Inflation fears have been the biggest reason for the call to raise rates.   Banks have not been able to pay deposit holders any kind of rate for deposited funds.  This is another reason to raise rates.

Many economists have predicted that interest rates will rise.    If the government does not meet the August 2nd deadline and raises the debt ceiling, the vast majority of serious economists predict that interest rates will certainly rise, almost immediately, a significant amount, with further increases as the weeks and months go by.

A default for a few days are assured to rattle markets.  Indexes to go down.     Nervous businesses will certainly delay a majority of hiring due to economic uncertainty.  This is a major factor that will trigger economic slowdown.

Standard and Poors, S & P, previously had announced that if the government does not come up with a deal, they will downgrade the U.S. AAA bond rating.    This will certainly trigger a rise in rates.   Treasury will be forced to raise rates to attract the same level of foreign investment, now offering a less credit worthy investment.

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Will interest rates rise?

While many forecasters are answering yes to the question of “Will interest rates rise?”,  those forecasts do not factor into account a failure of the government to raise the debt ceiling by August 2nd.

If the debt ceiling is not raised, the prospects of interest rates rising will increase substantially, most notably if a deal to raise the debt ceiling is not reached in the immediate aftermath of the August 2nd deadline.

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The government will have to choose who will not get paid.   If U.S. treasury bond holders do not receive their interest payments on the due date, as promised, the fallout will be immense.    The triple  AAA Treasury rating may be reviewed and downgraded by Standard and Poors and Moody’s.    If this occurs, and even if it does not occur, current purchasers of treasuries may not purchase treasuries, or reduce their volume of purchase, due to the fact that the issuer, the U.S. government is unwilling, or unable to pay.

Those that are wish to continue purchasing U.S. treasuries may begin to want, ask for, or demand a higher interest rate payout.   Simply a drop in demand for treasuries may force a rate increase in order to increase demand for treasuries.

Politicians should be acutely aware that creditors lose interest dramatically in purchasing bonds for which interest payments are not assured.

A default or delay in interest payments by the treasury will dramatically increase the necessity of an interest rate increase on treasuries, which will force an increase in the prime lending rate, which will then force an general increase in loan rates across the board.

Note to politicians, understand and be be carefull what you wish for.