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Saturday, July 30, 2011

DEBT DEFAULT EXPLAINED IN LAYMAN'S TERMS

Governments themselves aren't rated, their bonds are. When a government needs money, one way to create it is to sell bonds - that's how debt is created. The credit rating is how secure the bond is, in other words how likely the issuing government is to repay that bond on time with the promised amount of interest. We've always paid on time, in full, so we've always had a triple A rating. Some governments, say Zimbabwe, might pay late, not pay the full amount of promised interest, or might not pay at all, so their bonds have a lower...much lower...rating. BUT...when they need to borrow money that they can't get from selling bonds, then the creditors look at how they repaid their bonds and they charge them interest to get that money based on their repayment history; full repayment of bonds, on time, means they get a high rating, providing the rest of their fiscal house is in order. If they didn't fulfill their promises on their bonds, they get charged more interest. That higher interest is then passed down to banks which issue credit (say as a credit card or auto loan, etc) and then it's passed down to the consumer. So the effect of the US defaulting on it's bonds on August 2 could be the government having to borrow money at a higher interest rate and then that comes down to consumers at a higher interest rate in the form of credit and loans; basically a "tax" on EVERYTHING. Why don't the Republicans care? Because they're already wealthy and they can access sources of money that the average consumer can't, and they can get that money cheaper than the average consumer will be able to get it, too. The end result of debt default will end up costing consumers...taxpayers...billions if not trillions. But the Repukes are holding up the process for political gain. I told you back when they first formed that I named them the Tea Party Taliban. Well, I was wrong about one thing:  The Taliban can't damage our economy like the Tea Partiers are about to do. Our worst enemy isn't Al Qaeda, it's the Tea Party. Fact!