do as an american or farmer, where can i serve? >> find out about the work this guy is doing to help farmers in afghanistan in our 4:00 p.m. eastern hour. stay with cnn, "your money" starts now. s&p has downgraded america's aaa credit rating, no matser where you turn, only one things seems to be clear, america is facing an uncertain economic future. welcome to a specially edition of "your money. this next hour is dedicated to setting aside the panic and giving you a straightforward look at what's happening right now with your money. let's start with ken rogoff, christine romans is the host of "your bottom line." and chrystia freeland is an editor at thompson reuters digital. ken, tell us what this means. s&p said it may downgrade the u.s. and it did it.

it took us from aaa to aa-plus. what does that mean? >> well, it's a huge thing. this hasn't happened in the history of the united states. we have defaulted maybe in 1933. but since they started having the rating agencies, this hasn't happened and it's pretty shocking. my concern is not so much the professional investors but what about the man on the street? are they going to panic about this? is there going to be a broader effect that we don't expect? >> what do you think about that? what do you think? it's hard to make that connection. it's hard to tell people who are watching us right now that your credit card rates are definitely going up or your mortgage rates are definitely going up. we're not entirely certain what's going to happen, are we? >> no, absolutely not. right now with what's happening with the stock market, aa-plus looks pretty good. people still want to be in treasuries. i don't think they're going to necessarily be rushing into the stock market and out of treasuries because of this. but it definitely -- this thing plays out. the u.s. government has been the

line in the sand. they've been the one who put their foots down and said, we're going to back the banks, you can be sure of your bank account and our credit. this isn't the end of the world. it's aa-plus, still a really high grade. but it's disconcerting in the middle of the crisis as it's deepening. >> the full faith and credit of the u.s. government, it's an expression that's been used forever, it's not that this was entirely unexpected. i almost think what was unexpected was the reaction out of washington from all sides last night. everybody was looking for someone to blame. and no one looked inward and said, what do we do to fix this to get back on top. >> you know, i think you could have had a big rally in the stock market on monday if you had the president and leaders of both parties in congress and all the candidates for president from the gop to say, we're going to get our problems under control, we are now looking

beyond politics and our individual ideologies and we're going to get this fixed, we're going to cut more in a very strategic and thoughtful way, america is still the superpower. that's pretty polyanna for me to think that, right? but they all reverted back to what s&p was worried about in the first place. acrimony that leads global investors and people like s&p to think the u.s. doesn't have its act together enough politically to be able to deserve a aaa and to be get to get significant fiscal problems in order. you have really, i think, ali, an extension of the behavior that got us here. it's continuing right now. i'm worried about treacherous markets and politics until december 23rd when that super committee has to agree on another $1.5 trillion in cuts. >> chrystia, let's talk about it for a second. two things could have gotten us here. one is real budgetary problems, which we've got in the united states and frankly got in much of the developing world and then we have the concern that s&p

outlined and that is that a aaa rated country, the best rated countries in the world should be separating their budget process, which is very important, from their debt authorization process, the actual discussion about paying their bills. and s&p seemed concerned with that very behavior that christine is talking about. >> you're absolutely right, ali. s&p pointed to two things. one of them was this really unusual structural element of how the u.s. works. i think that denmark is the only other western industrialized country that works this way, where the people who -- the process whereby you decide your budget, how much you're going to spend and therefore how much you're going to tax and how much you will borrow. it's separate from the process where you authorize how much the country is allowed to borrow. and that's why we had these debt ceiling antics over the summer which were really actually structurally institutionally separate from the actual decisions about the budget. i think the s&p quite rightly

said, this is no way to run a country. and this means that the united states is set up for repetitions of the battle that we just had, which was really -- it was a political owned goal. we didn't have a situation in the united states, which countries often face when they're running into fiscal problems, that it's the market saying, come on, guys, get your act together, otherwise we're in trouble. the problems of this summer were a political owned goal. they were structurally created. and that's something i think the s&p pointed to saying, this is a weakness going forward. >> i want to ask you, ken -- we're going to speak to muhammad al aryan of pimco in a few later on in the show. there are countries you can get more money for lending that country money than you can the united states. but they don't have enough debt lying around to really replace the united states as this safe bet. do you think the united states

today is a riskier bet than it was yesterday? and by the way, that's that list of countries that are rated aaa by moody's and s&p. you can see the united states no longer on that list. what do you think, ken? >> i think what happened over the summer was pretty frightening. and it's our constitution -- we look like the italian parliament. that's how countries get into trouble, because they can't govern themselves properly. we look riskier from that. but the data's gotten worse. we're slipping back into slower growth. people were counting on fast growth to just sort of get our way out of this. and then, well, your political system doesn't work perfectly, it doesn't matter. it is riskier because difficult decisions need to be made. we're not going to get out of this quickly. the stock market's fallen dramatically. the economy slowed. there are some tough decisions, and it could affect inflation, for example, which is something s&p takes into account. if there's going to be high

inflation, that makes your bonds worth less, that counts, too. so it does feel riskier. no doubt about that. >> all right. we have two very specific issues we have to deal with. growth in this country, getting it back on track, and getting this aaa rating back. how are we going to do that? how do we get growth in this country? we're going to come back after the break with this fantastic panel and discuss how we actually get solutions, getting back on track economically and get our aaa rating back. you're watching a special edition of "your money" here on cnn. ♪ that "old flame" you should have called. ♪ that leap of faith you never took. but there's one opportunity that's too good to miss. the lexus golden opportunity sales event, with exceptional values on the lexus is. but only until september 6th. see your lexus dealer.

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rating. those four companies are adp, johnson & johnson, exxonmobil and microsoft. some have wondered what happens to those companies. i asked s&p's john branch, he's the head of sovereign debt rating for s&p about how this affects those companies and your mutual funds or your pension funds if they invest in those companies. here's what he told me. >> the u.s. corporations, i think there are four of them -- >> yes. >> they are not affected by this directly. in terms of other people who might be -- have portfolios that have aaa restrictions and the u.s. being downgraded, will that have an impact on them, we've spoken to a number of investors about that. they think the impact will be pretty minimal. they don't think that there will be massive forced selling because of this. >> christine romans joins me

now. christine, markets will open again, asian markets will open 8:00 p.m. eastern time on sunday night and our markets on monday. what a week we've had, a lot of people, a lot of our viewers out there would like to know what this means for investors when markets open on sunday night and monday. what do you think? >> it's absolutely impossible to know because you might ironically have huge safe haven buying into the treasury market pushing yields even lower. so you're hearing a lot of people talk about how higher interest rates are coming, it is inevitable. that could be a long time off if indeed you still have the u.s., the biggest most liquid debt market in the world, that's where everybody wants to go. i've learned a long time ago, 15 years of covering crises that you don't try to predict what the stock market is going to do. currency markets are huge as well. commodities markets, they'll all interact. one thing i can tell you is our biggest investor is out there scorning and chastising us,

china, a commentary on xinhua news agency saying the united states -- scorning it for its debt addiction, for short-sided political wrangling and warning us that the good old days of borrowing in america is over. using it as a new reason to call for a global reserve currency that is not the u.s. dollar. a little bit of political tension there, not necessarily that surprising. but, remember, china is the biggest foreign investor of u.s. treasuries, ali. >> ken, christine makes an interesting point here. u.s. treasuries continue to be a safe haven, in other words, for all the turmoil that's going on out there and for all the risky markets in the world whether you want to buy their bonds or stocks, u.s. treasuries, even downgraded, might still be a better bet and you might actually see yields or interest rates going down as opposed to up. do you think that's possible? >> that's absolutely possible, ali. where are you going to go? it's not easy to know right now where to put your money. the stock market is very volatile.

are you going to go to europe with your money. >> that's volatile. there's only so much gold and that has risk. the chinese put the money in china instead of the united states? i don't think there will be a dramatic effect. but this is a very fragile moment. there's a lot of emotion, there's a lot of tension. and the biggest crisis right now, the biggest crisis is in the leadership, in europe, in the united states, and the public is losing confidence. this underscores it. that's going to make it harder to do the right things and to do the right things and contain the problem which we're going to have one way or the other. >> chrystia, christine said earlier the only way to get a clear rally on monday is if everybody involved in the political bickering were to come together and say, wow, this is serious, this is a real message, let's get it together and figure out how we get our aaa credit rating back. she's getting a lot of tweets. chrystia, what do you think about that? christine and ken are both agreeing leadership is as much

of a problem here as budget deficits are. >> i think that's absolutely right. what was really interesting about the s&p rationale is actually they pointed much more to political issues really than underlying economic ones. i think at heart, this decision by them was really a political -- a verdict on dysfunctional politics as much as it was on a fiscal situation which needs to be resolved. what i think is worrying and the reason why the scenario that christine painted very eloquently, alas, i think is highly unlikely is that we are already seeing in the reaction this morning and on friday night that the really big ideological divide remains. so you've had democrats pointing very strongly to s&p's point about revenue. and the s&p saying, you know what, if you'd just let those bush tax cuts lapse, that would be a very big step towards a solution. meanwhile, you've got the republicans pointing to the idea

that, look, the s&p is saying that the budget deficit is the core problem, that's what we've been saying, we've been right. all those democrats who are talking about job creation may be more stimulus, focusing on growth, they're wrong. so it seems to me the ideological divide -- i think this is really about ideology. it's not just about rhetoric -- remains and it's a deep one in america today. >> ken, stick around. we're going to be listening to mohamed el-erian from pimco later on, they're very involved in bonds. chrystia, thanks for that analysis. christine, i think you should start a campaign for people to get their elected officials to come together on this one and try and fix it up. one of the biggest concerns out there is jobs. there are actually sectors that are hiring. we'll tell you which employers are looking to hire next on "your money." ight above my weight class. but i did. they said i couldn't get elected to congress. but i did. now i'm trying to make it in music.

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[ male announcer ] want to pump up your gas mileage? come to meineke for our free fuel-efficiency check and you'll say...my money. my choice. my meineke. the u.s. economy added a better-than-expected 117,000 jobs in july. we're going to give you some sectors that are hiring and tell you where those jobs are.

ted guillaume is the ye of deckham. he heads the world's biggest placement and recruiting firm. who is hiring right now? >> in manufacturing and retail. retail is a bit of a surprise given the level of consumer confidence. i think that's a very good sign. and then, of course, in health care. health care has carried us through the recession. we saw another month of strong job growth in health care. >> this is an industry, health care, we've seen an average of 24,000 jobs a month created in this. do you work in that part of the business, your companies place people in health care? >> we absolutely do. we place doctors, nurses and bilingual speech therapists, pharmacists. all kind of skills categories in the health care sector. it's been a turbulent sector but a growing sector over the course of this recession. >> help me understanding the role of temporary job hiring in a recovery. typically in past recessions, we

used to see the recession end and you'd see temporary job hiring until companies decided what to do and what kind of staffing levels they want. and then they would translate into permanent jobs. is that still the case? >> well, there is this normal recessionary and recovery process that occurs in temp where employers come back in the marketplace. they need resources but they want flexibility. they do that by employing temp and contract workers first. i think that's part of the recovery. but also we're seeing more of a fundamental change. this recession was so tough, companies are very much more focused on flexibility going forward. and i think they're going to look increasingly for flexible working environments in the economy as we get this recovery going. >> you get paid by companies that want you to find workers for them. so you talk to the ceos of companies that are hiring or potentially hiring. we keep discussing endlessly what companies need to hear or see or experience from the government in order to hire. what is it?

>> well, first and foremost, companies that are hiring are those that see good prospects for their business in the near term and have already reached the level of capacity they have with their current workforce. the best place to be from a skill set perspective is in i.t. engineering and finance. those are by far the strongest skill sets and it's the area where the labor supply is the thinnest. so we're really looking at more like a 4% unemployment rate in those skill sets as opposed to the 9.1 average. >> let's talk about the skills that workers come in with, the workers that you place in these jobs. what do you see if somebody's watching this saying, i'm ready to make a switch into something. what would you tell them to do? >> i'd go back to the professional skill categories as the best sectors to focus on. if you're looking at building your education. in terms of the job search, most of the permanent jobs that are being added today are coming from temporary and contract assignments. so what i'd say is in your search process, don't be afraid to step out and engage on a temporary contract basis. use it as an opportunity to

prove your skills and the value you can bring to the organization. that can very well be the best path to a new permanent job. >> explain that to me a little bit more. if i'm coming to cnn and there's a staff job there or maybe there isn't and i'm applying for it, they maybe are not sure they want to hire me or the work's not fully there. how do i then become a contract worker? >> in many cases, you can just make the offer. a candidate can say, look, i know you're looking for a permanent position and that's great. if there's a permanent position, i'd like that. however, if you're uncertain about making that decision today, i'm happy to work with you on a contract basis for the next six months and we'll get to know each other and get a chance to work together. and we're finding that's a good strategy to use. and, in fact, we have many of our clients coming to us saying, look, i need some resources but i don't want to go the permanent route yet. can you get someone to work with me for the next six months and let's see how it goes? that's a great avenue to pursue. >> let's talk a little bit about the difference between the behavior of large companies and small businesses in the u.s. with respect to hiring right now. >> this is a great point.

what happens in the u.s., we have about 2% of the companies that are large companies that hire half the workforce. 98% of the companies in the u.s. have less than 1,000 employees and they hire the other half of the u.s. workforce. the job growth we've seen thus far has been with the large companies. we come back to public policy and incentives to help the small and mid-sized companies get back to hiring mode and hire here locally in the u.s. >> all we hear about is people saying, what we have to do about the jobs. where the jobs are, you know it. it's such a pleasure to get this granular information from you. we've got a debt ceiling deal. now we can deal with our real economic problems. can congress and the president still be part of the solution? vrrooom...vrrroooomm vroom vrrooom

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what does it all mean? paul krugman wrote in an op ed in "the new york times," quote, the plunging interest rates and stock price say that the markets aren't worried about either u.s. solvency or inflation, they're worried about u.s. lack of growth. when krugman refers to a lack of growth, let me show you what he is talking about. gdp growth, that's how we measure. it's the biggest measure of the economy. we found out just over a week ago that gdp growth, look over on the side of your screen on the right side, for this quarter -- for the second quarter of the year was 1.3%. that's lower than we expected. look at the first quarter. 0.4%. those bar graphs should be getting bigger every quarter, not getting smaller and not dodging around. that's the problem. diane swonk joins us. diane, let's talk about what has to happen to spur meaningful economic growth in the united states. can you create economic growth with policies, for instance? >> well, if there was any silver

bullet to shoot on that front, it would have been shot already. there is no silver bullet in the wake of a financial crisis. we've stemmed the hemorrhaging the economy went through during the recession but we've been unable to get momentum going. that's very characteristic of a post crisis kind of recovery. it's one thing to know it's coming but another thing to living it. living it has been miserable. >> no kidding. this last week, we started to feel things we had felt three years ago. i don't think any of us needed to relive this. steven moore is the editorial writer for "the wall street journal." we saw the bush tax cuts extended in december of 2010. generally speaking, taxes remain low. but this recovery is not taking hold. why do some argue that lowering taxes, thereby reducing government revenue, would actually boost the economy? >> first of all, ali, the reason that tax revenues are so low right now -- you're right, we're only getting about 15% of gdp in taxes and we're spending 24% of

gdp. that's the big deficit gap. the main reason that we're seeing that drought in revenues is because the economy is not growing. and it's strange because i find myself in some agreement with paul krugman. the problem right now is growth. the economy isn't growing. we're not generating jobs. if people aren't working, they don't pay taxes, right? we do need to get to a growth program. it's just that paul krugman and i probably couldn't disagree more about what to do about it. >> how you get there. >> if you read my column in friday's "wall street journal," what i talk about is, you know the time might be right for a grand deal to do a tax reform that lowers tax rates, broadens the base, gets rid of all the pollution in the tax system. i think that's something that could generate -- >> i did read it. i read it very early on friday morning. and i thought to myself, i'm not really going to bring up the topic of congress getting a grand deal on tax reform on this show because my viewer will

click the remote and say, that knucklehead is a knucklehead. do you think it's possible? >> i really do. if you read the column, you'll see, in 1986, everybody said it couldn't be done. you can't take on the special interest groups. one of the points i make is this is the way for barack obama to save his presidency. >> it's possible. zbli believe so. >> i think the left and right both agree on the fact that -- i don't know what reform we all want, but that reform in taxes is necessary. the debt ceiling deal meant that a potential crisis was averted. but there was optimism that it could mean a lot more than that. listen. >> the sooner we get this done, the sooner that the markets know that the debt limit ceiling will have been raised and that we have a serious plan to deal with our debt and deficit, the sooner that we give our businesses the certainty they will need in order to make additional investments to grow and to hire.

>> interesting. so the president back on july 8th, by the way, a month ago, was arguing that closing this deal will give more certainty to businesses and allow them to start hiring. norm ornstein joins us. the celebration over the debt ceiling was remarkably short-lived, at least as far as markets were concerned. what policy tools do congress and the president have left to spur this economy notwithstanding what peter suggested, a grand deal on tax reform. what else do they have? >> it was more like a wake. i'm afraid one part of the disappointment in the deal was that some of the tools that were there pitifully weak ones, but for example extending the payroll tax cuts or including an infrastructure bank that could be funded without necessarily using many federal dollars, simply weren't a part of this deal. i continue to be worried that even though the spending cuts are going to be relatively

limited in this next year, this is just not a time to be doing that. so you hope that when we get beyond this phase in august and congress comes back, they'll start to focus more on some of the limited things that government can do. and that does include moving towards in this super committee possibly a grand bargain that includes tax reform. but you'd have to be a super optimist to believe that we'll move rapidly in that direction. >> let's ask diane. you started by saying if there were a silver bullet it would have been shot at this point. have been shot at this point. two things come up constantly. well, three, tax cuts. norm just mentioned payroll tax cut. and the third one is this q.e. 2 that sometimes gets talked about. the idea of more quantitative easing. the federal reserve putting lots and lots of money into the economy to stimulate it. give me your evaluation as an economist. >> well, all those issues that we've just talked about are

valid issues. i do think we probably will get an extension in the payroll tax cut in 2012. it's just a very bad time not to do that. but that's on the margin. these are all marginal tools. i agree with steve that fundamental tax reform in the longer haul could get us to a better, more competitive plain in terms of competitiveness. that said, i'm not the super optimist. i listen to norm a lot and i believe him and think highly of him. and i'm more than disappointed in our ability to come up with these. i think it's important to think about in terms of the federal reserve, this is putting a lot of weight on the shoulders of central banks around the world. the european central bank, disappointed this week by -- >> and look what happened. >> and look what happened, exactly. that helped to trigger the major losses we saw in the market this week. and the reality is that we're running out of tool kits. i think the fed can do more. and i think they're going to be considering it. certainly the employment report we saw on friday helps take some of the burden off the fed for

doing something immediately. but any way you cut it, if the european central bank does more, the fed will be likely pulled into the picture in one way or the other, maybe not q.e. 3. but they will be pulled into the picture because what happens in europe matters to us in the u.s. and they have to keep the swap lines open and all these different things we used during the crisis. the weight is still on the shoulders of the central bank to carry this economy. and it's a heavy burden. >> i'll say this, if we have a q.e. 3 -- and i think now there's a real chance of that, given the possibility -- >> there is a chance, yes. >> ali, this is a money show. i'm buying gold if that's going to happen because you don't create prosperity by printing money. we've seen the gold price go from $900 an ounce in january of 2009 to $1,650 today. we could easily see a $2,000 gold price because people around the world are losing confidence in paper currency whether it's the dollar or the euro.

these politicians thinking they can create growth by printing money. >> you saw it at the end -- gold had lost ground. >> hang on, diane, just a moment. an accident doesn't have to slow you down. with better car replacement available only with liberty mutual auto insurance, if your car's totaled, we give you the money for a car one model year newer. to learn more, visit us today. responsibility. what's your policy? what if we designed an electric motorcycle? what if we turned trash into surfboards? whatever your what if is, the new sprint biz 360 has custom solutions to make it happen, including mobile payment processing, instant hot spots, and 4g devices like the motorola photon.

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we're covering live here on "your money" the downgrade by s&p of the u.s. sovereign debt. i'm joined now by david beers, the global head of sovereign ratings with s&p. christine romans is with me as well. david, thank you for joining us. tell us, please, for our audience with the little bit of time between when this happened and now, why stan doord and poor's made between when this happened and now, why standard & poor's made the decision to downgrade the united states from its aaa credit rating. >> sure. two key reasons. the first is around the uncertainty that we think the political process as it's playing out on fiscal policy is creating in the u.s. and the uncertainties about the future direction of fiscal policy. and that's about the difficulty of creating a consensus across the political spectrum about making fiscal policy choices.

and the second factor, of course, relates to the agreement that congress and the administration signed into law earlier this week. we think that the -- that that package which will either be between $2.1 trillion and $2.4 trillion on its own will not do enough to stabilize the rising debt burden of the u.s. government. >> david, tell me about this discussion that's been going on where the administration says that it pointed out what it calls an error to standard & poor's in some calculations and that s&p said it would go back and look at it and ultimately still made the decision to downgrade the united states. can you give us some context around that? >> sure. this is about technical assumptions that the congressional budget office uses in looking at in its own

nonpartisan way medium-term and long-term fiscal trends in the united states. and they have two sort of baseline sets of assumptions. we were looking at one set of assumptions. we talked to treasury and agreed with treasury that another technical approach looking at it made sense and we adjusted our projections on that basis, ran it by our rating committee and concluded that the rating should be cut on the basis of those revised assumptions. >> so you take issue with the fact that it's an error? >> well, these are assumptions, these are projections going long into the future. and there are different ways that reasonable people can look

at them. and so this was a set of technical issues. it's not a question of who's right or wrong here. >> all right. my colleague, christine romans, i know, wants to ask you something. christine? >> the issue here -- and thanks for joining us this afternoon. the issue here for you, then, is that even though in the united states we see this big, huge debt ceiling deal and many people feel like, okay, finally they've put this behind us, it is not behind us. the national debt continues to grow. deficits are too big, too big as a size of the american economy and with the slow growth that we're seeing taken together, that makes the u.s. a slightly riskier investment than it was six months ago. is that a correct assumption? >> yes. and i just want to highlight again the fact that by our lights, the political process as it comes to grips with the fiscal policy issues, we think in and of itself creates a bit

of -- a lot of uncertainty, which we think itself is an issue in terms of the rating of the u.s. government. >> david, i want to ask you this one last thing. when do you think or what would the u.s. have to do to regain its aaa credit rating? do you have any guidance on that? >> well, remember where we are right now. we've lowered the rating one notch to aa-plus. still a high rating but we have a negative outlook on that rating which means that in our opinion, the rating could fall again some time over the next two years depending upon whether there are additional fiscal measures and how actually the package agreed to this week actually plays out. so at the moment, our best case scenario doesn't foresee over the next couple of years the u.s. getting back to aaa. but we suppose that if it did -- >> do we need to see tax

increases or taxes on the table -- >> could i finish? >> sure, go ahead. >> i'll respond to your question. we think there are two issues here. one is bridging the political divide, whether it's -- and whatever that looks like in terms of the mix of revenues and expenditures, that's where congress and the administration need to decide. but if we had more confidence than we do now that there was going to be a durable political consensus about the choices around fiscal policy, that would give us more confidence about the ability of the government to stabilize the debt burden over the medium term. if those two things happen, yeah, there's a chance sometime in the future the u.s. can go back to aaa. >> david, thanks for joining me. appreciate it. we'll continue to follow this story. david beers is the global head sovereign ratings. when we come back, we're going to talk to ken rogoff,

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back with a special live edition of "your money," covering the s&p downgrade of u.s. sovereign debt. ken rogoff is back with me. he's a professor at harvard university and former chief economist for the international monetary fund. on the phone is mohamed el-erian, the ceo of pimco, one of the biggest bond dealers in the entire world. they run the biggest bond fund in the world. mohamed, thanks for being with us. i just spoke to david beers of s&p. i want to get a sense from you. because it's a question a lot of viewers who may not be involved in the world of bond rating asked me after what happened in the financial crisis in 2008 and the errors that the major bond rating agencies made, do serious bond buyers and sellers and traders listen to what s&p says? does this matter?

>> it does matter, ali, but not because we invest on the basis of what the rating agencies say. here at pimco, we have our own sovereign credit assessment. we have our own internal ratings and we make investment decisions based on our own work. however, the rating agencies are through a monopoly are wired into the system in such a way as it gives them enormous influence. so they are reflected in investment guidelines. they are reflected in the way certain people think about risk and, therefore, we have to pay attention to what other people are going to do based on this downgrade. so strictly speaking, it will not impact how we invest our money but it does impact how the system responds. >> and may impact how other people invest. and that will be important to you. i want to put up a list on your screen of the 15 countries -- used to be 16 until yesterday --

the 15 countries that enjoy a aaa credit rating from both moody's and s&p. the united states is no longer on that list. but australia is, canada is. mohamed, these countries pay better yields. is there some reason why they wouldn't benefit dramatically from this downgrade in u.s. bonds? >> they will benefit, but it's not going to be dramatic. the u.s. had two things going for it in addition to be the aaa. it is a reserve currency. so other countries use the dollar. and secondly, it has the deepest and most liquid financial markets, which means that other countries outsource their hard-earned savings to be intermediated into the u.s. system. now none of these other countries on your list is either able or willing to step in for the u.s. they can do something at the margin, but they cannot replace the u.s. that's the good news and the bad news. it's the good news which means the system will not change

radically overnight because you cannot replace something with nothing. but it's also bad news because there is an uncertain element as to how a global system operates with a aa score. >> so given how plugged in you are to the system, and i just want to remind our viewers who may not be familiar with this, but the international bond market is substantially bigger than the capitalization of the value of the international stock markets. after being whipsawed this week, mohammed, many of our viewers are wondering oh my god, what happens next week? in the broadest economic sense -- i know you're not a stock market prognosticator. in the broadest economic sense, will we wake up monday with some massive response and reaction to what s&p did on friday, or was this in some quarters expected enough that the response will be muted? >> it was expected in some quarters, but it will also come as a shock in others. so we're looking at an uncertain and volatile outlook. certain things we know. we know this is bad news for the u.s. economy. it's a further headwind to growth and job creation.

we know that this is going to accelerate lots of questions about the ratings agencies themselves. we're going the hear the question who rates the ratings agencies. we also know it's going to put a question mark on other aaa countries, which means that there is going to be concern about europe. so whichever way you look at it, the risk premiere in the market is going to go up. and this was unthinkable, ali, not so long ago. >> david beers said that it could take, if everything is done the right way and in fact these budget discussions get a little more aggressive about either raising revenue, raising taxes or cutting spending, the u.s. could regain its aaa credit rating in about two years. but the credit rating is not the same as lowering or raising interest rarities themselves, mohammed. and what we saw is that u.s. bonds got more expensive, and their yield got lower, their return got lower. that's counterintuitive to some people. you would expect that this kind of thing would cause u.s. bonds to -- cause the u.s. to have to

pay more interest to borrow money. why is that not happening? >> so two issues. first on the s&p. they added insult to injury, because they didn't just downgrade the u.s. from aaa to aa plus, they put the new rating on negative outlook, which means they're still worried about the possibility, not the probability, but the possibility of a further downgrade. in terms of the impact on u.s. treasuries, remember, u.s. treasuries reflect a whole host of factors. what has dominated in recent times are two things. first, a recognition that the u.s. and the global economy are slowing down significantly. and that tends to push bond prices up, yields down. and second, we've had a flight to quality out of europe because of the crisis there, and out of the stock market because of nine sharp days of decline. so the bond market is trying to reflect so many moving pieces,

and these two i have just cited have dominate over the credit risk which is associated with the aaa downgrade. >> and mohammed, finally, i want to ask you, do you think, do you think there is going to be maybe not on monday, maybe not in the short-term, but what is the overall effect both psychologically and financially on the delicate economy here in the u.s. of not only this, which happened on friday, but of the things that we have happened, the things that have unfolded over the last nine days, the debt deal, the new numbers on gdp which show our growth is slower than expected, that manufacturing is slowing a little bit, that consumer demand had slowed a little bit, and our job growth was actually a little better than expected. when you put all of this into a bowl, what kind of a cake do you bake out of this? >> let me tell you my expectation and then my hope. my expectation is when you put all this in a bowl, analysts are going to be revising down again the growth estimates for the u.s. and for the rest of the world. and that is not good news for a

country that already has an unemployment crisis, and has a housing market that is not functioning properly. so this is bad news for americans because it means lower growth and fewer jobs. my hope, ali, and it's a hope, is that this will be a wake-up call for the politicians and the policymakers. this will be a sputnik moment, a moment in which a psyche as a country is shaken so much that we recognize collectively the need for common vision and common purpose to put this country back on the road of faster growth and more jobs. >> mohammed el-erian, very clear. thank you for coming here and making some sense of this. the co-chief and investment officer at pimco. i'm standing by with ken rogoff, the former chief economist of the international monetary fund, he is a harvard professor and one of the smartest guys i know. he is going to help make sense of this right after a break. stay with us. rakes.

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you're watching a special live edition of "your money" as we're digging into why standard & poor's downgraded the united states. i'm joined by ken rogoff, the former chief economist of the international monetary fund. even my head is spinning after this last week, ken. i mean, a week ago we were talking about this debt deal, then we were talking about gdp numbers and manufacturing numbers and consumer and in and a market that dropped several percent and jobless numbers, and now this downgrade. it's about eight months' of news in one week. tell me what my viewers are supposed to think about what has happened culminating in this downgrade. >> well, the downgrade certainly a kick in the seat of the pants of the united states. we're out there trying to market $15 trillion in debt, and somebody said it's good, but it's not great. it's not helpful. certainly the u.s. economy has been slowing. europe is in trouble. i'm afraid there is no other way to put it. this is certainly a little bit of a scary moment.