Over the weekend the Credit Rating Agency Standards & Poor downgraded the US Credit Rating from a Perfect AAA to AA+ the second highest rating possible and the world’s financial markets have collapsed, …..again.
Like a patient in intensive care, even a cold could be deadly.
The shock of the world’s largest economy having its Credit Rating downgraded for the first time in recent history is enough to have Stock Markets around the world on their knees, but why does a Country need a Credit Rating and why does it matter ?
The American Government is borrowing more and more money, just like most Governments around the world. They have borrowed it to pay for ‘’ Essentials ‘’ like the wars in Iraq and Afghanistan but there is one problem, Governments don’t have any money to pay it back.
So how does a Government with no money manage to borrow $1,700 bn ?
Easy, the money is borrowed and spent by ‘’ those Politicians again ‘’ but the debts are in the name of American Tax Payers, who have to pay interest until the loans are repaid.
The US borrows money by issuing Government Bonds. Everyone who owns US Government bonds is owed future tax revenue to be collected by the IRS.
Since the Credit Crunch in 2008 many Governments including the US have borrowed even more money to bail out Banks. As a result the US people have to pay even more interest, resulting in cuts to public spending and job losses.
This then leads to lower incomes, and lower tax receipts. Unemployed people have less money to spend which leads to more job losses, which leads to lower tax payments, which leads to more job losses, which leads to ………
The US economy is too close to the edge of this Vicious Circle and that is why Share Prices are falling. If they fall over the edge the people the US have borrowed money from would not get it back, and the only people who can save the day are the Government who borrowed the money in the first place.
The US Government has to do something to stop the economy going over the edge. Those owed money by US tax payers have to decide if the American Politicians can pull it off.
Now can you see why there’s panic ?
Bonds are bought by millions of people from individuals to Insurance companies, Pension Funds, Banks and last but not least other Countries.
The largest lender by far is China, with an estimated $1,000 bn worth of US debt. The Chinese Government use taxes paid by Chinese people to lend to the Americans on the condition that US taxpayers pay it back plus interest.
According to S&P, for the first time ever this is not 100% certain to happen.
Investors including China are still more than happy to lend to the US, but now they want more interest. This would result in less public spending, which leads to more job losses, which leads to lower tax payments, which leads to more job losses, which leads to ………
The US Government is stuck between a rock and a hard place, and they are showing all the tell-tale signs of not having a clue which way to turn.
If you’re on a Sinking Ship, it doesn’t matter how much water you ‘’ Bail Out ‘’, until you fix the leak you’re never going to be far from drowning.
US House Prices are still falling despite almost 0 % interest rates, unemployment is still rising and people are struggling to pay ever increasing mortgages for houses that are losing value.
American Politicians hope to pay off their debts buy printing more money, or Quantitative Easing, which is like the scene from Pulp Fiction, an Adrenaline shot to the heart. John Travolta saved the patient first time, this will be QE3 and suddenly the patient doesn’t look so good.
Every time the Fed prints more money imports to the US, like Oil, get more and more expensive. Every time petrol prices rise the people of the US have less and less money to spend.
This leads to lower incomes and lower tax receipts which leads to more job losses, which leads to lower tax payments, which leads to more job losses, which leads to ………
Every turn seems to be a step closer to the edge. Everybody who has a Mortgage knows that if you don’t pay the Bank every month they will take your house and sell it.
What nobody knows is what will happen if the Americans can’t afford to repay China?
hetuur.wordpress.com 