"A wise and frugal government which shall restrain men
from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government."
(Thomas Jefferson)

Sunday, August 7, 2011

Recession Fears increase with S&P Downgrade of US Credit

There is something about the S&P downgrade of the US Credit rating which makes us wonder what is the real story behind this and who is pulling the strings as S&P pushes for the end of the Bush Tax Cuts which should be a red flag to anyone.  Is there a conflict of interest with S&P?  They are not asking for the Government to spend less and if you read between the lines, they want the Government to spend more and get the revenue from allowing the Bush Tax Cuts to expire it looks like across the board.  The S&P comments in their press release look like they come straight of the DNC.
S&P laid blame for its decision to assign the AA+ rating directly on the political process in Washington. Even though lawmakers reached a decision on Aug. 2 to raise the government's debt ceiling and avoid a potentially disastrous default, the deficit-reduction package that accompanied the deal won't sufficiently improve the government's fiscal health in the coming years, S&P said in a release Friday. A factor in that projection, S&P said, is that Republicans seem unwilling to allow the Bush-era tax cuts to expire. 
From across the Atlantic comes these questions which frankly most should be asked  of S&P by members of Congress.  Hearings need to held into what went into this downgrade since the S&P release was so much like Democrat Talking Point paper.  These are legitimate questions that need answers but why once again is our media like crickets?

10 Questions About S&P Downgrade
By Barry Ritholtz - August 6th, 2011, 7:34AM
The downgrade from TripleAAA to AA+ by Standard & Poors raises many questions. Here is my list of most important issues the downgrade raises:
1. The change in trajectory of US debt was in service of Banks: It began with TARP, and continued with every other bailout/stimulus/economic plan. What was S&P’s role in creating that crisis? 
2. How will non-US investors (Private and Central Banks) view the downgrade? 
3. What is S&P’s methodology of rating sovereigns beyond Probability of Default? How does this differ from other rating agencies? 
4. What does the downgrade do to US currency — is that the true impact of the credit downgrade? 
5. Will borrowing costs likely increase for the US? What about consumers? 
6. Will the downgrade of US spill over to other agencies, states, municipalities? 
7. Will private sector holders of US Treasuries — insurers, pension, foundations, etc. — be downgraded as well? 
8. Why did the rating agency not wait until the special committee / debt ceiling deal was completed later this year? 
9. The Rating Agencies were downgraded by Dodd-Frank, with all regulatory and legal references to be removed. Was S&P’s move retaliatory? 
10. How will US markets open on Monday in response to the downgrade?
Thanks to Josh Rosner, Scott Frew, and other anonymous participants
Why is it that every time we have something to do with the economy, banking, etc., that it always goes back to the Dodd-Frank bill.  Even today, do most of us have a clue what is in that bill that was used to pay back their big donors?  That may be right up there with Obamacare for being a bad bill.

Going to MIT instead of the Ivy League for comments made me stop and notice this article on AOL this afternoon.  How many Ivy League guru's who helped get us in this mess are going to talk about stuffing money in your mattress where it would be safe?  Bet there are none!  

Word is coming out that Geithner has agreed to stay on as Treasury Secretary which we do not find is good news.  One more reason to send Obama and his whole Administration to the Unemployment Line on 6 November 2011.

U.S. Credit Downgrade By S&P Darkens Economic Outlook, Stokes Recession Fears 
First Posted: 8/6/11 03:56 PM ET Updated: 8/6/11 04:40 PM ET NEW YORK --
With the United States government now shorn of its top credit rating by Standard & Poor's, experts are increasingly worried that the American economy is headed back into recession, while Europe appears vulnerable to another shock. 
The announcement that the rating agency had reduced the U.S. government's AAA rating for the first time in history came after days of punishing declines in the stock market, and has now cast a shadow over economic prospects in the months ahead. A recent stream of indicators has provoked concern that the economy could be headed for another recession, with the growth rate slowing considerably, unemployment stubbornly elevated and the stock market swooning. Some experts say the downgrade could be the final trigger, making credit more expensive and sowing broad unease. 
"People will be pulling money out of equity markets, out of commodity markets, and putting it into cash -- essentially, stuffing money in your mattress," said Andrew Lo, a professor of finance at the MIT Sloan School of Management, in an interview Saturday. "This is the worst thing to have happened, given the weak economy we already have." 
"Some straw has to break the camel's back," he added. "This may be the straw." 
The psychological impact of the downgrade might cause stocks to fall Monday and could exacerbate the sovereign debt crisis in Europe, experts say. Over time, it could raise the interest rates on 10-year and 30-year Treasury debt, making it more expensive for the federal government to borrow money, further worsening the deficit. The downgrade could also push up the cost of loans that are tied to the Treasury rate, making it more expensive for Americans to get funds to buy a car or a house. 
The effects could reach Europe, where nations that share the euro currency are contending with a debt crisis that seems to deepen by the week. While S&P didn't announce plans to reduce the ratings of European countries following its U.S. Treasury downgrade, experts said European downgrades might be inevitable, to maintain consistency in the rating system. That in turn could spark a new round of panic. 
S&P's decision comes at a time of critical economic weakness, as the American economy seems increasingly vulnerable to another contraction just two years after the official end of the recession that began in December 2007. Gross domestic product grew at an annual rate of just 0.85 percent in the first half of the year, the government announced in July. Seen in relation to population growth, GDP actually shrank in the first three months of the year. 
After other data releases showed the manufacturing sector weakening and consumer spending drying up, the Dow Jones Industrial Average lost 513 points on Thursday, in the biggest one-day drop since the depths of the financial crisis. 
It remains unclear what the precise effects of S&P's downgrade will be, or when they might materialize. Some experts believe the global economy will be able to absorb the downgrade without much turmoil. But others, like Lo, take a more pessimistic view. 
Although interest rates on long-term U.S. Treasury debt might rise as a result of the downgrade, rates on short-term debt could fall, as investors throw money at safe-haven assets. The yields on Treasury bills, which have the shortest lifespans of the government's debt securities, could fall below zero, if investors turn to U.S. debt that is keeping its rating intact. 
Interest rate movement in bond markets, moreover, might be minimal at first. Investors' attitudes about the economy influence their demand for Treasury debt; with the outlook grim, investors have been fleeing from risk, eager to lend money to the U.S. government and happy to accept low compensation. Yields on 10-year Treasury notes neared 2.4 percent, a low not seen since last fall, as the Federal Reserve was beginning a second massive economic stimulus. 
But over the next few years, yields on a variety of investments that are influenced by the Treasury rate might rise, implying that a whole range of assets would be treated as riskier. 
"When there's more demand for credit, that's when we're likely to see a re-pricing of risk," Mark Vitner, a senior economist at Wells Fargo, said Saturday. "In the very near term, our borrowing costs are going down, due entirely to economic weakness."  
Excerpt:  Huffington Post AOL
No one knows for sure what will happen tomorrow but it could get really nasty or the markets could look at S&P as an anomaly as the other two credit rating agencies, Fitch and Moody's, left the United States credit rating at AAA. Moody's is also pushing that the deficit be tackled and gotten under control versus raising tax rates. Now we wait for the markets to open worldwide to see the fallout while world leaders have been working the phones:

World leaders race to head off Monday stock market turmoil

August 7, 2011

World leaders and finance chiefs raced Sunday to head off spiralling tension triggered by eurozone debt contagion and a US rating downgrade as the clock ticked on the opening of the markets Monday.

Officials from the Group of 20 and Group of 7 economies held emergency conference calls Sunday as leaders of major powers conferred by phone and European Central Bank (ECB) governors readied for talks before the opening of the New Zealand market, the first to trade in Asia.

No details emerged from the talks, with officials in European doggedly tight-lipped.

In a sign of a possible storm ahead, the Israeli market fell seven percent Sunday and Gulf markets tumbled on opening but later trimmed some losses as investors reacted to Standard & Poor’s unprecedented cut in the the US rating to AA+ from the top notch triple-A.

“Until the stock markets open (Monday) the extent of earthquake caused by the downgrade of the US. debt rating will not be known,” said Spain’s El Pais daily newspaper. “But everything points to a black Monday which may intensify the attacks on the euro.”

Excerpt: Read more a Vancouver Sun

Just turned on the Bloomberg Channel on Cox and they are reporting that France could be next in line to be downgraded from AAA to AA. Tomorrow is shaping up along with the rest of the month to not be good days for those in the stock market unless they have been smart traders.

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