Why so much noise about USA's credit rating being lowered?
Because US bonds have had the prior impression of absolute invincibility and safety that has helped the dollar become the world's reserve currency and the United States borrow essentially at will. For the people that care what S&P says, the aura of invincibility is broken and it is conceivable, in SOME universe, for the US to default on its debt. This is of little practical importance on its own, but it's yet another signpost on the road to Chinese or European economic hegemony. "Pension- and many ""low-risk"" investment funds may only invest in AAA-rated stocks and bonds.  While the S&P rating alone doesn't imply that such funds must immediately disinvest in US bonds (Fitch and Moody's are holding), it does create the risk that the other rating agencies will follow suite and also lower the US rating. As the largest issuer of bonds, controller of the world's reserve currency, and with many emerging markets placing almost all their current account surpluses in US bonds, this risk change has implications everywhere. Some companies will already start disinvestment while some investors will start demanding higher interest returns in order to buy US bonds.  It isn't yet a stampede, but the gates are now open. That said, S&P is simply reflecting the opinions of bond traders. Markets were already unstable long before the downrating.  However, from the US perspective, it is a timely reminder to politicians that the global balance is shifting and that the US cannot count on incumbency to protect it from the disapproval of financial analysts." Dollar is the lingua franca of the financial industry and unluckily it is the US currency. It is till today considered the most safest investment bet, that is why you have China possesing $3 trillion of US debt, as an investment albiet a very safe one. Financial investors get in queue to by US bonds the moment they are put up for sale. Because of the AAA rating the investors consider it to be safe at a specific rate. Now when you lower the credit rating you are indirectly asking the US government that you want a higher return(yield) on your investments. When you ask for higher yields, it translates into higher interest rates (money US would get for bonds issued decreases and so more bonds are issued). So you basically start looking at a slowdown in consumer spendings households and businesses. With already defaults, repossesions and lesser spending, the slowdown would increase manifold. The credit scale is deceptive, it goes: AAA, AA, A, BBB, BBB-, BB+, BB, B, CCC, CC, C, D. In reality it should be A,B,C,D,E, F, G,H, I, etc. The current scale does not reflect with clarity the ranking of risks and ratings. AA is much worse than AAA, but the uncertainty involved can be scary. Check out these corporate and sovereign debt credit ratings. "Because the USA is the world's biggest economy - everybody in the world works with the USA (even if the american companies are not direct suppliers, they are surely somewhere in the supply chain). If USA credit rating is lower, that means american companies will find it harder to get loans to finance their business (i.e. the price of capital will be higher), and this will consequently lead to higher prices for partners of american companies, etc. This will certainly lead to slowdown of global economy. Plus, the lower credit rating also means that the USA govt. is less likely to pay off the debts (Chinese already stated they will diversify their bonds portfolio -i.e. they will start selling out american govt. bonds). This will lead to cuts in public sector in USA, less spending by the consumers, also probably less import from abroad and less travel which will affect - you get it - the ""RoW"". It's not by chance we have a saying in Europe, when USA sneezes, the rest of the world catches a flu!"
Oh ok I see what you are getting at with the misdirection angle. I was wondering if there was a deeper meaning. Like making it more expensive for other nation to borrow money would help in some way for the US to unload it’s garbage? Reaching the debt ceiling is an admission that the US can't pay its bills as they come due.  Credit rating agencies could cut the US's debt rating, making acquisition of new debt much more difficult.   Creditors could file for involuntary bankruptcy, forcing the government to pay back the debt - which, to be clear, it simply is incapable of doing in any kind of reasonable timeframe.  The loss of confidence in the US's ability to pay its debts...  Given how the US is such a financial and economic center of the world (partially by design, partially by happenstance), it would probably be disastrous worldwide. Also, interest rates and credit risk directly corelate to Greece's ability to service the debt.  Japan could be at 400% and Greece 50%, but if they can't make payments or have credit good enought to refi the debt, that's when they will default.   Meanwhile, the fact that they are risky drives up rates further and makes it even harder to make payments.  It's called the death spiral.   Japan has low rates, solid GDP and good credit = non-issue. Lowering of the US credit rating would affect all US bonds.  Some institutional investments are required to invest in securities with a certain credit rating (i.e. money markets and some low risk mutual funds).  If the credit rating is lowered these institutions would be required to dump their US bond holdings.  This could have a serious affect on bond prices.  The lower bond prices would drive up yields. If the US credit rating was lowered after you purchased TIPS then the price you could sell your TIPS for would most probably be lower then what you bought them.  You would lose money. All US bonds, including TIPS, would be affected by a lower credit rating since the credit rating is suppose to indicate the borrower's ability to repay the debt.  This is independent of inflation.  TIPS provide no additional benefit over regular bonds in regard to credit rating. Don't know why you're getting downvoted, wouldn't be worried about a credit crisis until we get bad jobs numbers, so far they've been pretty fucking good. On top of it interest rates are at historic lows. Maybe in the future but not now Because it's barely reported and when it is most people don't understand some of the fundamental principles of finance to grasp the implications of it all.   It's not their fault really.   You can blame a man for a lack of wanting to be educated or no concern for intellectual curiosity but you can't for just being plainly uneducated. "The default scenario that we're talking about in the Summer of 2011 is a discretionary situation where the government refuses to borrow money over a certain level and thus becomes insolvent. That's an important distinction, because the US has the best credit in the world and still carries enormous borrowing power -- so much so that the massive increases in borrowing over the last decade of war and malaise have not affected the nation's ability to borrow additional money. From a personal finance point of view, my guess is that after the ""drop dead date"" disclosed by the Treasury, you'd have a period of chaos and increasing liquidity issues after government runs out of gimmicks like ""borrowing"" from various internal accounts and ""selling"" assets to government authorities.  I don't think the markets believe that the Democrats and Republicans are really willing to destroy the country. If they are, the market doesn't like surprises." ^This.   As we can see with the pending $125b bail-out that Europe will provide. Imagine, if India was in the place of the Spanish? Who would conjure up such a bail-out for them?  As said by 23_47 earlier, the credit rating is a measure of risk. A country backed by a 17-country alliance (Eurozone) is less risky to invest in than a country without such support. "This is known as an inverted yield curve. It is rare, and can be caused by a few things, as discussed at the link. It can be because the view is that the economy will slow and therefore interest rates will go down. It is not caused by ""secret"" preparation. It could also be that there is generally in the world a move towards safer investments, making their interest rates cheaper. If I had to guess (and this guess is worth what you paid for it) it is because Australia's interest rate is significantly greater than other parts of the world, long term lower risk investment is being attracted there, as it gets a better return than elsewhere. This is pushing rates lower on long term bonds. So I would not take it as an indication of a soon-to-be economic downturn simply because in this global economy Australia is different in ways that influence investment and move interest rates." In principle, a default will have no effect on your bank account. But if the US's credit rating is downgraded, the knock-on effects might cause some more bank failures, and if the debt ceiling is still in place then the FDIC insurance might not be able to pay out immediately. The picture talks is about assets on the Fed's balance sheet, which is very different than US government debt. Nor is there anything in the picture about corporate bottom lines, just US equities.   The implication of the picture is that the Fed's QE program is propping up US equity prices, and it is not a comment on the US debt or corporate earnings. You're reading things that simply aren't there. Should voters care? What is the scenario in which this debt actually becomes a problem? It seems to me that the money from this debt is largely going into the pockets of US Citizens, so less debt would mean less prosperity for Americans. What are the arguments against this assumption? "The sad part about this, IMHO, is that almost all of this new debt is ""bad debt"".  Meaning it hasn't really gone into productive endeavors. Just stock buy-backs and such.  So it has had minimal positive effects but is likely to be a drag on future growth for decades." So nothing preventing false ratings besides additional scrutiny from the market/investors, but there are some newer controls in place to prevent institutions from using them. Under the DFA banks can no longer solely rely on credit ratings as due diligence to buy a financial instrument, so that's a plus. The intent being that if financial institutions do their own leg work then *maybe* they'll figure out that a certain CDO is garbage or not.  Edit: lead in And I was being facetious, apologies.   I think your assertion that the  &gt; entire crux of the story was that credit ratings agencies weren't transparent  is a massive simplification of what happened. There are many great analyses of the crisis, and most of them come to the conclusion that 'it was a perfect storm' of different factors.  I gather you think the problem was regulatory, I think the problem is systemic.   To me it doesn't matter how the regulations are written what matters are the incentives. I see no evidence that the regulatory agencies in the US can effectively police, let alone effectively deter financial institutions from skirting the laws. In fact I think wall street runs on such a haystack of grey-area regulations that without wholesale, root and branch reform (e.g. antitrust laws similar to Standard Oil to be used on the big banks) there's no hope that any patchwork of regulations, well-intentioned as they may be, from making a difference.   CDOs are a great example of what to avoid.