No, it’s not the end of civilization just yet. However, the U.S. and, by extension, the global economy which is intimately affected by the Amerikan one, just took a major hit with Standard & Poor’s (credit rating agency) downgrading the U.S. from a triple A rating to AA+.
U.S. credit rating agencies are notoriously slow in downgrading Amerikan assets although they take great delight in slowly killing foreign assets and sovereign nations – their favorite target being the European Union which is of course a major Amerikan competitor. However, they tend to play follow-the-leader so once one agency issues a downgrade we can expect the other major agencies like Fitch and Moody to follow suit.
This is an historic first; the first time in history that a credit rating agency has downgraded Amerikan credit. Standard & Poor’s explanation for its long-overdue downgrade is that the recent Congressional debt-ceiling deal is not enough to stabilize the Amerikan government and stop its out-of-control spending; that U.S. government policy-making is becoming less stable, effective and predictable. Regular readers of this blog will not be surprised at this but many leaders, institutional investors, talking-heads that drank the Kool-Aid and the media that have been feeding us nonsense will likely panic.
This past April, U.S. Treasury Secretary tax-cheating’ Timothy Geithner declared that there was no risk of the United States losing its triple-A credit rating. It is becoming apparent that the government’s propaganda machine is losing its effectiveness as more and more of the sheeple wake up to the reality of a crumbling economy.
So, what does the S & P downgrade mean? Many large institutional investors such as pension funds and hedge funds are required to invest in ONLY triple-A rated assets. Governments control the price of money – interest rates are the price of money and governments’ control of interest rates has kept rates at artificially low levels that discourage investors’ saving and, instead, encourage them to buy supposedly safe government bonds. Once the government bonds lose their triple-A rating these large institutional investors have to sell these bonds. Selling bonds drives down the price of these bonds which panics other investors into selling which exacerbates the downward spiral.
The flip side of the problem is that interest rates are inverse to bond prices. This means that long term interest rates in the market will rise when bond prices fall. Not only does this weaken the government’s ability to control short-term interest rates, more importantly it will increase the government’s cost of borrowing which in turn will mean the newly-established U.S. debt ceiling will be reached that much sooner and another acrimonious debt ceiling debate will again destabilize the Amerikan economy.
Global investors are also affected because of the interconnectedness of global finance. Whither goes the U.S. so goes the rest of the world. I have been warning of this slow-motion train wreck for four years (I hate being right) since I wrote "Crash of 2007 – Economics 101" four years ago. If you haven’t read it and you want to understand what is happening and what you can do to protect yourself and your family, I strongly encourage you to read it as well as subsequent year’s major articles. I explain complicated economics and finance in simple terms so most people will understand.
Enjoy the rest of the summer because the you-know-what is going to hit the fan this fall.
August 6, 2011
Update – Aug. 7
The New York Times is doing its best to reassure us the day after S&P downgraded U.S. credit rating with its headline that read, in part, Markets Expected Credit Ruling using the oft-repeated abstract word ’expected’ which has certainly gotten a lot of play by media cheerleaders during the economic turmoil the last few years.
The downgrade was released AFTER the markets had closed Friday when the markets had dropped precipitously during the day (in fact, all week) so it shouldn’t be surprising what the markets will do when they open again on Monday. Although I usually avoid short-term market timing, I’ll go out on a very stout limb and predict a 99% chance of a continuing market decline. Word of warning: anyone trying to profit by shorting the markets will probably be chasing them down.
Try as they might to be positive, the article ended with a quote by Harvard economics professor Kenneth S. Rogoff, “if you picture a history book in 100 years with the timeline of China passing the U.S., one of the dates on the timeline will be ‘U.S. debt downgraded.’ ” Roggof and Reinhart recently authored the book, “This Time is Different” wherein they stated that no country ever recovered after their debt to GDP ratio exceeded 90%. By the way, U.S. debt recently exceeded 100%.
Your comments are WELCOME!
If you like what you’ve read or not, please “Rate This” below.
Lengthy comments may time-out before you’re finished so consider doing them in a word doc first then copy and paste to “Leave a Reply” below.