Saturday, August 6, 2011

Stock Market trend before the downgrade - S&P downgrades US

Late on Friday the S&P ratings agency downgraded the US from AAA for the first time in history after the debt ceiling rise by the Obama administration. The US narrowly averted a currency default as the tea party put up opposition to the rising of the debt limit. Currently the debt to gdp is 95% and the national debt may go over 100% of all the goods and services produced in the country combined.

Obama had pointed to how many times Reagan raised the limit and of course Bush as he has so often done. When Reagan was in office the debt-to-gdp that Reagan left behind was 53.1%.. At nearly 100% debt-to-gdp (currently it is 95% and counting) the country doesn't produce enough to keep up with it's debt and in my book that is bankruptcy.

Obama was handed a debt-to-gdp of 84.2% by Bush but rather than try to cut that figure Obama has pointed alot of fingers and hasn't handled the debt situation well. Soon the debt-to-gdp ratio will likely go above 100% with the largest debt ceiling rise in history.

Neglected from the argument was any possibility to raise the rates and the US appears to be in a deflation trap much similar to the one that happened in Japan. It was known as the "Japanese asset price bubble" which lasted from from 1986 to 1991 but Japan still has next to zero rates in the aftermath. Japan stabilized after the crash but never really recovered. If our future is similar to Japan but Japan has a head start one can only think what the possibilities of our long term rates in the US and the fate of the US dollar.

After the asset bubble in Japan housing prices steadily eroded in Japan while rates were slashed and the yen became the carry trade currency. But that was until the US market crash. While housing prices crashed in Japan they were going up in the US, UK, and Australia to set up an asset bubble lead by the US. US Housing crash of 2006 to present (although some say housing prices have bottomed). After the US housing crash Bernanke started slashing rates. When artificially low rates didn't work then came bailouts and QE.

One can only wonder how the US will handle so much debt when the trade balance in no way favors the United States.


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