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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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.