National credit rating impact on youIn isolation, Standard & Poor's recent downgrade of the United States' credit rating to AA+ really doesn't mean much, past the possibility of some quick "dislocation drops" on the news. After all, it's not like the American financial situation was a mystery before last Friday's downgrade was announced.

Additionally, Fitch's and Moody's both reaffirmed their AAA ratings. As long as they both stay at AAA, there won't be much that compels anyone to sell their Treasuries. And even they follow S&P, just those institutional investors that can only buy AAA securities could be forced to sell. Chances are that, much as the Federal Reserve allows an American exception for owning Treasuries even without the AAA rating, so will other institutional regulators.

The reason for that exception is simple. The U.S. government borrows money denominated in U.S. dollars. That same U.S. government also runs the U.S. Treasury, which prints those dollars. Thanks to that convenient arrangement, the probability of "default" is extremely low, no matter what letter grade is assigned to that debt.

The Real Risk to Ordinary People

The real risk is devaluation: Essentially printing tons of currency to reduce the worth of the U.S. dollar, in order to make that debt cheaper in real terms to pay off. And while that might sound harmless on the surface, it can wind up being quite painful for ordinary people.

You see, every dollar that the U.S. government borrows has to be lent by someone else. Those lenders won't be willing to accept low interest rates if they expect the dollars they'll get paid back with to be worth significantly less due to devaluation when the debt matures. As a result, if investors fear devaluation, interest rates will rise.

How high will they go? Well, as Motley Fool contributor Morgan Housel recently pointed out, a decent first guess would be around 0.7 percentage points, all else being equal. With about $14.6 trillion in total outstanding debt, that works out to a little more than $100 billion in additional annual interest costs, just to service the existing debt as it rolls over.

Aside from the higher long-term taxes that implies, it also showcases where the real risk is to you from downgrades to the United States' credit rating.

Feeling the Pain: Mortgages, Credit Cards, Jobs

As investors demand more interest from debt denominated in devaluing U.S. dollars, all U.S. dollar denominated debt will be affected, except pre-existing fixed-rate loans. So if you need to carry a balance on your credit card, expect your rate to rise. If you need a new mortgage or have a floating rate one, expect rates to rise.

On a similar note, a devalued currency is simply worth less on the international market, which means that as the dollar devalues, imported goods will cost more, as well. Or in other words, you'll both pay more to borrow and pay more to buy.

This, of course, will affect the entire country, and that means more tough choices ahead in terms of where and how much companies will be able to profitably invest for their future. You may have heard it said that "corporate balance sheets are deleveraging," which is a fancy way of saying that companies have been busy paying down their debts. They're doing that out of concern that if they borrow more in the future, they, too, will be forced to pay higher rates.

While that shores up their individual corporate financial strength, every dollar put toward debt reduction is a dollar not spent on investment, or on jobs to implement those investments.

That said, every crisis brings an opportunity with it. If your own debt is under control and your income secure, this might be an excellent time to own debt-light, foreign-domiciled companies.

How to Insulate Your Portfolio

For American investors looking to take advantage of both the likely devaluing dollar and the expected increases in the cost of debt, adding some foreign stocks would help insulate your portfolio from both issues. Here are some of the stronger ones, with moderate debt levels and good earnings prospects:

Company
Industry
Headquarters Country
Debt-to-Equity Ratio
Prior 12 Months Earnings
(in Millions)
Long-Term Expected Growth Rate
BHP Billiton (BHP)
Industrial metals and minerals
Australia
0.3
$17,111
19.8%
Royal Dutch Shell (RDS-A)
Energy
The Netherlands
0.3
$27,695
15.3%
America Movil (AMX)
Wireless communications
Mexico
0.9
$8,247
7.2%
SAP (SAP)
Application software
Germany
0.4
$2,794
15.6%
Honda (HMC)
Auto manufacturers
Japan
0.9
$3,666
5.0%
ABB (ABB)
Industrial electrical equipment
Switzerland
0.2
$3,022
13.5%
Potash (POT)
Agricultural chemicals
Canada
0.6
$2,454
13.3%
Source: Capital IQ, a division of Standard & Poor's.

Looking at those companies as a portfolio adds additional benefits, too. With headquarters in different countries, you're insulated from local political risks. With business lines in different industries, you're insulated from massive shifts in consumer behavior. And with decent earnings, solid balance sheets, and promising long-term growth prospects, you've got a collection of stocks with the potential to reward their owners over time.

Whatever fallout there may be from the debt downgrade and the potential devaluation of the currency will eventually pass. It always does. And if your own financial position is secure enough to enable you to invest throughout this mess, there may be an opportunity now. After all, the depths of a crisis often provide an opportunity to pay reasonable prices to buy the companies that will lead the way in the next expansion.

At the time of publication, Motley Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. Motley Fool newsletter services have recommended buying shares of ABB.


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87 Comments

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savemycountry911

Invest in dried beans. They keep well, taste good, are nutritous and you can make your own gas.

August 09 2011 at 9:21 PM Report abuse +1 rate up rate down Reply
william

"Pretty darn f**ked," Christina Romer, former Chair of the Council of Economic Advisers under President Obama, said of the U.S. economy following the downgrade

August 09 2011 at 7:25 PM Report abuse rate up rate down Reply
darkhrse4011

KEEP PRINTING THOSE GREENBACKS UNTIL THEY ULTIMATELY HAVE THE VALUE OF TOILET PAPER!

August 09 2011 at 2:09 PM Report abuse +2 rate up rate down Reply
1 reply to darkhrse4011's comment
maa2626

please refer to my last sentance, relax. you have plenty of time to prepare, QE3 is coming and your dollar will be worth less (no pun intended). we do not intend to sell any gold or silver for dollars, we do plan to buy some canadian dollars and more food. the world will not unravel this week. poor decisions are made when you freak out. think and plan

August 09 2011 at 5:06 PM Report abuse rate up rate down Reply
gramps180

its already trickeled down thru the hole in my pocket to my shoes

August 09 2011 at 9:59 AM Report abuse +1 rate up rate down Reply
God Bless

Cash only is the only way to go being on S.S. AND RAISING 2 SMALL GRANDS THROUGH NO FAULT OF PARENTS
I SAVED FROM the time sch let out till now for clothes supplies i do not get public assistance don,t need don,t want you can do anything if you plan ahead resale shops, swap meets with other parents and discount stores it can be done . if you don,t need dont get. now saving up for Christmas they do not go lacking for anything .my budget consist of house note, utilities, ins on house, car and food , and dr. & dentist vists.. LOOK IN YOUR AREA FOR free things to do. i have decided wash. does not i mean all of them do not care what happens to us so its up to us to do the best we can with what little we have.

August 09 2011 at 8:25 AM Report abuse +1 rate up rate down Reply
maa2626

be wary of gold, ok to hold it, but it is a commodity. a commodity goes up and down in value. as my wise wife says, until you have the cash, it is monopoly money. I expect gold to have a drop, just as oil has the last week. we are in trouble as a debtor nation and I am not sure if our elected officials have the smarts or morals to fix our economic problems. It is better to be humble with your investments, educate hardworking folks around you in the ways economic, the payoff will be huge. final note, have your life in order before you point fingers, enjoy the day and count your blessings, they are many. tone down the hysteria and for gods sake, turn off your tv.

August 09 2011 at 7:27 AM Report abuse +1 rate up rate down Reply
2 replies to maa2626's comment
darkhrse4011

What are you even talking about , Gold and Silver are about to take off , its the US DOLLAR thats finished , talking about monopoly money ,wait until QE3 starts !

August 09 2011 at 2:08 PM Report abuse rate up rate down Reply
william

"The latest casualty in President Obama's failed record of leadership,"

August 09 2011 at 7:27 PM Report abuse +1 rate up rate down Reply
Yo

thats ok. i basically stopped buying stuff altogether except yard sales and thrift stores and ebay.

August 09 2011 at 12:48 AM Report abuse +4 rate up rate down Reply
1 reply to Yo's comment
sjoberdix

You got it. I live cash only. Buy only what i need. Only USA made. So say good bye to these big banks and companies that sent work to Mexico, China, India or where ever. then you don't have customers, you don't have a bussiness. Let the market crash, weed out the failures. Gone will be the bought politicians, there won't be any campaign contribution bank roll their pockets

August 09 2011 at 6:47 AM Report abuse +1 rate up rate down Reply
1 reply to sjoberdix's comment
william

How are things in lala land anywho?

August 09 2011 at 7:27 PM Report abuse rate up rate down
kafrench34

Don't cry for the rich!! They got that way off the middle class spending their money on their products and services!! If you do't have customers then you don't have revenue!!! If we the middle class don't make enough money, you can't buy anything you rich idiots!!! So give some scraps so we can make you rich!! You rich batard want to do your own laundry and mow your own grass? If you give people a decent living wage they will put their money back into the econony to make it work!! Everyone needs to take Economics 101 and basic Accounting so you know how to balance a budget!!! Spend less-save more cause SS won't be there for people under 55-better start hiding money under your mattresses people!!! We're headed for a major depression!!! I'm not being negative just a realist!!! Good Luck people and start praying!!! God help us all!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

August 08 2011 at 10:37 PM Report abuse -2 rate up rate down Reply
3 replies to kafrench34's comment
longanman

I an attempt to stimulate inflation to pay for the Iraq war the FED has collapsed the American economy. Basically, ( because of this 1.5 trillion dollar war we are bankrupt ), this debt will have to be extracted from the American people at great cost and suffering. This is the price the American people will have to pay for letting Israel dictate our foreign policy in the Middle East. Remember this to Communist, Fascist, National Socialist (Nazi ), or Zionist the ends justify the means.

August 08 2011 at 9:15 PM Report abuse rate up rate down Reply
1 reply to longanman's comment
mac2jr

We will still owe billions after the war is over, we have to take care of the million plus service people who came home mentally and physically wounded, and that will be for upwards of 60 plus years.

August 09 2011 at 12:40 AM Report abuse +2 rate up rate down Reply
longanman

The Tarp was never designed or meant to stop the economic collapse, just to let the air out of the bubble slowly. Wall Street knew this, that is why they just lined their pockets with the money, sort of the extra golden parachute, the last feed at the public larder. If the collapse had of taken place all at once in September 2008 as it was happening there would have been anarchy in this country. With this slow collapse the middle class can adjust without the shock to their new and very reduced standard of living. Sort of like cooking a frog in boiling water. If you throw the frog in boiling water he will jump out. If you turn up the heat slowly the frog will not realize it until he is cooked. Folks face it a oligarchy of special interest and a foreign government that controls Washington has traded your standard of living for the benefit of others. The
trillion dollar Iraq War, well friends its time to pay and it will be expensive. You will earn far less, but will be paying much higher taxes.. Think about it, work on it, you will work much harder for far less, this is the legacy that you leave your kids.

August 08 2011 at 9:14 PM Report abuse +2 rate up rate down Reply