Note: The Skinny blog is written by Rick Smith, editor and co-founder of WRAL Tech Wire and business editor of

RESEARCH TRIANGLE PARK, N.C. – Everyone who cares anything about the future of this country ought to be concerned about what will happen today on Wall Street in the wake of the downgrading of America’s bonds to less than “AAA” for the first time.

To try to help our readers better understand what could be a cataclysmic event, we reached out to Dr. Michael Walden, economist extraordinaire at N.C. State, for a Q&A. His answers to each question are repeated in full – no editing. We wanted Walden to have an opportunity so speak clearly and fully about America’s debt crisis.

Who are the ratings agencies such as Standard and Poor’s, which cut America’s debt while two others did not, and why are they so important?

They help investors establish the riskiness of investments, which in turn influences the interest rate that borrowers (here, governments) must pay to obtain funds.

They were wrong on the housing mortgages that helped precipitated the current economic crisis – why do they have credibility now?

There is some concern that the rating agencies (S&P) may have moved so quickly to help re-establish their credibility after their “misses” on the mortgage market.

Their statement about the downgrade mentions more political factors (inability of the political parties to agree on a large long-run plan to reduce federal debt) rather than economic factors (our ability to continue carrying the debt).

This has led some to think the downgrade is more about “face saving” than economics.

What do you believe the impact will be on Wall Street on Monday?

It is always hard to predict Wall Street. The downgrade had been expected, so it may already be priced into the stock market.

On the other hand, many were surprised the downgrade came so quickly.

My guess – and only a guess – is that the stock market will open weaker.

Is the reaction of global markets more important than what happens here?

Both are important. Almost equal amounts of new federal debt are bought by domestic buyers and foreign buyers.

What does a debt downgrade mean for consumers? Why should they care?

If it means higher interest rates for the government, it would also mean higher interest rates for private loans. Consumers would also lose if equity markets fell.

What about people looking for work? Does this make the private sector even more hesitant to add workers?

The driving force in the economy is still consumer spending, and consumer spending (per household and adjusted for inflation) is still weaker than before the recession.

If the downgrade results in a weaker stock market and higher interest rates, then these reactions would work against the already modest economic recovery.

How soon could there be fallout, such as an uptick in interest rates?

Ironically, interest rates may not rise if, in reaction to the fear and uncertainty that the downgrade means, investors “flee to quality: by purchasing U.S. debt securities.

Actually, this has already been happening.

The experience of other countries where a downgrade occurred is that little impact was immediately seen on interest rates.

I realize you want to steer clear from politics, but is the debt downgrade a warning of financial disaster on the horizon beyond what we are already experiencing if Washington can’t find consensus?

There is no question that the federal government faces a long-run fiscal issue, mainly related to rising program expenses for our aging society. This issue was already evident prior to the recession – the recession simply sped the trend.

The lingering question is how to address it, and the answer involves some “pain” – higher taxes, reduced future government benefits, or a combination.

The political system has, thus far, desired to avoid such pain. But what the financial markets are telling us – with the downgrade and the recent drops in the stock market – is there will be monetary consequences for continuing to delay these hard decisions.

From the point of view as an economist, what is your best case solution for solving debt situation?

I think there is much to like about the “Bowles-Simpson” debt reduction plan, as well as the outline of the plan discussed by the Senate’s “Gang of Six.”

On the tax side, obtain more revenue by limiting deductions and credits but encourage more investment with lower tax rates.

On the spending side, raise the eligibility for Social Security and Medicare and perhaps make some of the benefits of those programs limited for higher income households.

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