Freedom New Mexico: Argen Duncan Eastern New Mexico University Dean of Business Chris Taylor said a downgrade of the United States’ credit rating would result in credit being harder to get, causing a drop in the stock market, which would lead to inflation and hurt retirement savings. Taylor believes spending would alleviate the current recession.
The recent credit downgrade by Standard and Poor’s won’t have an immediate resonation to Americans beyond rhetoric, but the effects will be felt over the next few years, local bankers and economists said.
For the first time in the country’s history, the country’s credit rating was downgraded by a credit agency from “AAA+” to “AA+.”
Standard and Poor’s released its downgrade announcement Friday, along with a justification that touched on political brinksmanship and Congress’ unprecedented use of the debt ceiling as a bargaining chip.
Randy Harris, president of the Bank of Clovis, said the downgrade is a red flag, but not the end of the world.
“I try to correlate everything to individual as well as businesses in our community,” Harris said. “You’re an individual. You have a credit report, you have a credit score. Any time you have a downgrade because something happened in your life, there’s a consequence.
“You’ll have to pay a higher rate because the risk is higher. I don’t think the government’s any different from that. It’s a message that was sent early on by a risk rating agency.”
Chris Taylor, dean of business at Eastern New Mexico University, said the downgrade means credit will be harder to get, which will cause the stock market to go down, which hurts retirement accounts and causes inflation.
People already entered into fixed-rate loans won’t see increases. But adjustable-rate liabilities like credit cards, and future purchases will come at higher expenses.
Savings and retirement are hit the hardest because most are tied to the stock and bond market. Investments will be worth less. As with an individual’s credit rating, a drop in a nation’s credit rating means it costs more to borrow money and there are fewer people willing to loan it to that country.
“Therefore,” Taylor said, “inflation occurs.”
Inflation generally brings the stock market down, which means investments, including those for retirement, aren’t worth as much.
Also, prices are higher with inflation. “With salaries not keeping up, it means we have less disposable income to spend on our needs and wants,” Taylor said.
All of those factors lead to consumer confidence.
“If the confidence is less,” Harris said, “people will not spend as much money. They’ll want to hold their money. It’s a cycle that gets worse instead of better.”
The U.S. is not the first country to receive a downgrade, but a one-to-one comparison with other countries is difficult because each country has different economic priorities. Comparing Canada, which went through a downgrade, and the U.S. would be difficult, based only on comparisons of health care systems and military expenses.
Taylor said a downgrade for Canada had less effect than one for the U.S because the U.S. gross domestic product is more, and U.S. citizens buy more.
“We’re the world’s consumers,” Taylor said. If the U.S. spends less money, the people selling to us get less money. “And then we continue the downward spiral.”
Taylor said the hardest part of a recession is that the natural inclination is to cut, but history shows that smart investment produces more benefits than austerity. He points to what he says is over-inflation in the gold market. Because consumers are scared, they are putting money into precious metals instead of investing in companies that hire people, who then spend money.
“It just keeps the money out of circulation,” he said.
There is a current discussion about cutting military spending, with a suggested target of $500 billion in cuts over the next decade. Harris said there’s no way to tell how it would affect Cannon Air Force Base. But he felt it might be wishful thinking to assume Cannon wouldn’t feel some of the pinch.
“You should always be concerned about any military cuts because a vital part of this community is Cannon Air Force Base,” Harris said. “If people said, ‘We’re going to stop eating cheese or drinking milk,’ we should be concerned about that because we’ve got a cheese plant and dairies.”
Freedom New Mexico staff writer Argen Duncan contributed to this report.