Historic Downgrade of US Debt

Last modified on August 5th, 2011

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.