Monday, August 8, 2011

My Thoughts on the Downgrade

Recently, S&P decided the long-term outlook of the US's economic situation concerned the rating agency enough to move the US Government out of investment-grade status.  For the first time in US history, the credit rating of the US Government has been downgraded (to AA+, from AAA).  This should bring a host of concerns for everyday consumers, because this could ultimately affect interest rates in the future if the government doesn't get serious about significant debt reduction, and NOW.

From what I've read, the downgrade had as much to do with the "brinkmanship" policy making in Washington as anything.  The strategy for both parties seemed to be to wait for the other side to flinch.  This inability to collaborate on a long-term debt reduction that would have met the "requirements" set forth by S&P in essence triggered the downgrade.

Given the performance of the equity markets over the past few weeks, investors are already on edge regarding the global economic outlook.  The gains in the DJIA (Dow Jones Industrial Average) for the year have been wiped away.  The performance today has been especially sickening.  The Dow dropped over 600 points to under 11,000, down nearly 7% for the year. This has an effect on consumer confidence that, along with stagnant unemployment, will most certainly hurt the ability to pull out of this downturn.

The suprising thing is that, in spite of the move from investment grade, 10yr treasuries were still in demand, which tells me that the concerns are not just limited to the US government's potential to default.  There are still significant global concerns that are pushing the equity markets down as well.

When the details of the debt ceiling deal came out, I thought they were a bit underwhelming.  Apparently, Standard & Poor's felt the same.  The fact that Social Security and Medicare were off the table should have been an ominous sign.

(Here's a really good article on the debt ceiling negotiations, through the lens of "game theory":

Here's hoping our elected officials get the message sent by S&P and get serious about debt reduction.

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