Australian (ASX) Stock Market Forum

The S&P Downgrade

Michael Cornips

Formerly known as TradersCircle3
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The downgrade of the US by S&P to AA+ is a complete nonsense. The reality of the modern monetary system is that the US will never default on its ability to print money to meet its obligations. If you own a $1million US Government bond that is maturing, the Government will mature your bond by placing $1 million on deposit in your cheque account. The Government will never lose the ability to take that action. Remember, the obligation of the Government is to provide you with US dollars, not gold, not Euros, not a foreign currency or any other physical asset.

The S&P downgrade appears to be more of a political comment than the reality of the US monetary framework. Remember, S&P rated AAA the worst forms of sub-prime securitized loans, backed by inflated property prices, backed by borrowers who misstated their incomes, and guaranteed by AIG who proved eventually insolvent. Are S&P saying these securities they rated AAA were more secure than the US Government? The hypocrisy is breathtaking.

Does that mean that the US economy is healthy - of course not, but the catalyst for a correction should be the infantile bickering of US politicians not the ability of the US Government to meet its US dollar obligations. S&P downgraded Japan, starting in 1998, removing the AAA rating down to A2 in 2001. Japan has proven that its has never failed to meet its Yen obligations, and interest rates have not risen, remaining at close to zero until now.

With the price falls the yield on our banks stocks, for example, are around 12% (including franking credits). And you have our Government, the IMF and the Treasury sticking to the story there will be a mining boom to support our economy. Also, the US Government and Treasury will need to respond further to this crisis. I think that they will follow Japan's lead and provide further stimulus to the economy via another version of QE3.

Michael Cornips
 

skc

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The downgrade of the US by S&P to AA+ is a complete nonsense. The reality of the modern monetary system is that the US will never default on its ability to print money to meet its obligations. If you own a $1million US Government bond that is maturing, the Government will mature your bond by placing $1 million on deposit in your cheque account. The Government will never lose the ability to take that action. Remember, the obligation of the Government is to provide you with US dollars, not gold, not Euros, not a foreign currency or any other physical asset.

The S&P downgrade appears to be more of a political comment than the reality of the US monetary framework. Remember, S&P rated AAA the worst forms of sub-prime securitized loans, backed by inflated property prices, backed by borrowers who misstated their incomes, and guaranteed by AIG who proved eventually insolvent. Are S&P saying these securities they rated AAA were more secure than the US Government? The hypocrisy is breathtaking.

Does that mean that the US economy is healthy - of course not, but the catalyst for a correction should be the infantile bickering of US politicians not the ability of the US Government to meet its US dollar obligations. S&P downgraded Japan, starting in 1998, removing the AAA rating down to A2 in 2001. Japan has proven that its has never failed to meet its Yen obligations, and interest rates have not risen, remaining at close to zero until now.

With the price falls the yield on our banks stocks, for example, are around 12% (including franking credits). And you have our Government, the IMF and the Treasury sticking to the story there will be a mining boom to support our economy. Also, the US Government and Treasury will need to respond further to this crisis. I think that they will follow Japan's lead and provide further stimulus to the economy via another version of QE3.

Michael Cornips
The rating is about default risk so you are quite right that US will never default on its debt, and the downgrade is hence nonsense.

But the market didn't sell off because of the downgrade imo. It's not about US' ability to repay, but her ability to borrow. You can shadow default (by printing) only for so long until the lender decides enough is enough. Right now it hasn't come to that as evident by the yield... but you just never know how many ticks are left on that time bomb.

And is there any doubt that US will follow Japan's lead and experience the lost double decade?
 
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