People always say there is no news but bad news and from looking at the selection broadcast to the American people, I can see that. But looking elsewhere, I see nothing good happening to this country. And the bad news isn't mildly bad.
Moody's and S&P are always extremely late on important ratings such as this. Like you mentioned, we witnessed their fine work with the banks and the mortgage market failure (MBS,CDO's, etc.) They have institutional pressure on them as a downgrade below AAA (Aaa) would result in massive selling of Treasuries as most institutional investors have an investment policy for part of their portfolio's to be only invested in AAA rated securities. Treasuries are also used as collateral for many debt structures because of it's top rating. If they were to be downgraded, it would create a massive margin issue for banks and investors causing many markets to get annihilated in order to satisfy margin calls or debt pay downs.
But this can't go on forever, the U.S.' debt rating should already be below AAA IMO. Institutions will have to prepare to adjust to this change within their IPS' and collateral guidelines.
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If we take away the sophisticated economic mumbo jumbo that Chicago style economists like to use, and take away that false yardstick that is GDP and look instead at the trade deficit one comes to this very simple analogy as to what's happening.
First, picture the U.S. as a couple we will call the Joneses who rent a huge 5,000 sq foot rooftop penthouse in NY city. The landlord who owns the penthouse outright and all penthouses for that matter, lives in a small apartment in Chinatown. He lives very austerely in a three bedroom apartment with his family of five.
From the outside, the Joneses looks good. They have two new cars in the underground parking garage, even an indoor pool which amazes all of their guests. The place is decorated with the finest imported antique furniture. Art worth millions hangs on the wall. The Joneses have a servant, a cook, a maid, a butler, a chaffeur, a gardener (it has a rooftop garden). The Joneses dine in restaurants owned by the Chinese man who lives in Chinatown.
Every day the Joneses buy the newspaper and read about what goes on in the rest of the world "Oh my, Greece is in debt. Oh my Ireland doesn't look much better"
What the Joneses fail to realize is that everything they 'own' is infact on credit. It is borrowed money. Come to think of it, it's not even borrowed money. The money doesnt even exist. They dont have enough to pay for the cars, the butlers, the maids, the chaffeurs. They can't afford to dine in restaurants or even buy the $2.00 paper to read about the bankruptcies in Greece and Ireland.
So HOW do they do it? Credit. The promise to pay someone back..eventually. That someone is the Chinese landlord. He is the one who really is wealthy. He may one day decide to knock on the door of the Jones family and ask for his money back. But right now he is being made rich because they are paying him with US dollars which he can still use to buy things for himself in Chinatown. He only needs a small amount of it to pay his bills, because he doesnt have many expenses and everything he buys is paid with CASH. He is literally swimming in bills which surround him in his apartment. He is wondering if it isnt time to start getting rid of all that PAPER sitting there. Its almost of no use to him. He may as well line his bird cage with it. Everytime the Joneses want something they print more of it and give it to him as a promise to pay him back. The Chinese man is starting to think and think hard.
ONLY QUESTION IS: How long can Joneses continue to give him paper money that promises to pay him back? And, when will the Chinese man finally cut the Joneses off and REFUSE to help them at all.
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Here's another great article as it relates to the U.S. downgrade via Zero Hedge, This is obviously not a real press release but one that should be:
"It took less than 48 hours for the market to completely shrug off S&P's warning about America's credit rating, even as the dollar: that prima facie indicator of US stability and viability, has just hit a fresh 16 month low. And while nothing anyone says has much of a chance to impact the market, which continues to move with a negative 1 correlation to the now default carry funding currency, the following is the press release that S&P should issue if it wants to truly bring attention to the US debt crisis.
NEW YORK (Standard & Poor's) April 22, 2011--Standard & Poor's Ratings Services said today that it initiated ratings on the debt issues of the Federal Reserve System (commonly referred to as U.S. dollars) with a AAA/Negative Outlook.
We derive our opinion from the observation that the Federal Reserve’s assets consist of roughly $2.5 trillion of government debt with a deteriorating outlook against $52 billion in capital, thus yielding a leverage ratio of 48x.
In addition to its highly leveraged exposure to a deteriorating credit (the United States of America), the Federal Reserve’s stated strategy is to sell these securities back into the market (as a means of tightening policy). In the event of future downgrades of the U.S., these securities are likely to generate losses in multiples of existing capital.
The Federal Reserve intends to handle said losses via a ‘negative liability’ account, which makes them the liability of the United States of America. This creates a very clear event horizon, or point of no return: downgrades of U.S. government debt generate substantial losses on Federal Reserve’s balance sheet, which then make the U.S. government’s debt larger than it was before the downgrade, thus creating a vortex of deteriorating credit.
If we were to lower the ratings on the U.S., we would also lower the ratings on the debt of the Federal Reserve, as well as our issuer credit ratings on all other individual GRE entities.