The recent downgrading of the full faith and credit of the United States should come as no surprise. The US's credit rating has been on negative watch for some time. The other credit agencies have also had a negative watch on the US's credit rating and it would come as no surprise if the others, who had less gumption than did Standard and Poor, reduce their credit ratings to AA+.
If course this does not mean that the US will default on its debt. However, a country, like a person or business, cannot indefinitely go on borrowing 40 cents of every dollar it spends. In time, the mere servicing of the debt will outstrip all of the mandated expenditures (viz, social security, Medicate, etc) that a country is required to make. While the US sovereign debt is not overly high as related to GDP, continued borrowing will have, in time, a snowballing effect. Once over the edge it will be difficult to retrench. For example, see Greece.
While most of the wounds in the US were self inflicted (this need not have happened has the debt ceiling been raised without much political fuss) there are a number of disturbing fundamentals that are most worrisome. First there are 13 million people who are unemployed. Many will never be employed again. Then there are millions of homes under foreclosure and there is no short term likelihood that the housing market will turn around. Also consider that there are 48 million Americans (that is 16% of each man, woman and child) on food stamps. The separation between "haves" and "have nots" is growing wider. This against the political lunatic fringe who oppose even modest tax increased on the rich. Add to this crumbling infrastructure, the bankruptcy of many state and municipal governments and it is no wonder that credit agencies are having a second look at the full faith and credit of the United States.
I have recently seen a lot of the technical information coming out of wealth managers who are trying to convince customers to stay the course. Until recent slumps in the Dow, the markets have been doing quite well in a stagnant economy. Certainly the Fortune 200 companies are doing well. But they are doing so mostly abroad while trading on a cheap US dollar. They are sitting on a lot of cash that, unless there is a fundamental change in the US tax code, will remain offshore where it is doing the American economy little good.
Looking at the Dow reminds me of the 18th century where ladies used perfume rather than soap and water. For a short time everything went well until the stench overcame the perfume. Jobs are created by small business and, until banks are willing to finance inventories, accounts receivable and equipment the economy will remain stagnant. And the Dow will continue to slide.
If the Dow continues to slide then it will take international markets with them. And so you have the making of a double dip recession. The only sanity on the block is the price of gold. It has always been and will continue to be a hedge currency. It is no surprise to see the price of gold skyrocket in the face of uncertainty.
If the short term looks gloomy then the long terms looks even worse for the US. The US does not appear to have the political will to marginalize the looneys and get on with government. The President, although well meaning is not, I believe, up to the job. He has tried to get bipartison support for reasonable fiscal legislation but the looneys seem to prevail--on both sides of the house. What the US needs is a wartime government with one goal--bringing the US back from the brink. It is unlikely that this will happen any time soon.
Bernie.
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