The Unthinkable

             So, the unthinkable happened during this past weekend. US long term debt was ‘downgraded’ by Standard & Poor’s, one of the three leading credit rating agencies. The reason behind the downgrade was not financial but the political instability in the US congress to make fiscal decisions.

            John Chambers, the head of sovereign debt rating at S&P became the most hated man in the world. S&P had sent a note to the US Treasury at around 1:30 on Friday afternoon that it is going to downgrade long term US debt from AAA to AA+. US Treasury replied back indicating a $2 trillion error in there calculation at around 5:30pm. At 7pm S&P acknowledged the error and at 8:15pm Wall Street time, S&P took the historic step of downgrading the most secure of the securities in the world. All the TV channels stopped there regular programs and called in there ‘experts’ to evaluate the situation. John Chambers was on the top of every channels list. To add insult to the injury, the AA+ rating is on a Negative watch, which means that if US Congress doesn’t act, the debt can be downgraded to AA- in 2 years time.

            S&P and Treasury are still at odds over the $2T error. Markets world over took a blood bath on Monday. Ironically, the debt that S&P downgraded, US 10-30 year bonds, were high in demand and investors were selling stocks to buy into bonds. This shows that world doesn’t have any alternative to the US securities. US dollar is the world reserve currency, period. Not that I support the current fiscal policy of US, but out of all the nations, two emerging countries had the audacity to tell US to rein in there spending; Really, Mr.Hu Jintao. Let me refresh your memory, the Chinese central bank in early 90’s put its printing press in over drive to pay out its debt. Russia actually defaulted on its debt and later did the same thing in 1998.   

            One thing to notice is that after flooding the system with US dollars, Fed and Treasury are still not able to increase the US domestic consumption, so now the focus has to turn on increasing the investments and one way to attract companies is to lower your corporate tax rate, which is highest in the developed world (after Japan). But it seems that this Whitehouse is busy with there own agenda of making US the first Socio-Capitalist economy. The energy that President Obama invested in passing the healthcare bill should have been diverted into fixing the economy. Republicans are also to be blamed, especially the Tea party advocates, who are narrowly focused on there tax policies and don’t take into consideration the whole macro economic picture. The damage has been done.

           

According to S&P, 5 countries have gotten back there AAA rating but it took them 9 to 18 years!!