Thursday, 21 April 2011

Downgrading of U.S. Credit Rating Just Tip of the Iceberg


Why the Standard & Poor’s downgrading of the U.S. triple “A” credit rating from “stable” to “negative” is just the tip of the iceberg.

In coming up with a headline for today’s editorial, I was contemplating just using the word “denial.”

Simply put, the investors and markets are in denial…much the same as an alcoholic who thinks that if he skips drinks at breakfast and lunch, he’s okay to drink at night.

As reported here Monday, credit-reporting agency Standard & Poor’s downgraded the U.S. “AAA” credit rating from “stable” to “negative.” It was one big, loud message: if the U.S doesn’t get spending under control, its credit rating will be jeopardized further.

So how did the markets react? They gave us the opposite of what is expected. Instead of the U.S. dollar falling in value, it rallied. Bond prices, instead of declining, rallied. And gold stock prices declined with crude oil prices.

Why would U.S.-dollar denominated assets rally on the news of a U.S. credit rating cut (aside from trying to confuse the heck out of investors)? The reality of the situation is that investors still foolishly flock to U.S. dollars in times of uncertainty—even when the debt rating of the country issuing the dollars, the U.S., has been downgraded.

Back in 2005 I said there would come a time when “real estate” would become a dirty word in America. Few believed me then. Today I’m saying that, as difficult as it may be for us to see, there will come a time in this very generation when U.S. dollars will not be in vogue. A time when any economic uncertainty will see investors running to precious metals, when inflation will run rampant and U.S. dollars will become worth less and less.

Do you really think the politicians in Washington can put a cap on their spending binge? Of course not. In this day and age, spending only what one takes in is a foreign concept to our politicians. It’s utterly ridiculous. Just the interest on the national debt alone costs Washington more than $1.0 billion every day, seven days a week!

Investors are not just in denial; they simply can’t see what’s happening in the economic environment. A government debt ceiling of $20.0 trillion for 2016 may not be enough. QE, Act 3, or a version of it, looks more and more like a certainty to me this summer. What will happen when we get to the point where there are so many U.S. dollars in the financial system that no one wants them? A sobering, but real thought.

The Standard & Poor’s downgrading of the U.S. triple “A” credit rating from “stable” to “negative” is just the tip of the iceberg. Moody’s Investor Service could follow soon with its own rating cut. And the inflation that I’m predicting…

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