Late Friday August 5th, the United States suffered a Credit Rating Downgrade by Standard and Poor’s rating agency from AAA or perfect, to one notch below at AA+. This is the first time in history the US has been downgraded. It is a pretty big deal. What’s more is that S&P warned of future downgrades if our deficit and debt problem is not contained within two years. In fact they rated the possibility of another downgrade at a one in three chance.
Markets fell around the world on the news. The Dow lost 634.76 points to close at under 11,000, the biggest single drop since December 1, 2008. Foreign markets also lost on fear of entering into another deep recession. Hong Kong’s Hang Seng tumbled 4 percent and South Korea’s Kospi slid 3.3 percent.
The downgrade should not come as a surprise. The ratings agencies have been warning of a downgrade for a few months now. It reminds me though of an interview with Treasury Secretary Timothy Geithner on Fox News earlier this year. Mr. Geithner was asked “”Is there a risk that the United States could lose its AAA credit rating? Yes or no?” Mr. Geithner responded with “No risk of that.” So maybe everyone just believed what Mr. Geithner had to say and was actually surprised?
Ultimately this downgrade will probably cost us in the long-run. As the US government has to pay more to its lenders to compensate for the added risk, consumers and businesses will have to pay more to borrow as well, which will push up prices on most consumer goods.
But the real question is how long will people be willing to buy US Treasuries? If the buying stops the game is up. Forget about deficit spending as it will not be an option. Then real cuts will be inevitable.
During all of this mess gold has been a major benefactor. Gold has broken the $1,700 per ounce mark to $1,742 this morning as money has been shifting in this safe haven asset. For the first time as of yesterday, gold has outperformed stocks since the market bottom in March 2009. Look for this trend to continue as central banks continue to buy into the asset class. More recessions more often as predicted by ECRI, will also play into the buying frenzy as fear in the economy becomes more real and who knows, maybe another credit rating downgrade.