Skip to comments.BREAKING: Egan Jones Downgrades US From AA To AA-
Posted on 09/14/2012 12:32:42 PM PDT by tcrlaf
From Egan Jones:
Synopsis: UNITED STATES (GOVT OF) EJR Sen Rating(Curr/Prj) AA-/ N/A Rating Analysis - 9/14/12 EJR CP Rating: A1+ Debt: $15.2B EJR's 1 yr. Default Probability: 1.2%
Up, up, and away - the FED's QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US.
Some market observers contend that a country issuing debt in its own currency can never default since it can simply print additional currency. However, per Reinhart & Rogoff's " This Time Is Different: Eight Centuries of Financial Folly " , p.111, 70 out of 320 defaults since 1800 have been on domestic (i.e., local currency) public debt. Note, US funding costs are likely to slowly rise as the global economy recovers or the FED scales back its Treas. purchases (75% recently).
From 2006 to present, the US's debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%. We are therefore downgrading the US country rating from "AA" to "AA-".
The true value of the American Benjamin Franklin in my pocket is exactly the same as the true value of that bill from Zimbabwe and I am afraid that it is about to be marked to market! Already we are at the point that the same nominal dollar amount that my father used to earn in a year as a master carpenter is only a good week’s pay or a poor month’s pay and he supported four sons and my mother stayed home to raise us. It would take his gross pay for ten years to buy a low end new car now. One average month’s electric bill for me now is equal to from two to three year’s worth of electric bills back in his day, of course I use a lot more power now but the price per kilowatt is twelve times higher than then. Gasoline is about fourteen or fifteen times higher than then. The sales tax on many items here is as much or even more than the item with sales tax added cost in those days. The worst part is that WE AIN’T SEEN NOTHIN’ YET!
Yep, Romney will probably be elected and what he will have on his plate will make the labors of Hercules look like a child’s chore. After four years we will still be in a deep pile of dung regardless of what he has done or not done by then and we will be treated to endless stories from the “media” about how Obama would have had everything straightened out by now. A huge contingent of idiot voters will be begging for Obama to run again and become the second Grover Cleveland.
Ah, but all we need to do is develop a new variety of Tulip and it’s off to the races again, right? Can’t we make Ol’ Rattler hunt one more time?
I see a spike in air fares to El Salvador. Are there some sort futures I can buy on that?
How long before banks charge you interest for your bank account?
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