As a person trained , deployed and often asked to comment on macroeconomic shenanigans- I have the following observations to make on the downgrade of US Debt by S&P
1) Credit rating is both a mathematical exercise of debt versus net worth as well as intention to repay. Given the recent deadlock in United States legislature on debt ceiling, it is natural and correct to assume that holding US debt is slightly more risky in 2011 as compared to 2001. That means if the US debt was AAA in 2001 it sure is slightly more risky in 2011.
2) Politicians are criticized the world over in democracies including India, UK and US. This is natural , healthy and enforced by checks and balances by constitution of each country. At the time of writing this, there are protests in India on corruption, in UK on economic disparities, in US on debt vs tax vs spending, Israel on inflation. It is the maturity of the media as well as average educational level of citizenry that amplifies and inflames or dampens sentiment regarding policy and business.
3) Conspicuous consumption has failed both at an environmental and economic level. Cheap debt to buy things you do not need may have made good macro economic sense as long as the things were made by people locally but that is no longer the case. Outsourcing is not all evil, but it sure is not a perfect solution to economics and competitiveness. Outsourcing is good or outsourcing is bad- well it depends.
4) In 1944 , the US took debt to fight Nazism, build atomic power and generally wage a lot of war and lots of dual use inventions. In 2004-2010 the US took debt to fight wars in Iraq, Afghanistan and bail out banks and automobile companies. Some erosion in the values represented by a free democracy has taken place, much to the delight of authoritarian regimes (who have managed to survive Google and Facebook).
5) A Double A rating is still quite a good rating. Noone is moving out of the US Treasuries- I mean seriously what are your alternative financial resources to park your government or central bank assets, euro, gold, oil, rare earth futures, metals or yen??
6) Income disparity as a trigger for social unrest in UK, France and other parts is an ominous looming threat that may lead to more action than the poor maths of S &P. It has been some time since riots occured in the United States and I believe in time series and cycles especially given the rising Gini coefficients .
Gini indices for the United States at various times, according to the US Census Bureau:
- 1929: 45.0 (estimated)
- 1947: 37.6 (estimated)
- 1967: 39.7 (first year reported)
- 1968: 38.6 (lowest index reported)
- 1970: 39.4
- 1980: 40.3
- 1990: 42.8
- (Recalculations made in 1992 added a significant upward shift for later values)
- 2000: 46.2
- 2005: 46.9
- 2006: 47.0 (highest index reported)
- 2007: 46.3
- 2008: 46.69
- 2009: 46.8
7) Again I am slightly suspicious of an American Corporation downgrading the American Governmental debt when it failed to reconcile numbers by 2 trillion and famously managed to avoid downgrading Lehman Brothers. What are the political affiliations of the S &P board. What are their backgrounds. Check the facts, Watson.
The Chinese government should be concerned if it is holding >1000 tonnes of Gold and >1 trillion plus of US treasuries lest we have a third opium war (as either Gold or US Treasuries will burst)
. Opium in 1850 like the US Treasuries in 2010 have no inherent value except for those addicted to them.
8 ) Ron Paul and Paul Krugman are the two extremes of economic ideology in the US.
Reminds me of the old saying- Robbing Peter to pay Paul. Both the Pauls seem equally unhappy and biased.
I have to read both WSJ and NYT to make sense of what actually is happening in the US as opinionated journalism has managed to elbow out fact based journalism. Do we need analytics in journalism education/ reporting?
9) Panic buying and selling would lead to short term arbitrage positions. People like W Buffet made more money in the crash of 2008 than people did in the boom years of 2006-7
If stocks are cheap- buy. on the dips. Acquire companies before they go for IPOs. Go buy your own stock if you are sitting on a pile of cash. Buy some technology patents in cloud , mobile, tablet and statistical computing if you have a lot of cash and need to buy some long term assets.
10) Follow all advice above at own risk and no liability to this author 😉