So We've Been Downgraded. What Does That Mean?

By Phillip Martin

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Standard & Poors' downgrading of the U.S. credit rating from AAA to AA+ has a lot of people in the Boston area wondering how it might affect them. But many others seem confused about the ratings process altogether.
 
When I asked people in Davis Square their reaction to the downgrade, one thing was clear: Few people actually know what Standard and Poor’s is or what it does.
 
Over in Cambridge, Professor V.G. Narayan of the Harvard Business School explained.
 
“Well let’s start with what is a rating in the first place, right. If you want to borrow money from a bank –– the bank before it lends you money is going to look at you and say ‘What is your ability to repay the loan back to the bank?’ So what we do, as a society, is get a rating agency to examine your information and then issue a rating, which is really their marking of your ability to repay this loan."
 
Okay. Now back in Davis Square. Those who are aware of the Standard & Poors downgrade were unanimous.
 
“Well, it just saddens me. That that would happen,” said Ed Tanzi of Providence, R.I.  “I would always like to see us spiraling upward. So it shows there’s discontentment.”
 
Julian McDevit, of Somerville, interpreted it as a sign of Congress not caring about how the average person fares in the economy. "People seem outraged and Congress seems like they just dragged it out for fun almost, it’s very strange,” he said.
 
“Bad news. We’ve never been that low. We’re down a notch," said Cambridge's Ed Morgan. "Is it going to be as bad news as they say it’s going to be or not?”
 
That's the question everybody's asking.
 
Narayan, the Harvard business professor, said there is uncertainty even amongst the experts.
 
“We don’t know, is the honest answer because this has not happened before. My own sense is that it’s not going to be nothing immediate. Japan was downgraded and nothing has happened to Japan. They have continued to borrow and in fact at lower and lower cost," Narayan said.

Narayan said that could lead to more inflation, which would cause borrowing costs to rise -- and with them, the cost of living.
"So eventually it means our standard of living would come down. But that’s really in the long run. I don’t think you can point to this moment and say ‘next week’ or that something is going to happen to the person on the street,” Narayan said.
 
So it may be some time before we discover if the credit downgrade is much ado about nothing or a wakeup call to government to further slash the federal deficit, curtail Medicare and Social Security spending and raise revenue through taxes, which are currently at an all-time low. But government watchers and financial experts say implementing any of these options — especially tax increases -- faces uphill battles in Congress.

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