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Regardless of how the debt ceiling fight turns out, it’s really only a matter of time before the US loses its AAA rating.Barring some shock growth spurt, the deficit is going to keep on growing, and eventually the ratings agencies will have had enough, and take the US down a notch, just like they’ve done with Japan.
Now here’s the good news: It won’t be that big of a deal.
First of all, the US AAA rating is not what underpins super-low interest rates. The easiest way to demonstrate that is to look at Japan, which has had its ratings cut several times, only to see interest rates grind lower.
US interest rates are a function of various things, though mostly they reflect the strength of the economy (meaning, the most likely reason for rates to jump is a jump in economic growth).
The only issue that would arise would be regulatory: Various institutions (banks, pensions, etc.) are required to have a certain amount of assets in AAA holdings, and right now this means Treasuries, so that poses a problem.
But here the US is protected by its size. There’s no other AAA-rated asset that would come close to being an alternative, so the only logical thing that could happen after that would be some form of regulatory forbearance.
And that actually would be a good outcome for everyone since the current system is what encouraged the manufacturing of artificial “AAA” assets.