InvestingAdvicebyGeorge – 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.
About The Author – George has been an investor for 30+ years. When he retired in 2004, he took over the control of his investments full time. In March of 2009 he committed a sizable stake to the market and doubled his money. he sold half about a year ago and what he started with is in drips dividend reinvesting. The other half he have been a bit more speculative with, but he recently bought SLV at $26.00 in January and sold it all on April 29th for a 66% realized gain. He spends my time reading every financial classic he can get his hands on and has become a fairly good chartist.