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Historic Downgrade of US Debt

Posted by in Journal :: Updated on :: 6 Comments on Historic Downgrade of US Debt

I gotta hand it to the S&P ratings agency – I didn’t think they had it in them. After the other two ratings agencies reaffirmed AAA rating a few days ago, I thought S&P would simply cave to political pressure and keep the rating in tact as well.

In fact, I read a few news articles that basically seem to allude that the government was frantically trying to get S&P to keep the rating in tact. There was even talk in congress about passing some legislation to restrict the ability of the ratings agencies to downgrade any debt.

But S&P followed through and downgraded US debt from AAA to AA+. That was followed shortly afterwards by the Obama administration attacking the credibility of the S&P, saying there was a last minute error in their calculations. Whether the administration wants to admit it or not, they have a huge problem on their hands. China knows it and now the S&P is reaffirming it.

It’s a huge embarrassment for the United States obviously. The US dollar forms the backbone of all international transactions as the reserve currency. China is already talking about accelerating it’s diversification after the downgrade, which means they will start offloading US treasuries on the market and investing in other financial instruments.

I’ve blogged many times about what I think will ultimately lead to a complete crash of the US economy, and this is definitely along those lines. I think this is the first major event that will cause people to abandon the US dollar, which will cause serious economic problems for the US at home, namely that they can no longer export their inflation away to other countries.

This is a historic occasion, so I really have no idea what the markets will do on Monday. If I had to guess though, it’s likely to be a pretty big onslaught on Monday with stocks and bonds taking big hits, and possibly precious metals and commodities making some minor gains. But who knows, everything could explode next week.

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6 Responses to “Historic Downgrade of US Debt”

  1. curtismchale says:

    I’m consistently surprised that the US lives in this debt fantasy land. It’s about time that someone started to wake them up. They have to do something about the debt and it should have been done a long time ago. It’s absurd that they keep putting it off because it’s a politically unpopular decision, tough I suppose politicians want to keep their job which means it’s hard to make unpopular decisions.

  2. Chris Bond says:

    I think things will really get ugly if and when France is stripped of its AAA. People who have actually read the various prospectuses and bailout agreements say that if this happens Germany will become essentially the sole backstop for the Euro. Then you’d really see the bond market go haywire.

    For all the doomsaying about the US, treasuries have been doing great. I was long 10yr and 30yr treasury futures all week and it was a great trade. There’s nowhere else for that money to go realistically…

  3. Chris Bond says:

    While plenty of commentators are doomsaying, the market clearly thinks treasuries are rock solid:

  4. Duane Storey says:

    I think it’ll start going to foreign currencies and into precious metals. I think yields on treasuries are going to start going up, especially if nobody wants them and the US has to start monetizing the debt, which is undoubtedly going to happen.

  5. Chris says:

    Yep I agree, yields couldn’t get much lower anyway

  6. Scott says:

    Interestingly enough though, even after the downgrade the first thing everyone did was start throwing more money into treasuries. Go figure right.

    Granted, I think the instability in Europe was a big part of it.

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