One could think the Apocalypse was approaching, the way the debt ceiling fiasco has lit up the news as of late. A divided government, underwhelming leadership from both sides of the debate, and prospects unfamiliar to our country’s fiscal history—the depiction has not been a pretty one, by any stretch of the imagination. Even after coming to a tentative agreement to raise the debt ceiling through 2012, along with about $1 trillion in spending cuts, and even more long term cuts, the US has not averted crisis altogether. Talk of a US credit rating downgrade is becoming increasingly less suspect, as more and more people believe it is not a question of if it will occur, but rather, when, and what the implications will be of a downgrade from the highest rating “AAA” to “AA.”

According to a Bloomberg article by Daniel Kruger and Allison Bennett, Standard and Poor’s and Moody’s Investor Service have both indicated the likelihood of a downgrade, due to an insufficient amount of spending cuts for the former, or due to simply raising the debt ceiling at all for the latter. It appears that according to ratings agencies, such actions symbolize a lack of true initiative by the US government to tackle the fiscal mess it has created.

So, what would a credit downgrade mean for the US and everyone else involved?

It may seem, after years of unrestrained spending, that the dollar is due to lose its position as the world's reserve currency.  However, it seems a truism, at least for the foreseeable future, that there is no other country in the world with a currency to supplant that of the United States as the global reserve, even if the US is hit with a credit downgrading. In that sense, it is possible not a lot would significantly change about the way that US debt and currency are viewed.

In thinking about the implications of a credit downgrade in another light, it is important to consider that this situation did not just fall out of the sky and onto Congress’ agenda last month. Inherent in the debt ceiling issue is that we have been moving towards this point for years. We are exactly where we would be expected to be, given our past behavior. Therefore, the markets are already aware that as a country, we certainly like to spend, and incurring a lot of debt is not much of a hindrance to us. This has never hurt our reputation before (at least when it comes to the markets) because historically, it has been difficult to imagine anything less risky and more secure than US Treasuries. Would a credit downgrade really reverse that repute, when in a way, the only sudden change that occurred dealt not with our behavior, but the ratings agencies’ reaction to our behavior?

Nevertheless, we know that it is important to be vigilant about economic issues and the market’s reaction to global events. Channeling that thought, we are aware that there will have to be some consequences to a US credit downgrade. However, it seems that this could already be priced into the bond market, due to existing factors that led us to this very place, such as a weakening dollar, net capital outflows, and high unemployment in the US. It is likely that many other entities would also receive a downgrade, as a result, such as states and other municipalities, possibly even US corporations. It would certainly be representative, overall, of the United States’ failure to handle its spending responsibly. However, we maintain that the effects would be relative. Even if US credit is not technically where it was a year ago, it is still in better standing, and more powerful standing, than anything else. That naturally limits the extent to which its downgrading has true impacts on borrowing and lending with the United States. A credit downgrade certainly is not anything we would wish for, but with it potentially waiting in the wings, we can only hope that its implications would not set back economic recovery and progress in the United States anymore than has already been the case.