Countries are businesses. They have payrolls to make, infrastructure to maintain, they initiate projects, award contracts, etc. The government’s income comes in cyclic doses and like many businesses they need operating funds now and so they borrow against the income they expect to receive later… or that’s how the theory goes. Much of the ‘borrowed money’ is in the form of bonds sold. They’re essentially promissory notes to pay back to the buyer a higher amount than the buyer pays for the bond. Those bonds come due and the initial amount plus interest must be paid. If we don’t have the ready capitol to cover what’s due (and we don’t) we either sell more bonds to pay off the first and effectively compound interest owed on top of interest owed (like paying a credit card with another credit card), or we print more money (Quantitative Easing ‘QE’). Because QE money has nothing to back it up, all of our dollars are immediately worth less (which ticks off the people who bought our bonds because the money they get paid back with is worth less than the money they bought with)... no wonder they don't like us. At this point we owe 16 trillion dollars to investors in our country. These are European and Middle Eastern countries (banks), China, India and US financial institutions.
A business or government gets rated based on its ability to make good on the debt it owes. If our creditors all needed their money back at their respective due dates and we could not cover that debt with more debt, what is the likelihood that we could make good?.. that’s our rating.
To make matters worse, major banking businesses have come up with creative and complex financial schemes that essentially create investment and profit opportunities (Derivatives), where no tangible commodity exists. These schemes are high risk and carry substantial downsides if anything goes wrong. Regrettably, our government has invested largely into Derivatives (which does not help our rating). The rating doesn’t reflect a countries wealth, but its wealth contrasted with its liabilities. That’s how a less wealthy country can have a better rating than we do…. They’re not in hock to their eyeballs.
As long as we have continuously growing income as a nation, our wealth to debt ratio can hold its own. While our economy slides, debts come due. A liberal Congress piles on the contracts and programs that require immediate money we don’t have. We borrow in unfavorable markets and dig the hole deeper. At some tipping point the house of cards will fall. More debt will come due than we can pay. No one will buy our bonds or take our QE dollars and in a heartbeat we will become a third world economy… financial meltdown. We will cease to be the leading financial power in world… the goal of this administration.
