Sunday, August 7, 2011

The US Downgrade - Who is to blame?

Standard and Poor's just downgraded the US from AAA to AA+. Who is to blame? First off, everyone is blaming everyone else. Obama is blaming Bush. No surprise since he blames Bush for everything. The Democrats are blaming the Tea Party. Huh? Yes they are blaming the Tea Party for creating the environment in which the president could not get his wish for a "clean" raising of the debt ceiling which would have raised the ceiling by $2.4 trillion with promised cuts in spending! These people are lunatics since the downgrade occurred because spending is out of control and would have been made worse if Obama had gotten his way and were there not a Tea Party. The Republicans are blaming the democrats for their lavish increase in spending, forgetting that this mess started with Bush's embracing of TARP. I guess the independents are blaming anyone who is not an independent forgetting that they are the ones who elected all the congresses and presidents in the first place. So the answer is simple: everyone is to blame except the Tea Party. The reason for the Tea Party's existence is out of control federal spending. However, until enough voters get the religion we apparently are going to continue on our profligate ways. Did I hear "Japan" anyone? By the way, Japan's bonds are probably the riskiest on the planet for developed countries, yet they are also rated AA (as is China - the least riskiest). Everyone is acting as if they know that the downgrade means and what effect it will have. In reality no one has a clue. First it assumes that the downgrade somehow caught everyone by surprise. Go figure. Only if there was a surprise would there be a market reaction. But unlike Nolan Ryan's fastball, we all saw this coming. So the markets should have already adjusted. Nevertheless, the link between the Treasury bond market and the stock market is tenuous at best. Moreover, no one knows the impact on Treasury yields although the folks at Fox seem to think that rates on everything for everyone will go up. Au contraire. In the face of an anticipated downgrade, rates on long term Treasurys last week actually fell as investors sought save havens from the European debacle. Say what you will, the dollar is still a lot safer than most world currencies. I suspect that given what is happening in the eurozone that Treasury bond rates will not rise dramatically. Bond markets are still going to be determined by the fundamentals of inflation and economic growth. Rising rates of inflation and continued lagging economic growth will ultimately cause Treasurys to rise and not any downgrade by S&P.

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