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Am I the
only one who finds it a bit ironical that the agencies that were supposed to
protect us from the greed of the bankers, the same the same agencies that
stamped the garbage mortgages, CDO’s and derivatives “AAA”
grade so they could partake in the greed fest that was going on in the years
from 2000 – 2008 are now the agencies that are holding our countries
credit rating hostage. To date I have not read or heard one report that says
if S&P, Moody’s and Fitch had done their job properly we would not
be in this economic morass we find ourselves in. They seem to permeate an air
of innocence and holy than though as they dictate the terms that would be
suitable for them to allow us to keep our “AAA” credit rating. I
can’t help but wonder where these guardians of the financial system
were as they stamped junk CDO’s that were packaged and sold to
unsuspecting investors as grade “AAA” U.S. debt obligations. If
it wasn’t so sad it would almost be laughable. See
chart below.
Yesterday
the market sold off 199 points on the DOW to close at 12302.55 and the
S&P closed down 27.05 to close at 1304.89 breaking a key support level of
1310 or the 150 Day Moving average.
With
every day that passes without a deal to prevent a U.S. credit downgrade
brings us closer to a calamity that would make the Lehman Brothers failure
look like a ride at Epcot.
President Obama’s and House Speaker John Boehner’s speeches on
Monday night only strengthened the resolve of each party and the squabbling
between both parties in the recent days has only served to further raise
concerns that our elected officials will fail to reach a compromise which
will lead to disastrous consequences.
According to a report in Reuters, Paul Light
a government scholar was quoted as saying “I’ve never seen
anything like this. This is a defining moment in America’s inability to
act.”
Despite what you may have heard in the media let me clarify something, the
probability of the U.S. defaulting on their debt is very low. The probability
of the credit rating getting downgraded grows with every minute. The
consequences of a lowering in our credit rating would have disastrous
effects.
A downgrading of our “AAA” credit rating would mean higher
interest rate and subsequently higher costs not only for the U.S. debt but
for home loans, credit card rates, student loans and loans to small
businesses. The cost of borrowing money would skyrocket for consumers and
businesses alike.
Likewise,
states and municipalities would also face higher borrowing costs. The cost of
all capital projects like road repairs, water systems, hospitals and schools
would become much more expensive.
The ensuing credit crunch would lead to
higher borrowing costs for all and we would find ourselves back in March of
2008 only this time we would be 14 trillion dollars deeper in debt.
Add to
this that with the dollar already in a year long slump the dollar would
continue to sink against the other world’s currencies. S&P has
estimated that a downgrade would cause the dollar to drop 10% or more in
value. Add to this that a downgrade would cause the dollar to lose its status
as the world’s reserve currency, something that would be catastrophic
for the U.S. economy.
Combine
all of the factors above and I think you will conclude as I have that the
already shaky economy would implode. Not only would a recession return but
this time with a vengeance. If Congress cannot get a measure passed in 6
short days I see the economy sinking even lower than it did in 2008 –
2009.
The
worst part of all is that this scenario would cause the global markets to
freeze up and make the failure at Lehman Brothers look like a day at the
beach.
In
conclusion, those of my readers who have properly positioned themselves in
physical Gold and Silver as well as the Gold and Silver ETF’s, GLD and
SLV. Will not only survive this carnage but will find themselves in a
position to profit from it as well.
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