| APRIL 24, 2011 -- As most of you have probably heard, the S&P 500 is considering lowering the Government’s credit rating. Currently, government treasuries, aka- bonds, bills, and notes, hold a AAA credit rating; the highest evaluation a rating agency could assign. In practical terms, AAA means investing in that security carries little to no risk. The chances of a AAA company defaulting on their debt (aka-not paying back money owed) are very low. They’re considered stable, dependable, and safe. However, the S&P 500 believes the government’s debt level is now so extreme it will be unable to pay back its debts. In other words, the U.S. Government is no longer a safe investment.
This is a problem for many reasons. In every university across the country, from MIT to UCLA, business students are told that government treasuries are to be the benchmark against every potential investment.
This means if you’re considering investing in company X, you should first compare its returns to the money you could be making by investing in government treasuries. If you can make more money by investing in U.S. treasuries (bonds, bills or notes), then you shouldn’t invest in company X. It’s that simple, or at least it has been since 1860 when the rating system was established. Without the government’s dependability for safe investments, what becomes the benchmark? However, even more than that, if the government’s rating gets slashed, investors in U.S. securities, like China, will begin cutting back on their investments. We’ll have to offer higher interest rates, usually associated with higher-risk investments, in order to compensate for that loss and to attract new investors. In addition, higher interest rates would be attached to everything from mortgages, to car loans, to getting a passport. In an already fragile economy, this could prove devastating.
There is a bright light somewhere; however. While securities like stocks and bonds have been jumping around in price the last few months, commodities have enjoyed a steady climb to the top. Gold has risen over 31% the last year, and food prices rose 3.9% in February alone. Gas prices have risen 67% since Obama was elected, and the list goes on. This can be somewhat expected, as when investors can’t find comfort in the stock market, they often turn to the reliability of commodities. In a word, commodities are reliable because they are necessities. People have to eat, gas must be put into cars and to transport goods, and gold is always worth something…especially when other things are rapidly losing value. In other words, for the last 2 years or so, you would have done better to take money out of government treasuries and put it into industries like agriculture and oil. How 'bout that?
Either way, right now the S&P 500 says there is a 33% chance they will reduce the government’s rating within the next two years, and despite responses from the White House, the S&P 500 is simply doing its job. Their number one obligation is to investors, to reporting an honest, unbiased assessment of their findings. Apparently their findings say the government can no longer provide a safe environment for investors. And frankly, even if the government doesn’t lose its rating, significant damage has already been done. Its accountability has been called into question. Doubt has been stirred in the minds of investors and they will think twice before investing in government securities, especially when there are other companies out there whose AAA ratings have not been questioned.
Grace Boatright
National Grange Programs Assistant |
