Buy the dip no longer sounds sufficient to calm fears, nor will forward guidance. Jerome Powell will...
As "First Among Equals" Fades Away…
08/31/2011 12:30 pm EST
Yes, US debt was downgraded, and it doesn’t spell doom for the economy, nor is it something to be ignored…there are real implications, and it’s important to understand them, write Pamela and Mary Anne Aden of The Aden Forecast.
For the first time in US history, the US credit rating was downgraded on August 5. Coming on the heels of the steepest stock-market drop since the 2008 financial crisis, it was a big blow to an already fragile financial system.
Both in the US and globally, trouble was already brewing before the S&P downgrade.
Growing signs of a global economic slowdown kept stock markets jittery weeks prior to the first stock meltdown on August 4. Essentially ignoring the debt compromise reached on August 2, and fearing another recession, bond prices surged.
As investors turned to safety, gold soared, hitting one record high after another, and so did the two safe-haven currencies. And these trends have intensified since then.
The markets are clearly telling the story…They don’t like what they see. For now, the tug of war between inflation and deflation, which we’ve often discussed, has tipped heavily to the deflation side. And again, this will continue to strongly affect the markets and the global economy.
’Fighting on Titanic’ Feeling
As you’d expect, reactions were widespread around the world. But when all was said and done, the general feeling was that the US was careless for taking its budget disagreements down to the wire, risking default.
The system appeared flawed, leadership was perceived as weak and the opposition as stubborn. In the end, the US essentially lost international credibility.
This political paralysis was one of the main reasons given for the downgrade, but there’s much more, and it revolves around the debt. It has nearly reached the point of no return, and the politics-as-usual stance was viewed in a negative light by the rest of the world.
China and Russia were the most critical, but they have been all along, especially Russia. In China’s case, however, it pulls more weight because they are the US’s largest lender.
They’ve been urging the US to get their financial house in order, but now they’ve basically said they’ll be reducing their US debt exposure. If that’s true, their timing isn’t so good. With the US dollar stabilizing and bond prices on the rise, bonds are looking good.
Japan realizes this. They said they’ll keep lending. And since they’re the US’s second-largest lender, that was a positive note.
Nevertheless, the bottom line is one we’ve been expecting. Calls have increased for an alternative to the US dollar as the world’s reserve currency. They say the US has been irresponsible, bringing the rest of the world along with it, affecting the global economy by causing instability.
But this is nothing new…
NEXT: US and Europe in the Same Boat|pagebreak|
US and Europe in the Same Boat
We all know the US has the largest debt in world history, and its annual deficit has exceeded $1 trillion for the past three years.
The US is also fighting wars in many countries, spending more on its military than China, Japan, Russia, India, and NATO combined. The majority within the US now want to get out of Afghanistan.
This has been going on for years. The downgrade simply brought it all to the forefront. The US, however, is not alone.
The Euro crisis is flaring up again, along with concerns about their banks. This is making the world even more nervous, which adds fuel to the fire, with fear flip-flopping from Europe to the US.
This is being reflected in the growing number of downgrades. Aside from the US’s downgrade by S&P, thousands of muni bonds were clipped as well. Moody’s also gave the US a negative outlook. Greece was downgraded deeper into junk status and Spain is under review.
In a nutshell, the US has now joined New Zealand and Belgium in the AA+ group, leaving behind AAA countries like Australia, Canada, France, Germany, Singapore, Switzerland, the UK, and Hong Kong.
None of this means the world is ending. It just means the US has to buckle down and make some very tough choices about the debt crisis it’s gotten itself into.
Yes, the economy is slowing from an already weakened position. Jobs and housing are in poor shape, and the Misery index is at a 28-year high. This is a composite of unemployment and consumer prices and since food prices are still at highs, it makes matters worse.
So at times like this, there’s plenty of blame throwing to go around.
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