So US Government debt got downgraded by S&P. So what does this mean?
Initially, not a lot. I write this with same trepidation, since the downgrade happened after the markets closed last Friday, but before the markets opened on Monday (I queue up posts the evening before).
But all in all, I don't see more than a short-term hit, if any. It may be a net positive, as it's all out in the open now, and the markets hate uncertainty. It's possible that the markets priced this in already, and open up.
Where you should be looking right now is Italy and Spain. No, not for great art and wine, but at financial markets. Italian and Spanish government bonds, in particular. Their debt (and particularly deficit) problems are even worse than ours. And by "even worse", I mean "way worse".
And the problem is that European banks are holding much - maybe most - of those bonds. If those get downgraded, than the bank's reserves fall below important solvency levels. The problem is not that Italy and Spain (and Greece and Portugal) default and leave the Euro; the problem is that another financial crisis is about to start over there.
It's possible that the Euro Death Spiral impacts the ground this week. Not likely, mind, but possible. Check back tomorrow for more thoughts, but this is the key issue: which government bonds currently held as reserves by European banks are at risk? The answer is way more than anyone is talking about now.
That may let the U.S. Government keep borrowing like a drunken sailor, despite the debt downgrade. Hey, thanks, European folks! You're financing my Government's attempt to emulate you!
But when the financial crisis hits, Obama will find he doesn't have any credibility to address it. Nobody thinks he has any clue about what to do about the economy, nobody trusts him any more (not even the Left), and nobody will give him the benefit of the doubt. He's squandered more good will, faster, than anyone I've ever seen.
The only thing still propping us up is that the rest of the world is pretty much divided into three camps:
ReplyDelete1. The same problem as us, but way worse (Europe)
2. Too closely intertwined with our consumption economy to risk triggering TEOTWAWKI here, fearing that doing so would hurt them even more than it'd hurt us (the Pacific rim, plus OPEC)
3. Too small to trigger TEOTWAWKI in the US even if they wanted to (pretty much everyone else).
We're alive because we're a "safe harbor". And we're a safe harbor principally because every other harbor in the world worth talking about is slightly _more_ infested with pirates, vortices, great white sharks, and the Spanish Inqusition than ours is.
Which means that, essentially, our entire economy is currently running on schadenfreude.
As of 10 pm last night, gold was up $57 an ounce. I think that what we are seeing here is the opening shots of the war between China and the US.
ReplyDeleteThe reason that we won world war two was that we were simply able to produce war materiel faster than the Germans and Japanese could blow it up. If our economy is in the crapper, we won't be able to do that again. The Chinese know this.
This could all make the Germans grumpy. Please don't do that.
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