Are those storm clouds on the U.S. economic horizon?

Originally posted elsewhere on 4/18/2011

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  • S&P rates outlook on U.S. debt as negative. An analyst at National Review, explains what happens if U.S. treasury bonds are actually downgraded:

    The journey to insolvency can be quick, or it can be slow, but most analysts agree that the first signpost along the way will be the withdrawal of the U.S.’s coveted AAA bond rating. And when that happens, woe be unto him that owns government bonds.

    Throughout modern history, the U.S. has had a relatively low cost of funds because Moody’s and the other ratings agencies have given it the highest rating possible. If Uncle Sam loses that rating, then borrowing costs will increase. These higher costs will make the U.S. fiscal situation more untenable, inviting subsequent downgrades and an ultimate death spiral that can be stopped only by massive policy intervention.

    According to the Wall Street Journal, an S&P analyst:

    puts the chance of the U.S. losing its coveted AAA rating within two years at one in three.

  • Alan Simpson, one of the co-chairs of the president’s deficit commission, testified before Congress:

    I think it [the coming economic crisis] will come before two years. I think within a year, at the end of the year, if [the people who hold our debt] just thought you’re playing with fluff—5, 6, 7 percent of this hole—they’re going to say, ‘I want some money for my paper.’ And if there’s anything money guys love, it’s money. And money guys, when they start losing money, panic. And let me tell you they will. It won’t matter what the government does, they’ll say ‘I want my money, I’ve got a better place for it . . . ’ Just saying for me, it won’t be a year.”

    In relation to the current negative rating by Moody’s, Treasury Department Assistant Secretary for Financial Markets Mary Miller states:

    We believe S&P’s negative outlook underestimates the ability of America’s leaders to come together to address the difficult fiscal challenges facing the nation.

    Similarly, the administration’s chief economic adviser, Austan Goolsbee, opines:

    I don’t think that the S&P’s political judgment is right.

    But it really doesn’t matter what the administration thinks, does it?

  • The guy who runs the world’s biggest mutual fund, Bill Gross, has dumped all United States Treasury notes from the fund that he manages.
  • Utah House passed bill to make gold and silver legal tender. By the way, Forbes rates Utah as one of the best, fiscally-run states in the Union. Since 1893 Colorado has had a similar legal tender law on the books.
  • The university with the second biggest endowment in the U.S. has acquired nearly one billion dollars worth of gold.

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