Reply #19: It wouldn't

[anigbrowl]

If ratings went down basically the government would have to offer a higher rate of interest on bonds (which is what's happening to Greece right now, because they were overspedning and then fudging the national accounts until quite recently). A higher rate of interest means higher payments to bondholders (to compensate for the increased risk), and thus more of your taxes go towards debt service.

Now you might think that bondholders would want to crank the interest rates as high as possible in order to collect more interest, but doing so would mean that they were taking a greater risk with their investors' money and would in turn have to pay more interest themselves and hold more insurance against the risk of default. It would be easier and cheaper to just avoid the risk altogether and buy the bonds of some country with a healthy economy, such as Germany. Financial institutions are generally required to hold minimum amounts of highly-rated bonds in order to provide a sufficient degree of security for investors.

But if the rating were artificially lowered and not truly reflective of economic reality, the increased cost of bond service could be offset by allowing the currency to depreciate by the simple expedient of increasing the money supply, thus inflating away the debt. There's a distinct possibility that this might happen anyway to a limited degree, in order to smooth out the cost of debt management at relatively little real expense. that would )or perhaps will) lower the value of the dollar relative to other countries' currencies, which would reduce the real value of Wall Street profits.

Probably rather more than you wanted to know, and you shouldn't construe this as financial advice or an economics lesson. The short answer is that a credit downgrade would drive up taxes or necessitate a reduction in spending, but the benefits would go more towards other countries than towards Wall Street (please, no conspiracy theories about it being part of some secret attack on the dollar...politicians like to drag that one out when they're in trouble but reality is that there are tens of thousands of economists in the world, and it wouldn't be possible to fool all of them at once.