AAA to AA+: The Causes and Effects of USA's Credit Rating Downgrade
Out of control national debt and spending deficit are some of the major reasons why United States is encountering the threatening crisis nowadays. It was said that the economy is slowing but not falling. The incompetent political leadership most likely triggered the current downturn to be a full blown crisis. In the past the world could look to the United States for leadership and financial stability. Unfortunately that very option is no longer applicable. The current occupant of the White House does not even have a clue except to find a way to win reelection through obfuscation and class warfare, while promoting his fiscally disastrous policies. The Federal Reserve, having essentially printed trillions of dollars to no avail, is out of options except to reprise the same policy, thereby worsen an already precarious situation.
Out of control national debt and spending deficit are some of the major reasons why United States is encountering the threatening crisis nowadays. It was said that the economy is slowing but not falling. The incompetent political leadership most likely triggered the current downturn to be a full blown crisis. In the past the world could look to the United States for leadership and financial stability. Unfortunately that very option is no longer applicable. The current occupant of the White House does not even have a clue except to find a way to win reelection through obfuscation and class warfare, while promoting his fiscally disastrous policies. The Federal Reserve, having essentially printed trillions of dollars to no avail, is out of options except to reprise the same policy, thereby worsen an already precarious situation.
The President, Mr. Obama and the Congress reached an agreement to lift the so-called debt ceiling and cut the $14.3 trillion national debt. President Obama urged Congress to do the right thing by approving the agreement. This is a sign of progress and it may be a time of international economic uncertainty, whether in the United States or in the Eurozone or from commodity prices, so agreement will help build stability across the global economy.
But the promised cuts were not enough to satisfy S&P. Credit rating agency Standard & Poor's on Friday lowered the nation's AAA rating for the first time since granting it in 1917. It's the first time in this nation's history that anyone anywhere has ever considered the creditworthiness of the United Stares anything less than iron clad. They had warned that during the budget fight that if Congress did not cut spending far enough, the country would face a downgrade. One fear in the market is that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest rate paid on U.S. bonds, notes and bills would have to rise to attract buyers. And that could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities.
S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade, to AA, would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.
The number of Americans claiming new jobless benefits fell to a four-month low, a sliver of hope for an economy battered for days by a credit rating downgrade and falling share prices. The jobless claims data released by the Labor Department eased concerns that the economy was heading back into recession as feared by investors, and buoyed U.S. stocks. Initial claims for state unemployment benefits fell 7,000 to seasonally adjusted 395,000, the Labor Department said the lowest level since April. Economists had expected a reading of 400,000.
The US downgrade will force the reassessment of the entire concept of risk in the global economy. And while ratings for the world's safest haven for investment is downgrading, the same way that the high-powered markets like Indonesia had been rising. In other words, the downgrade will alter the way investors decide on what is safe and what is not and will allocate their money accordingly. Another implication of the S&P downgrade would be fast efforts for the replacement of the U.S. dollar as the world's number one currency. We all know that countries like Russia and China are calling for a new reserve currency several years ago, and due to the downgrading the calls might get louder.
There are worries that a sharp sell-off in stocks and the nasty fight between Democrats and Republican over raising the government's debt ceiling could dampen employers' enthusiasm to hire new workers. The dominant effect is that, Standard and Poor's didn't downgrade the United States' financial system, but it downgraded the United States' political system.
The number of Americans claiming new jobless benefits fell to a four-month low, a sliver of hope for an economy battered for days by a credit rating downgrade and falling share prices. The jobless claims data released by the Labor Department eased concerns that the economy was heading back into recession as feared by investors, and buoyed U.S. stocks. Initial claims for state unemployment benefits fell 7,000 to seasonally adjusted 395,000, the Labor Department said the lowest level since April. Economists had expected a reading of 400,000.
The US downgrade will force the reassessment of the entire concept of risk in the global economy. And while ratings for the world's safest haven for investment is downgrading, the same way that the high-powered markets like Indonesia had been rising. In other words, the downgrade will alter the way investors decide on what is safe and what is not and will allocate their money accordingly. Another implication of the S&P downgrade would be fast efforts for the replacement of the U.S. dollar as the world's number one currency. We all know that countries like Russia and China are calling for a new reserve currency several years ago, and due to the downgrading the calls might get louder.
There are worries that a sharp sell-off in stocks and the nasty fight between Democrats and Republican over raising the government's debt ceiling could dampen employers' enthusiasm to hire new workers. The dominant effect is that, Standard and Poor's didn't downgrade the United States' financial system, but it downgraded the United States' political system.
0 comments:
Post a Comment