Standard and Poor's downgraded US debt today from AAA, or prime investment grade, to AA+. What does that mean exactly?
In the immediate future, not much. US Treasury debt is still one of the safer investments out there. It could mean new Treasuries are a little bit higher interest. The big problem is the future outlook is negative. What that means if we don't show some serious moves to lower spending pretty quick, we'll be downgraded again, which could add many billions to the amount of money we have to pay for interest on government debt.
The Federal Government borrows about 43 cents of every dollar it spends. This is, approximately, what you would be doing if you made $100,000 a year but spent about $175,000, each and every year for the last three years. On top of that, we pay 20% of tax revenue, or in my example, $20,000 a year on interest on the debt. We ideally should get spending down to $80,000 a year and pay $20,000 on paying down the debt. However, that means we'd have to cut federal spending in half. Now imagine due to debt downgrades the amount we have to spend on debt service goes up by 50%, to $30,000. Cuts would need to be even deeper.
Raising taxes isn't much of an option because we're already past that 18% of GDP point. Raising taxes past that point means you end up collecting about 18% anyhow, so cuts will need to be part of the equation no matter how you slice it. The other problem is any cuts will cause economic issues in the short term, as we've been propping up GDP for years with government spending.
We as a country need to prepare for some tough choices across the board, or face a collapse.