Free Markets, Free People


Credit rating downgrade fallout

First among the reactions globally was that of China:

China bluntly criticized the United States after the S&P ratings cut to AA-plus, saying Washington had only itself to blame and calling for a new stable global reserve currency.

"The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone," China’s official Xinhua news agency said in a commentary.

[…]

Xinhua scorned the United States for a "debt addiction" and "short sighted" political wrangling. China, it said, "has every right now to demand the United States address its structural debt problems and ensure the safety of China’s dollar assets."

"International supervision over the issue of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," Xinhua said.

If you think it is bad now, consider our predicament if the dollar was to be replaced as the new global reserve currency.  However it is ironic to be lectured by the Chinese on economic matters given their ideological bent.  Communists telling Capitalists (pseudo anyway) how they should conduct their business. 

France, on the other hand is expressing faith in the US’s ability to get its house in order, as is Poland’s Prime Minister:

France’s Baroin said France had faith in the United States to get out of this "difficult period." Friday’s U.S. unemployment numbers were better than expected and so things were heading in the right direction, he said.

"One should not dramatis, one needs to remain cool-headed, one should look at the fundamentals," he told France’s iTele.

"There is no need for panic," Polish Prime Minister Donald Tusk said. "We will see in August, and maybe more intensively in September what the effects for the world economy will be."

Of course, with the huge problems in Europe, both France and Poland are inclined to play down the significance of a US downgrade.  And  more interesting than what will happen later this month or next may be what happens on Monday, the first day global markets will mark their reaction to the US credit downgrade:

Because the S&P move was expected, the impact on markets may be modest when they reopen on Monday. But the ratings cut may have a long-term impact for U.S. standing in the world, the dollar’s status and the global financial system.

"The consequence will be far reaching," said Ciaran O’Hagan, fixed income strategist at Societe Generale in Paris.

"It will weigh on secure assets. The bigger reaction will be on risky assets, including equities and on agencies (Freddie Mac, Fannie Mae) and states backed directly by the federal government."

But he added: "U.S. Treasuries will remain a benchmark. This is a ship which takes a long time to turn around."

Norbert Barthle, a budget expert for German Chancellor Angela Merkel’s conservatives, said the downgrade would certainly provoke further turbulence in markets.

Everything mentioned is very important to the future of the US economy and its financial health.  Unfortunately most of it is negative.  In the next few months we’ll see how this shakes out, but at this point, even the optimists are pessimistic.

~McQ

Twitter: @McQandO

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12 Responses to Credit rating downgrade fallout

  • Owww….!!!!
    Obama spanked by the Chinese “worder” torture…!!!  That’ll leave welts…

  • Perhaps the Chinese would prefer if we used their old method of murdering their way out of a crisis. Of course, Americans are so far disinclined to murder their own population, unless one counts the unborn. I don’t think that counts, with the Chinese.

    • Hey, Bill Ayers was ALL about that.  And maybe still is…

    • Of course, Americans are so far disinclined to murder their own population

      >>>> Nah, that’s where leftism always leads. I’d say a sizeable segment of the population would be quite happy to march that troublesome tea party into the chamber.

    • I don’t think the left would mind killing off the Tea Party.

      • Oh, please…  Such a thing would NEVER enter their vacant little heads…
        Far too peace-loving and scrupled for that.
        Now, incarceration in a nice Gulag….  THAT’s a different thing altogether…!!!

  • they didn’t downgrade the debt as bad as it really is. just like they didn’t do with the CDO’s before the housing market crashed. betcha the banks aren’t betting on us treasuries going up..
    http://joshuagamen.com/2011/08/05/here-comes-qe3-dow-drops-500-points-in-biggest-loss-since-that-week-we-all-remember-in-2008/

  • Last week we had Putin calling the US “parasites.”  Now China chimes in the same chorus singing the tune for a new international currency.  If that happens, the US has no way to monetize the debt any more .. the “jig is up” with the currency games.

  • But there is other gloomy assessments …

    Markets could rebound after Thursday’s global market sell-off, but investors should see any bounce as a selling opportunity, as the world economy rolls towards total collapse, Mark Faber, editor and publisher of the Boom, Doom and Gloom Report, told CNBC Friday.
    A mooted third round of quantitative easing [cnbc explains] (QE3) in the U.S. and more money printing elsewhere is merely deferring a crisis that will be bigger and could end in war, Faber said.

  • Yeah, China will love it when we go into super pay back mode…no more new T-bills to buy, paying off debt, not buying their stuff. Yawn. Let me know when China stops buying Euros and Dollars to keep their currency low.