The ratings agency Standard & Poor last month downgraded the outlook on United States Treasuries from “stable” to “negative.” What does this mean?

For the United States, it’s not good news. Although the country has maintained its AAA credit rating, the outlook downgrade indicates that the ratings agency is dubious of the US government’s ability to meet its debt obligations.

A full downgrade, should it occur, would mean a lower credit rating for America and would result in increased borrowing costs for the government. But as the news surrounding federal government debt intensifies, just how bad is this outlook downgrade and what does it mean for the US economy?

There are various conspiracy theories going around regarding the timing and intent of S&P’s announcement. Was it a shot at the US government – perhaps one meant to show that S&P has the power to move markets and influence political decision-making, or at least speed things up? Or was it a show of power to convince the US government that it should not prosecute S&P, which has often been blamed as a major contributor to the economic meltdown?

According to the S&P statement, the main reason for the downgrade in the outlook was because of political gridlock over the plan on how to get the deficit under control. If S&P intended on lighting a fire to get politicians to move forward on this issue, the plan seems to have worked.

According to S&P, the political differences on any viable plan are very wide and they do not see any progress toward a possible solution. But Moody’s, one of the other two rating agencies, opined that the progress of the debates are evidence that things are moving in the right direction.

The downgrade officially means that there is a small chance that the US government’s debt rating will be downgraded from AAA at some point in the next six months to two years.

Keep in mind that a downgrade does not necessarily mean the US will default, but it will increase the cost of borrowing for the US government, and make borrowing costs higher for consumers and businesses across the country. This would clearly be a potential drag on growth prospects in the future.