Economics Case

Analysis

Many countries and businesses have braced for what they believe could be the collapse of the United States economy. The infighting between the Republican Party and the Obama administration has brought the country to its financial knees. This infighting has delayed the growth of the American economy, as well as businesses and foreign countries invested in America's prosperity.

Recently the debt ceiling was raised to allow the country to borrow passed its constutitional limits. The raising of the debt ceiling may have come too little, too late as "America's credit rating was downgraded in August of 2011 from AAA to AA+ (Bailey, 2012)." The United States has become too big with very little oversight in spending during President Obama time in office. Others believe that this debt can be completely blamed on the Bush administration. Whether or not that is the case, one thing is certain. Many businesses, investors and consumers will be affected by the downgrading.

According to author Dr. James Brinkley (2009), "S&P, Moody and Fitch are the top three agencies that rate corporate debt of large companies for default risk." These companies rating whether "negative or positive" can have an enoumous impact on the world economy. Many investors use these rating companies to determine the financial stability of a business or country. Although the three agenices are recognized worldwide they are not the only credit rating agency, as Edgan-Jones recently downgraded the United States credit rating to AA+ prior to the other agencies doing so.

How are consumers affected?

The downgrade of the credit rating has a direct effect on the world economy, as well as American citizens. Most Americans are unsure as to how the lowering of the credit rating affects them personally. There are many ways Americans could be affected, such as mortgage rates and auto loans which are directly tied to treasury bonds. According to author D.C. Denison (2011), if the credit rating goes down, interest rates go up; which means higher cost to consumers. This means that Americans will pay more for products and services.

Possible effects of the downgrading as listed:

* Increases the possibility of a double dip recession and a larger fiscal recession

* Damages the interests of US debt holders such as China, Japan and Russia as US Treasury bonds lose their superior international status and the U.S. dollar depreciates.

* Exposes US citizens to higher borrowing cost and lower purchasing power thus reducing U.S. consumer demand and exposing countries to relying on import orders to significant loses and economic slow-down.

Many economists looking at other countries that have experience a downgrade, do not see this as a bad thing for the United States. Other countries throughout the world have lost their AAA credit rating only to come back stronger than ever within the market. "Canada experienced a downgrade in 1994, but rebounded back after two months to regain it AAA rating it holds to this day (Bailey, 2012)." Japan rating was also "downgraded in 1998 from AAA to AA+ and two weeks later Japan stocks were higher than ever (Lauricella, 2011)."

Also, economists believe the downgrading of the U.S. credit rating won't hurt as much since "most financial industry regulations