Economics forecasters on cable television seem to be of two minds ever since Standard and Poor’s downgraded the US debt rating from AAA to AA+. Some sound more like doomsday prophets, claiming the American economy is due to crash into a smoldering sea of ash and brimstone. Others, such as the stocks and investing specialists on Fox and MSNBC, come across as hype men for Wall Street, claiming that S&P are simply playing politics and that the US is still the champ and can take on all challengers.
Nobody is answering the question most Americans are asking:
How does this downgrade impact me now and in the near future?
REAL EFFECTS OF THE US DEBT DOWNGRADE
The hype men at Fox and MSNBC and the doomsdayers both look pretty wrong, as it turns out. The market has continued on as before, gaining a bit some days and losing others. Actually, this is exactly what several prominent academic and foreign economists expected.
The downgrade is largely misunderstood amongst the public, because people on television are trying to make sure you are not informed! Debt downgrades are not actually catalysts for economic change – they are symptoms. It’s just like a report card. You don’t do poorly in class because you got a bad grade. You get a bad grade because you were doing poorly in class. The United States was rated too highly, so S&P gave them a new report card.
In the short term, the real effect of the downgrade is small. Over the next few years, everything should continue as normal. However, if the US is not upgraded or is downgraded again, it will be a sign that the US economy is really ailing.
One sign of this is the continuing increase in the value of gold and silver, which are setting all-time highs right now. Because the trustworthiness of the US dollar has been falling, more banks are trading in gold and silver. The bank of South Korea has actually changed all its holdings from US dollars to gold and is storing them in the UK.
MORE PRESSING FEARS
You should be more worried about the trading value of US currency than our country’s debt rating. The US economy has largely been artificially stable because the dollar has a privileged status as trading currency. If that goes, then the US economy will come down to earth. But it won’t happen overnight.
We will probably see steady market decline, say the academic economists at leading institutions in the US. Derivatives are built with triggers tied to debt. If financial institutions are downgraded as well, banks will demand more collateral and the market will begin to decline with falling derivatives. Read the rest of this entry »