Is the S&P downgrade actually good for the US economy?

revoldlog

People think the S&P downgrade will raise the yield for the US bonds, and therefore increases the interest payment for our national debt, and thus reduces our GDP growth. For general public, the cost of borrowing will also increases so we have less to spend.

But from the market reaction, it seems it is showing exactly the opposite effect. The bond yield is actually going down. I know it could be a short term knee-jerk reaction for the money to find a safe place to park, but isn't it exactly the reason that people still think the US bond is safe?

The other bonus is that this downgrade is really a wake up call for the general population (excluding the member in this forum because most already know this is happening) to realize that there is urgency to fix the deficit and entitlement problem. So, it give the politicians more incentive to fix the balance sheet.

Your thought?

cohodk

History has shown that yields are almost the same a year after a downgrade. Reason for this is that markets are light years ahead of ratings agencies.

To answer your question "is it good fo the economy"? The short answer is no. But to expand why you need to understand why the economy was where it was in the first place. Our economy was fueled by debt. People, corporations and certainly government spent more than they made. This excess spending provided jobs for million upon millions of people. When this spending stops, those jobs will be lost. Think about your local shopping mall. Is there really anything in there that you need? No. The mall exists solely because people spend excessively. If everyone were to save their money, the shopping mall would close and jobs and tax revenues would be lost. This is what will happen to the US and European economy. It is not necessarily due to a credit downgrade, but rather an economy reverting back to its mean. There is virtually nothing any Govt or central bank can do about it. I say virtually as I think there is a way out for the USA, but Europe has crossed the point of no return.

In this scenerio, the Euro fails and the US dollar rips higher. Sounds counterintuitive, but thats what has happened in Japan for the last 20 years. A rising dollar does not mean the end of the gold rally, but it does for other commodities and most other assets classes.

BigE

Maybe its good i the sense that the economy may finally just tank and regrow stronger on its own. I say lets get it over with----------------BigE

roadrunner

Bond yields have been artificially depressed along the entire yield curve due to the $450 TRILL in world-wide otc interest rate contracts (ie derivatives). These have created an
artificially high demand for US Tbonds for years. The US banks own about $240 TRILL of that number. That's totally skewed the bond market as well as every other market.
Thing is, they've been adding about $10-$20 TRILL each year to this pile to help keep yields low. Morgan Stanley all by themselves added around $12 TRILL on the last OOC report.
Guess they must have gotten the nod from the FED/Treasury to buy a pile for the team.

The numbers I used above are after the BIS changed their accounting methods (2nd half of 2008) on tracking these. So in essence they did an inverse split from $900 TRILL to $450 T.
It didn't change anything but the overall perception. Both are weighty numbers. Our banks may have as many as $480 TRILL in IRC's.

roadrunner

jmski52

Buying government paper now is just such a bad, bad idea.

Do people somehow believe that rates will go down from here?