Standard & Poor's Puts U.S. Government Debt on Credit Watch

This blog’s subjects are so wide-ranging that it is hard to know where to begin.  Stocks, bonds, currency movements, commodities, precious metals, money markets, investment returns, inflation, world events and their effect on finance and your investments, and political events that affect financial markets are all worthy subjects.  We will also give you an idea of how this may affect your investment decisions and why you would care about each topic.

In the coming weeks, our focus will be on the following topics:  government finance (specifically, that of the U.S.), currency markets (especially related to China’s currency), and gold as an investment vehicle.

Today, the bond rating firm, Standard & Poor’s 500, sucker punched the European and U. S. stock markets by putting the U.S. Government’s debt (i.e. U.S. Treasury Securities) on watch for possible downgrade.  This is the first ever time that U.S. Government debt has been put on credit watch.  It has never had a credit rating below AAA (the highest possible rating in Standard & Poor’s rating scheme).

In a conference call with analysts, the analyst at Standard & Poor’s who covers U.S government debt basically said “we are impatient and would like to see Congress and President Obama come up with a plan to reduce deficit spending now, rather than later”.  He indicated that it has been two years since the financial crisis occurred, yet there is still no plan to reduce the budget deficit.

S&P expects the U.S. debt outstanding to reach 94% of GDP by 2013, with 3% growth in the economy.  This means that it would take an entire year of output (or production) from U.S. industry and their employees to pay off the debt in one year.  The last time that U.S. debt grew to be that big a percentage of GDP was during World War II, when it reached a zenith, somewhat in excess of 100% of GDP.  So why is today different – in other words, why would S&P put U.S. government debt on possible downgrade?

Back in the 1940’s the country’s population was a lot younger.  When soldiers returned from the battlefield, they were educated and put to work in the only major country whose industrial infrastructure  was not seriously damaged by the war.  The U.S. was the new major superpower, and controlled its own destiny.  There was a plan, and the ability to, grow our way out of the large debt that had accumulated.

Today, the average age of the country’s citizenry is older.  Fewer citizens as a percentage of the total population are working – indeed, the percentage of people in the U.S. who are working is now below 50%!  Government does not have a plan in place to deal with the coming explosion of Social Security and Medicare beneficiaries (despite ObamaCare’s promises).  There is some doubt as to how we will grow our way out of this hole that has been dug at the federal, as well as state, levels.

I believe that the pendulum will eventually swing back – that the S&P’s notice that it is watching U.S. government debt for possible downgrade is in some sense the rating agency’s way of “acting out”.  They were caught flat-footed during the mortgage crisis, with AAA ratings on a wide swath of mortgage-backed securities that were backed by dodgy sub-prime and alt-A mortgages, many of which went into default.  They do not want to be embarrassed this time. 

I believe that the U. S. government’s political arms – Congress and the President (either President Obama or his successor) -- will come up with a plan to put the country back on the path to prosperity.  I believe that this is an overreaction by both S&P, and common stock investors, who drove the Dow Jones Industrial Average down by over 200 points today.  This is buying opportunity. Investors with cash on the sidelines should take this opportunity to make some strategic investments in solid, blue chip stocks.

For more information on this topic, you may want to read the following web page:

http://useconomy.about.com/od/fiscalpolicy/p/US_Debt.htm