U.S. Debt Ceiling- Possible Downgrade Effects

Haven’t seen much discussion on the Debt Ceiling crisis going on right now, other than a brief discussion saying it won’t be too much of a big deal. I actually am very nervous about this, as I think it has the ability to severely cripple an already fragile recovery.
I don’t claim to be an expert on this, but it seems to me that downgrading the U.S. credit rating would be really bad for the economic recovery. Already the recovery is disappointing enough, with the unemployment rate north of 9% and GDP growth below 3%. It seems to me, a U.S. downgrade would make it more expensive to borrow money. The FED has done everything they can to keep interest rates down and flood the economy with money (still waiting on the $600B bond buyback to do something). This will cause their actions to be basically worthless, and just leave a huge waste of $600B.
Here are my thoughts on the U.S. being downgraded to AA+. 1: The housing market will continue to be bad, as even ~0.25% Fed funds rate can’t induce people to buy houses. 2. The world market will continue to be pessimistic on the U.S. economy, as a government default signals much more than just economic problems (why can’t our politicians suck it up and work for the people?). This indicates a lot of uncertainty in American politics, which can’t be good for the economy. 3. A higher interest rate on government borrowing will just make it more expensive for our government to fund their ever increasing budget deficit. It’s not like the U.S. will stop borrowing cold-turkey. Politicians know they will absolutely borrow more, and a lot more. Why make it more expensive to do this?
Just a few thoughts on what the potential downgrade could do. What does everyone else think? Is this just evidence of the decline of American economic influence on the world stage? Do we really see ourselves as worthy of having an equal debt rating to Belgium and New Zealand, and below the likes of France and the U.K.?

 

Doesnt matter. People cant buy things if they dont have jobs. The jobs are never coming back... America will never recover...Time to get this through our heads.

 

How does the short-term target rate, such as the 25bps fed funds, affect home sales?

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Best Response
GoodBread:
The short-term target rate is a benchmark for the rest of the yield curve which home loan interest rates are based off of. A downgrade wouldn't affect the target rate but will make it more difficult to maintain for the Fed and lead to a steepening yield curve and higher interest rates.

I would disagree on that slightly. Mortgage rates are actually independent of the FF rate (it just appears that there is a direct relationship). Mortgage rates are based on several conditions (including the credit/underwriting standards, securitization dynamics/MBS supply and demand, housing starts, existing and new home sales, CPI, etc). It just happens that when the FF rate is changed, a lot of the other indicators are affected. There is no actual direct relationship and mortgage rates are not pegged in any way, shape, or form to the FF rate.

EDIT

This is just based on my exposure to it so far. I might have not explained that clearly.

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.
 

Anyone notice that the total number for the deal these jackasses (yes both sides) want to agree on and keep proposing get's lower and lower? First it was $6 Trillion, then $4T, then $3.4, $3T, now $2.7. WTF? I wish S&P would cut it to BBB+ just to fuck with politicians for one day and see how fast we compromise on that shit. Not that I want that to actually happen but I imagine there would be just a bunch of egos let go in that moment and people would come to their senses.

 

Yes sir, like I said, not the clearest explanation haha. You just summed it all up in one sentence, so I guess I do agree with you at the high level.

Anyway, I just remember working on something related a couple of months ago and having to ask a few guys in structuring and on the pass-thru desk.

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.
 

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