I think everyone is starting to recognize how important credit is to an economy like the United States. It’s pretty apparent that in this credit crunch, it has been more than difficult to get loans for things like cars, houses or any other things that you’re looking to have. The US dollar has been getting hammered over the last month over fears that the USA could lose it’s AAA rating.

I know what some people are thinking, “The US is a super power. No way will we lose our triple A rating.” I’d like to think that this would be the truth, but other first world countries have lost their AAA rating as well. Great Briton is a prime example of this. Their country has officially ran out of money. They are consistently running out of people to buy their bonds.

What does this all mean?

Well, it basically means that the US will be looked at as a person that is more risky for default. That’s basically a good way to look at it. Being downgraded from a AAA rating to a AA rating doesn’t seem like a big deal, but it is. When you give out money to someone that is more risky, you want to have higher interest rates because of the risk.

In the case of governments, the central bank needs to start raising interest rates. That makes the cost of debt more expensive for both the government and the private sector (you and me). It also puts a damper on the easy credit that is designed to stimulate the economy. But the higher interest rates help lenders to the government make more return and hedge against things like inflationary trends.

Trading This

Traders have been already pushing out of US dollars in anticipation of it losing the triple A rating. They been buying up commodity rich currencies like Canada and Australia. If the change in the rating happens, there will be a huge dump on the US dollar, so make sure you leverage yourself to profit on this news.

It’s hard to predict what will happen, but I wouldn’t be surprised if the rating stayed the same or was downgraded.