Historic Downgrade of US

If you haven't heard, Standard & Poor's (S&P) downgraded the US's credit rating for the first time ever from AAA to AA+ last week.  What does this really mean though?

The historic August 5, 2011 downgrade of America’s AAA credit rating by Standard and Poor’s has confirmed the trouble that many have feared. I and others have long-warned that decades of deindustrialization and building an economy based on borrowing and printing money would lead to ruin. But who knew that the coup de gras to the American economy would be politically self-inflicted. As S&P said, it is now “pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics anytime soon.” Hopefully, the American people will identify those extremists in Washington who were either incompetent enough or intentionally willing to damage the country for political purposes, and vote them out.

How damaging is this downgrade?

Although Standard and Poor’s new AA+ with a negative outlook assessment on America’s credit alone is not a death sentence, it does confirm not only my long-held sentiments, but that of the markets in general as well. It says that if unchanged, our fiscal and economic path is unsustainable. As a result of this action, some of the things we can look for are further stagnation in the credit markets; rising bond yields and increasing difficulty in attracting foreign capital; an exacerbation of the foreclosure crisis due to possible rising interest rates and tightening austerity; extreme volatility in stocks; and strong momentum for rising prices in the precious metals and energy sectors.

Can the Fed maintain confidence?

The Fed has indicated that the measure of risk on Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities will not change. In other words, U.S. Treasuries should still be considered secure AAA collateral for practical purposes even though S&P has issued its historic downgrade. But this assurance from the Fed, though comforting, still does not answer many questions. The markets still want to know, how much longer the Fed can ride the back of the tiger, and will foreign interests who are also required to hold AAA assets as collateral finally begin to diversify? Remember, the Fed does not regulate and control how other countries deal with downgraded securities. Finally, everyone wants to know; at what points will Fitch and Moody’s follow Standard and Poor’s lead and issue their own downgrade?

What have we learned?

This was a close shot across the bow and a wakeup call for Washington. I only hope they were listening. If they were, then they heard a warning about using the full faith and credit of the United States in their insane game of political brinksmanship. All sides in Washington and their voices in the media need to understand that our expanding deficits and the national debt is not a partisan issue. All Americans are deeply concerned about our fiscal situation, as is the rest of the world operating under the dollar reserve system.

But the extremists in Congress who played the dominant part in adding the final straw to break the camel’s back act like they don’t understand that our economic trajectory has been a decades-long trend. Whether they acknowledge it or not, our problems have the momentum and economic kinetic energy of a one hundred car locomotive running at full speed. Therefore, to remain rigid and undiplomatic in an ideological posture trying to stop the train in its tracks is ill advised. In fact, they may have already initiated a catastrophic train wreck that promises to give the opposite of their stated desired result, and kill rather than save America. If, however, the intent among extremists on the Right in Congress was to damage our economic standing for political purposes, and I personally believe it was, then they are not patriots but enemies of the United States of America.

What we need are careful, deliberate, and meaningful steps to slow our momentum toward insolvency, and safely arrest and reverse our trajectory. We need to establish a sustainable path toward restoration of the prosperity that we inherited through the blood of our forbearers, if we are to ever reclaim our place in the world economic order. That means the long-contended interests of labor and business must be pragmatically addressed and balanced. It means substantive investments must be made in human as well as material capital. As President John F. Kennedy said in his inaugural address, “if a free society cannot help the many who are poor, it cannot save the few who are rich.


The original article can be found at http://realdealtalk.com/2011/08/06/the-downgrade-of-america%E2%80%99s-aaa-credit-rating-and-its-meanings/