If you pay your Visa bill with your MasterCard, well, that would be okay. However, when MasterCard sends you a bill and you send it an “I owe you,” well, that’s not okay. Your debt payments should be made on time, or you could face a lowered credit score. That’s what happened with the U.S. Essentially, the United States treasury is playing “duck, duck, goose” with our country’s debt. The “goose” being the entity holding the bag of bad U.S Debt, or the U.S. social program that goes broke because the coffers are empty.
Standard and Poor’s, one of three of three major bond-rating agencies that give countries and companies “grades” on their bonds, lowered U.S. long-term debt to AA+ from the highest rating of AAA. This occurred because of the inability of the federal government to lift the “debt ceiling” in a timely fashion, as well as the inability to devise a plan to shave $4 trillion from spending over the next ten years. The psychological impact is huge. Long-term, U.S. bonds are no longer considered the “safest” investment in the world, according to S & P. Additionally, downgrading of our sovereign debt can have a negative impact on the U.S. dollar by lowering its perceived value.
A bond is an instrument which allows a person or institution to purchase an interest of ownership. Bonds have historically been considered relatively “safe” investments because they are typically secured by partial ownership of the issuer. The entity guarantees payment of the bond, plus interest, until the bond matures (expires). The safest bond investments have traditionally been short term, highly rated bonds. The reason is because these bonds are re-paid faster, and are sold by issuers (companies or governments) which are highly rated. They are entities that usually have good balance sheets, good reputations, and good position in terms of the goods or services they sell (market position).
“The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,” Standard and Poor’s said in a statement.
Currently, four companies have AAA ratings by Standard and Poor’s, Automatic Data Processing, Exxon Mobil, Johnson & Johnson, and Microsoft, What that means to you is that S & P views the bonds of these four companies to be safer investments than U.S. long-term bonds. The S & P identifies the U.S. as having a bigger risk of default than bonds of companies which operate inside the U.S. The reason, according to S & P is because of the “global and diverse business lines and significant financial strength” of the four companies.
Who owns most U.S. long term bonds? Japan, China and the United Kingdom are the top three. They are followed by several other foreign and domestic bond-holders. Institutional and individual investors hold a relatively small amount of our sovereign debt.
So who gets paid back? Well, that’s the tricky part. Most of the money lent to borrowers in the form of U.S. bonds, is money earmarked for future obligations such as Medicare and Social Security. The real question is, when it’s time to “pay the pied piper,” who will go without needed care and support because the U.S. had to reimburse borrowers?
Should you keep investing in U.S. long-term bonds? That depends on your “investment risk,” which should be discussed with your licensed financial advisor. Risk tolerance (adversity to risk), length of time you have to invest, and investment objectives (goals) should all be considered when investing. Remember, there is a risk of not investing—inflation. Failure to invest involves the risk that inflation will “eat” away at the value of your money over time. The best advice is to seek professional assistance, participate in an investment assessment (to help focus your investment goals), diversify, and review your investment plan regularly.