, Newburyport, MA

August 2, 2011

Why shouldn't the US be downgraded?

Money Matters
Donald E. Askey

Congress has led us to the point of choosing between two scary choices: the one, downgrade with default, and the other, downgrade without default. "Led" is not the right word, because there is no leadership in Congress.

Congress has defaulted on its responsibility to provide sound fiscal management and, as a result, it has brought us and the world financial markets into new and scary territory.

Today is Aug. 2 and, as far as is possibly ascertainable, the country and the government are still operating.

But investors worldwide have every reason to question the long-term creditworthiness of a country that simultaneously reduces taxes and leads itself and its allies into the longest and most expensive wars in its history. The mess we're in is largely the legacy of bad past leadership and irresponsible fiscal policy.

Now we have reached the limit of our credit limit (the debt ceiling) and created the mother of all deficits.

If you were a disinterested investor of sovereign debt — the bonds issued by countries — why wouldn't you expect the debt of a fiscally irresponsible nation to be downgraded? Why wouldn't you in the light of the conduct of that nation's fiscal managers — the U.S. Congress — insist that nation pay more to borrow from you in the future?

We will, of course, extend our credit limit at this moment in time, but how soon again will our national fiscal behavior force us to return to this same place of having to ask for an extension? What confidence does that build in the investor community worldwide?

What the present crisis — a self-inflicted crisis at that — has done is to raise the concern that U.S. Treasury debt, formerly considered the risk-free benchmark in the investing world, may under its present management actually carry some risk. That truth or the perception of that as truth naturally leads to the question: If U.S. Treasurys aren't the premier safe haven, what is?

We truly don't know what the long-term impact of a downgrade in our country's AAA rating on the world's markets will be. But it is a serious negative in these recessionary times.

So, what about you, the little investor who used to believe in the full faith and credit of the U.S. government? Is there a call for action here?

Yes, but it has nothing to do with your investments. Unless you are a day trader, an options trader or a person who is investing for the next quarter's return, leave your well-diversified, long-term holdings alone. Practically speaking, the only thing you can do is to write to your Congressman or woman and share your concerns. Unfortunately, if the media portrayals are to be believed, there are a mere pitiful few in Congress who listen to anything but their own rhetoric and ideology.

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Donald E. Askey, a Certified Financial Planner™ professional and president of Provident Advisory Group, is a registered fee-only adviser, headquartered in Newburyport. For questions, visit