Sunday, July 31, 2011

Will A Downgrade Matter?


Remember when he used to talk about "adult moments?"

S&P still says it's serious about a downgrade. Economics Weekly looked at it from their perspective:
S&P have recently revised its outlook for the US from stable to negative, indicating it may lose its precious AAA credit rating in 2012. For an long time now the US has had economic and fiscal risks and has an large amount benefits. However the strengths of the US, the fact that it is highly diversified and flexible, their track record have allowed it to maintain the highest possible credit rating, however recently the fiscal uncertainties i.e. the weaknesses have started to outweigh the strengths of the US economies. Thus it looks like their rating may be downgraded, but what are the likely effect of a possible downgrade?

Any downgrading of US debt will mean investors will see US dollars as riskier therefore will sell US dollars, resulting in a fall in the value of the US dollar against most global currencies. However many believe that as many of the world currencies do not want to be devaluated against the main global currency, as it will effect price competitiveness many central banks may intervene in the market to maintain the value of the US dollar. Therefore in the long term the dollar may not fall that much in value that is of course if the dollar is still the major global currency at the time when the US may have their credit rating downgraded.

Moreover any downgrading will result in the cost to obtain money increasing, this will therefore cost the US more to service debts. The return they will have to offer for bonds would therefore have to increase. Furthermore with news that China may cut up to two thirds of its $3 trillion worth of US debt, this will mean yet greater interest will have to be offered in order to borrow money. This will therefore limit the US ability to borrow money in the future.

Furthermore if the rating does fall it will result in the US dollar no longer being seen as the safest currency in the world, and may result in many investors moving away from the dollar to precious metals such as gold and silver, or to other countries. This will further weaken the US and may result in a decline of the US dollar as the world’s most prominent currency. This will then result in a fall in investment levels within the US, as the country will no longer be as appealing.

Yesterday while I was putting on my socks, I had the TV on and Steve Womack, the freshman Republican Party hack who replaced now-Senator John Boozman in Arkansas' reddest district, was babbling on about the greatness of the Boehner bill. Watching this highly bigoted, former small-town mayor-- and Merrill Lynch financial advisor-- trying to grapple with the impending financial meltdown his party is purposely inflicting on the country, I made a snap decision. I ran down to my safe, which I hadn't opened in a decade, and took out a big stack on I Series federal Treasury bonds, zoomed over to an open bank and cashed them all in. When I got home I read Binyamin Appelbaum's analysis of what a credit downgrade is likely to look like if the GOP gets its way and forces one on the country in their mad and demented jihad against Barack Obama.

Applebaum says that one of the reasons the talks have broken down is because Inside the Beltway, there is a feeling that although a downgrade would probably increase the cost of borrowing for the federal government, state governments, businesses and consumers, the economic impact might not be as bad as many people have predicted. That's encouraging?
The federal government makes about $250 billion in interest payments a year. Even a small increase in the rates demanded by investors in United States debt could add tens of billions of dollars to those payments. And the credit rating agencies have said other downgrades would follow like dominoes.

For example, Fannie Mae and Freddie Mac, the huge mortgage companies that are backed by the federal government, would be downgraded, raising rates on home mortgage loans for borrowers. Maryland and Virginia, and many local governments near Washington, their economies tied to the government, would also be downgraded. So would New Mexico, because an unusually high proportion of residents depend on federal benefits.

“A default on our nation’s obligations, or a downgrade of America’s credit rating,” 13 financial company chief executives said on Thursday in a letter to the president and Congress, “would be a tremendous blow to business and investor confidence-- raising interest rates for everyone who borrows, undermining the value of the dollar, and roiling stock and bond markets-- and, therefore, dramatically worsening our nation’s already difficult economic circumstances.”

...Moody’s said on Friday that it would maintain its Aaa rating for the United States so long as the Treasury keeps paying bondholders and Congress passes a long-term deal to extend the debt ceiling. The announcement said that failure to act by Tuesday night, or to meet other obligations, including Social Security payments, would not prompt a downgrade.

Ready for what last line may be presaging? Meanwhile click on this image to get it large enough to read. It's from the Chicago Tribune and warns of higher borrowing costs for consumers, plummeting consumer confidence, and jittery markets-- the GOP game-plan for the 2012 presidential election.

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