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DU Professor Has Predictions After The Debt Downgrade

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Prof. Ron Rizzuto with the University of Denver's Daniels College of Business (credit: CBS)

Prof. Ron Rizzuto with the University of Denver’s Daniels College of Business (credit: CBS)

DENVER (CBS4) – President Obama says the United States will always be AAA country, but the credit downgrade could have real consequences for millions of Americans.

Experts keep telling people not to panic … it’s a little bit easier for those who are prepared for what’s coming.

Interest rates the government pays to finance the growing national debt will almost certainly rise because of the downgrade. But when will it happen?

“I think you’re probably going to see that in the next month, you’re going to start to see that,” Prof. Ron Rizzuto with the University of Denver’s Daniels College of Business said.

Rizzuto is a professor of finance at the school. He says with the government rates on the rise, the interest rates Americans and their employers pay will also go up. That means mortgages, student loans and credit cards will cost more.

“Probably in a month to six weeks you’re going to start to see that phenomena,” Rizzuto said.

Increased costs for consumers and businesses tend to slow economic activity.

“Certainly by the fall and by the 4th Quarter of the year you’re going to start seeing that phenomena,” Rizzuto said.

As the economy slows, does that mean the stock market will react — again? Not necessarily,” according to Rizzuto.

“In some respects the stock market is reacting already. It’s a leading indicator, rather than a lagging indicator.”

But a slowdown in economic activity means less demand for workers.

“We’ll probably see 3rd Quarter unemployment rate be higher, 4th Quarter flat to maybe a little higher.”

Looking at history, other countries have come back. There are a lot of factors involved, but when Canada lost its AAA rating in April 1993, the country’s stock gained more than 15 percent the following year. And when Japan was downgraded in November 1998, the Tokyo stock market climbed more than 25 percent in 12 months.

It’s hard to say exactly how much more this downgrade is going to cost consumers. For example an increase of half a percentage point in mortgage rates could increase the total cost of a traditional 30-year mortgage by $19,000 on a $172,000 home.

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