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One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.
Earlier quoted context omitted.
It would be interesting if they make a financial vehicle that turns US AA+ debt (along with something else) into AAA.
Damn you, but the boys at Goldman Sachs are probably on it, right now. Take a pile of T-bills. Siphon off the income from them into a pie. Cut the pie into tranches. The first tranch or two are guaranteed to be AAA. Just look at the math that the quants derived... We can all lipsync this tune.
If the government that produces the reserve currency can't hold up a AAA rating, what can? The idea that anything else should have a AAA rating if the US gov't doesn't seems a little ridiculous to me on face value.
One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.
Took those lazy rating agencies a while. - 1.6 Trillion budget deficit - 14 Trillion national debt - 55 Trillion US total debt - 115 Trillion Unfunded liabilities - 17% U6 unemployment - 45.8 Million Americans on Food Stamps - 52 Million Americans without health insurance - 1/2 of mortgages are underwater - 63% labor participation rate, lowest since early 80s - -5% in Real medium household income in the last 10 years…
One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.
This is by far the biggest problem. I don't think anybody realizes how huge a sell-off that's going to be if the institutions apply their rules about AAA debt to US bonds (a big if, as others have noted). A sell-off of bonds would make it more expensive for the government to borrow money, which would further accelerate the expansion of the deficit. The deficit is the primary driver of the downgrade, so an acceleratio…
One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.
What about China bailing. How bad does it need to get before they decide to pull out?
Didn't S&P maintain that Lehman Brothers had a favorable rating up until they collapsed? And in the subsequent congressional hearings the rating agencies simply responded that the rating is their opinion. Why do people put so much faith in these ratings when they have proven to be not very useful in evaluating the risk associated with investing in an institution?
As another comment on this thread pointed out, if the sole maker of the world reserve currency cannot keep a AAA rating, then who really deserves it? As the recent budget fight showed, the US government cannot make more than token attempts to improve its finances. The current debt is about one-fifth of the annual world GDP. Well-nigh invincible power blocs guard the biggest line-items on the budget. Tax increases are off the table and of doubtful effectiveness in this economy even if they were passed.
What confidence should such a government inspire?
One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.
What about China bailing. How bad does it need to get before they decide to pull out?
EDIT: This seems to sum it up: http://lostechies.com/johnpetersen/2011/07/16/the-impact-of-...