Sunday, 7 August 2011

History In the Making – U.S. DEBT DOWNGRADED – Should We Panic?

 

For the first time in history, The United States of America has had its debt rating downgraded by globally recognized ratings firm Standard & Poor’s.

We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

We have also removed both the short- and long-term ratings from CreditWatch negative.

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

Source: Zero Hedge

This comes on the heels of a downgrade earlier Friday by China’s leading credit ratings agency Dagong Global Credit Rating Company, which lowered US debt to ‘A’ after having lowered in late 2010 to an ‘A+.’

“The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts,” Dagong Chairman Guan Jianzhong told CNN.

“The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals,” he said.

Our downgrade simply reflects reality,” Guan said.

Source: CNN

We’ve previously noted that the reality of the situation is we don’t need ratings agencies to tell us what we already know. Our debt has now exceeded 100% of GDP, putting us in the same boat as the Greeks, Italians and Spanish. There is no way, mathematically speaking, that our government will be able to reverse the trend. US Debt is worthless and everybody knows it (or they’re just not paying attention). From our April 7, 2011 report AAA Ratings or Not, US Bonds Are Toast:

The debt ceiling debate in Congress is really nothing more than a distraction. The government will not shut down simply because just about everyone knows Congress will eventually raise the ceiling to absorb even more debt. A week or two delay is no big deal. Very few of our elected officials are prepared to take the necessary steps and the subsequent immediate pain that would follow an outright refusal to increase our debt borrowing capabilities.

Whether US Treasury bonds are downgraded officially, or through back channels when our creditors decide to stop buying any new debt, makes absolutely no difference. The end result will be the same.

Most of our readers have had a good idea for years that U.S. debt is toilet paper. S&P, as was the case when they were rating mortgage backed securities as Triple ‘A’, is behind the curve. While this is certainly a big story because it’s the first time in history that a major agency has taken the drastic step of downgrading US sovereign debt, before you panic we suggest contemplating an alternate viewpoint from Martin Armstrong’s August 1, 2011 one page brief Will a Downgrade of USA from AAA Really Mean Anything?:

The hype about Standard & Poor going to downgrade USA credit rating is just not important. Oh the talking heads will cry the sky is falling. They downgraded Japan in 2002 and nothing took place. Not even their rates increased. The same is likely in the USA and quite frankly, if S&P really thinks they have that much power, they should stop drinking their own bath water.

When it comes to sovereign debt of the USA, we are talking about the US$ is the RESERVE currency. About two-thirds of central bank reserves globally is in dollars and the way those dollars are held is in government treasuries. Does anyone really think that if S&P downgrades the USA that its debt will not be sold?

When you deal in REAL money, there is a problem. How do you store it? You can’t just put a billion on deposit at a bank…

The ONLY way to park serious money is in treasuries. If you have hundreds of billions, now you have the added problem of MARKET SIZE. You can’t just go to any country. Their debt structure cannot provide the ability to park serious money…

Don’t worry. Be happy! Until we revise the world monetary system and the dollar is no longer the RESERVE currency, sorry boys, but you are spinning scenarios that scare people, sound good as talking points, but are just gibberish in the real world of serious money…

S&P’s actions are certainly a major indicator, and they may have far reaching market effects, but until those countries and large financial conglomerates that invest in U.S. pull the plug the can will continue to be kicked down the road.

There is, of course, a breaking point, and we believe we are well on our way to that rendezvous. China, Russia and a host of other nations are aligning to eliminate the US dollar as the sole reserve currency of the world. One morning – perhaps it’ll be Monday, because we really have no idea what is happening behind the scenes – we’ll wake up and the US dollar will be in complete free fall. Actions of ratings agencies mean nothing unless the global markets react – that’s what we should be watching for.

The following video depicts one such scenario. We’ll note for our readers that this is just one of many scenarios that can play out, and the time lines involved are unpredictable. Whether it takes 12 hours, two weeks, or longer, it will nonetheless be sudden and very painful.

The First 12 Hours of a US Dollar Collapse:

These will be times that try our souls, our minds, perhaps even our existence. Gerald Celente warned in 2009:

…I think for a lot of people it’s going to be – it’s going to feel very hard, harder than anything they’ve experienced in their lifetime now, for some time to come.The trend is clear – and S&P’s downgrade simply confirms it (or we’re being set up for the grand calculated scam of a future ratings upgrade to assure us that things are getting better).

We urge our readers to remain vigilant and to continue preparing. We are entering a period of great turbulence, and it’s better to be prepared years in advance than to be a day late.

http://www.shtfplan.com/headline-news/history-in-the-making-u-s-debt-downgraded-should-we-panic_08062011

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