If you think of it, our current world order can be thrown into disarray by a single rating agency. The current most important country in the world is the US and along with it the USD. With the USD being the reserve currency and the general currency for trade, the triple A rating of the US is of grave importance for it to continue playing such a role. With all currencies off the gold standard and just about nothing backing it but the "full faith of the government", a downgrade of the US credit rating will cast doubts over its ability to sustain, refinance and repay its debts. With certain large funds mandated only to buy investment grade bonds and the furore a downgrade will generate, there will probably be a huge sell off in US treasury bills, securities and the USD, leading to a cataclysmic downward spiral.
If the USD is no longer accepted as the reserve currency, which is a logical path since a primary currency has to be solid, reliable and accepted globally, then the fiscal and trade deficits will become a big issue. The plausible recession which comes along with it will likely be disastrous seeing how they will be unable to finance it like they are financing this one (by printing money). Debt refinancing will be at a much higher rate and a whole lot of things will change.
Maybe something of graver concern will be the decimation of military might which comes along with it. You cannot be a military superpower without first being an economic superpower. US' global military presence is pretty hefty and when this unravels, something (hopefully a benign force) will fill its place. Truly global dynamics will change 360 degrees. Issues concerning Iraq, Iran, North Korea, etc will be reshaped.
Also for the common folk like you and I on a more micro level, since commodity prices are priced in USD, a devaluation of the USD and expected future devaluations of the USD will be priced into commodities but how things have seemingly worked so far is that a 10% drop in the USD doesn't equate to a 10% rise in commodities but a >10% rise in commodities. I think it's probably due to pricing in future declines of the USD (it's like saying if you know something will happen in the future it doesn't make sense if you don't price it in now), a flight to things with real value and momentum traders pushing it up further than it should be. That, as we have seen with $147 oil and a sharp spike in food prices, is terrible inflation for all of us.
So why would the US be downgraded after it's gone through so much and still retains its AAA rating? Perhaps what I'm saying doesn't really apply but if you look at the US as a company, its profits are basically its net exports where it is running a huge trade deficit. It's borrowing to finance its spending, essentially leveraging itself dramatically. Logically, how can a company which has made continuous losses over the years with huge liabilities on its balance sheet be given a triple A rating? This whole leverage thing sounds remotely like what happened with the investment banks. Like that, this is somewhat of a confidence situation as well. Especially now, with the Fed and all increasing their balance sheets, even though they are buying assets which may be profitable in the future, it's still debt and a whole lot of uncertainty. Like Nassim Taleb said in his book "The Black Swan", you really cannot predict the future with much certainty. As profitable as the recapitalisation and MBS deals may become, "Markets can remain irrational longer than you can remain solvent" - John Maynard Keynes. Lets just hope it doesn't come down to that.
If the USD is no longer accepted as the reserve currency, which is a logical path since a primary currency has to be solid, reliable and accepted globally, then the fiscal and trade deficits will become a big issue. The plausible recession which comes along with it will likely be disastrous seeing how they will be unable to finance it like they are financing this one (by printing money). Debt refinancing will be at a much higher rate and a whole lot of things will change.
Maybe something of graver concern will be the decimation of military might which comes along with it. You cannot be a military superpower without first being an economic superpower. US' global military presence is pretty hefty and when this unravels, something (hopefully a benign force) will fill its place. Truly global dynamics will change 360 degrees. Issues concerning Iraq, Iran, North Korea, etc will be reshaped.
Also for the common folk like you and I on a more micro level, since commodity prices are priced in USD, a devaluation of the USD and expected future devaluations of the USD will be priced into commodities but how things have seemingly worked so far is that a 10% drop in the USD doesn't equate to a 10% rise in commodities but a >10% rise in commodities. I think it's probably due to pricing in future declines of the USD (it's like saying if you know something will happen in the future it doesn't make sense if you don't price it in now), a flight to things with real value and momentum traders pushing it up further than it should be. That, as we have seen with $147 oil and a sharp spike in food prices, is terrible inflation for all of us.
So why would the US be downgraded after it's gone through so much and still retains its AAA rating? Perhaps what I'm saying doesn't really apply but if you look at the US as a company, its profits are basically its net exports where it is running a huge trade deficit. It's borrowing to finance its spending, essentially leveraging itself dramatically. Logically, how can a company which has made continuous losses over the years with huge liabilities on its balance sheet be given a triple A rating? This whole leverage thing sounds remotely like what happened with the investment banks. Like that, this is somewhat of a confidence situation as well. Especially now, with the Fed and all increasing their balance sheets, even though they are buying assets which may be profitable in the future, it's still debt and a whole lot of uncertainty. Like Nassim Taleb said in his book "The Black Swan", you really cannot predict the future with much certainty. As profitable as the recapitalisation and MBS deals may become, "Markets can remain irrational longer than you can remain solvent" - John Maynard Keynes. Lets just hope it doesn't come down to that.