From last night’s Situation Room with Wolf Blitzer.
Erin Burnett thinks the debt deal cuts are not nearly enough to avoid a downgrade, and we could be looking at an increase in interest rates of a quarter to a half per cent.
Video below (on a related note, CNN’s background sort of makes Burnett look like Wonder Woman).
ERIN BURNETT, CNN ANCHOR: That’s right, Wolf. I mean what’s amazing, we were talking about this. These numbers that we’re hearing in terms of the deal are not anywhere close to the numbers that S&P and the credit rating agencies said we needed to hit to avoid downgraded.
They said we needed $4 trillion in cuts. And obviously there’s room to move around there. But even at the highest level here, the $2.4 trillion on the table won’t get us there. So this puts the rating agencies in a very tough spot. We al know over the past few years they’ve lost a lot of credibility by getting the mortgage mess wrong.
They want to prove themselves. They’ve said they needed more cuts, they’ve put us on watch for a downgrade. So it would seem that the right thing for them to do right now, Wolf, would be to go ahead and do that downgrade.
The real question is, have the financial markets already assumed there’s going to be a downgrade and what we called priced it in?
BLITZER: They’ve already factored that into the equation if necessary. But what would it mean practically speaking if the U.S. went from a AAA, let’s say, to a AA?
BURNETT: All right. So practically speaking — and Bill Gross from PIMCO was one of the biggest bond investors in the nation, very influential. Before the Fed does anything, they talk to Bill Gross.
He thinks that over the longer term, the increase in interest rates could be between a quarter of a per cent and half a per cent. And that is the borrowing cost for the U.S. government and also, Wolf, the borrowing cost for consumers to varying degrees it would affect mortgages, fixed rate mortgages particularly credit cards, auto loans, all of those to varying degrees.
And while a quarter of a per cent to a half a per cent may not sound like a lot, and it’s not — it’s not a huge amount, Wolf — over time that does ad up. It will cost us more to borrow every time we go to the bank. So that is something that’s important to consider.
But I would say this, Wolf. If you look at interest rates, since the late 1970s, and a lot of people remember buying a home in the early ’80s when it’s 16 per cent to borrow money, we’re now at 2.75 per cent to borrow money over 10 years. So it is incredibly cheap and that’s something to keep in mind. Now the U.S. is still the best place to put your money out there in the world compared to anywhere else.
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