Sunday, August 07, 2011

US Downgrade and its Implications?

S&P downgraded United States this week confirming what the world already knew that lending to the United States is not entirely risk free. One does not need to be an economics PHD from Harvard or have the seat of power in Wall Street, to know that one cannot keep taking debt forever to finance excess spending over one's earnings. While the United States may not default, at least technically because it can inflate away its debt by printing money, the resulting loss in value of the dollar would essentially mean a default to the lender.

The fact that Moody's and Fitch have not downgraded their credit rating has no meaning (weren't these the ones, including S&P, which were merrily rating stacks of sub prime junk mortgages as Triple A and when the bubble burst testifying that the rating was merely their opinion and investors were essentially foolish in believing them). Confidence has been shaken and that is enough to strike fear in the hearts of the investors.

Now, in the last few years during each recession, the risk averse investors took shelter in US treasuries. Where will they park their money now? Gold is one easy choice. Emerging markets anyone?

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