Ramifications of a U.S. Debt Downgrade

The U.S. debt downgrade is really more than a tiny one notch cut in the credit worthiness of the U.S.  One talking head on television said yesterday that there was never any question that the U.S. would repay its debt because the country can print money.  The talking head is correct but does not take into consideration the future buying power of the repayment dollars. Printing money at the rate the Fed has been doing devalues the currency and, in effect, allows the government to default with dollars with reduced buying power.  This is precisely why Bill Gross, head of the world’s biggest bond fund, PIMCO, said recently that people who invest in Treasuries will “get cooked.”   In my mind, the debt downgrade by S&P last week was really a downgrade of the U.S. dollar.  There are going to be many more downgrades to come.


Guest Writer Brandon Smith wrote a great piece this week forecasting some of the consequences of the S&P action.  Smith is the founder of Alt-Market.com.  If you want a general map of the sights you will be seeing on the downgrade road, please read this important post. —Greg Hunter–

America “Makes The Cut” – So What Happens Next?

By Brandon Smith

Guest Writer for USAWatchdog.com 

Around the world, starting Monday, all eyes are on the markets. The tension is palpable. The uncertainty is ample. And anger is heavy in the air. As predicted, the debt ceiling deal was not only NOT enough to assuage economic fears, it actually exacerbated them, triggering a flight from the Dow, and creating a decisive opportunity for ratings agency S&P to cut the once perfect U.S. credit rating from AAA to AA+.

At Alt-Market, we often talk about points of balance, and how certain moments in history become highly visible indicators of balance lost. If we pay close attention, and know what we are looking for, these moments can be recognized, allowing us time to shield ourselves from the explosion and the resulting financial shrapnel. The past two weeks have culminated into one of these defining events that tell us the tide has fully turned, and something new and dangerous is just over the horizon. The question now is; what should we expect?

The nature of the credit downgrade situation is not necessarily “unprecedented” in history, but it is surely unprecedented on the scale we see currently in the U.S. It is difficult to predict how exactly the investment world will react. Some consequences, though, are probable, if not inevitable. Let’s examine the events we are likely to see in the coming weeks as well as the coming months, as nations attempt to adjust to America’s final plunge…

1) Ratings Agencies Under Attack

This has already begun. Italian authorities have raided the offices of S&P and Moody’s, apparently perturbed that their credit rating is not under their control. The U.S. is accusing S&P of making “accounting mistakes” and jumping the gun on the American downgrade. The battle between insolvent governments and the ratings agencies from here on will escalate quickly. More offices will be investigated and raided. The mainstream media will try to assert that the downgrades are “not that important”, and that the U.S. will recover quite nicely without a perfect score. Eventually, as the collapse becomes more evident, ratings agencies will fill the role as the go to scapegoat / economic hitman at which all governments will point accusing fingers.

“S&P is gonna’ cut you man! S&P’s a blade-man, man!”

In my view, it’s all theater. First, let’s set aside the recent ratings cuts altogether and look at the facts. The U.S. should have been downgraded years ago, especially after the Federal Reserve decided to begin purchasing U.S. Treasury Bonds in place of dwindling foreign interest and turned to monetizing our debt to the point of rampant inflation. Italy and numerous other EU members should have been downgraded to junk status a long time ago as well. If anything, the ratings agencies over the past few years have been PROTECTING the credit reputations of many countries which in no way deserve it. The recent downgrades are long overdue…

Second, suddenly governments and MSM pundits feel it necessary to point out the large part ratings agencies played in the derivatives bubble and subsequent credit crisis? Please! They were perfectly content with S&P or Moody’s giving fraudulent top ratings for toxic garbage securities, and even defended agency actions after the bubble burst! Now, after they finally start doing their jobs by downgrading bad debt, governments want an investigation?

Third, ratings agencies were not alone in the creation of the derivatives bubble. The private Federal Reserve artificially lowered interest rates and flooded the markets with cheap fiat. International banks used this fast money to create the easy mortgage groundswell and the derivatives poison that was fed it into the system. Ratings agencies went along with the scam and graded the worthless securities as AAA. The federal government and the SEC allowed all of this to take place by purposely ignoring the crime and refusing to apply existing regulations in investigating the fraud.

The Bottom line? You CANNOT create an economic crisis like the one we face today without collusion between big business, government, regulatory bodies, and ratings agencies. The Obama Administration is well aware of this, and the attacks on S&P are nothing more than a show. S&P is not to blame for the downgrade this past weekend. They are ALL to blame.

2) Increased Borrowing Costs

While the mainstream will attempt to downplay the effects of a U.S. downgrade, they cannot deny that our country’s borrowing costs have just gone up. This causes several unfortunate circumstances to develop. Our ability to continue funding our liabilities is now greatly diminished, unless we turn to the Federal Reserve even more in the purchasing of treasury bonds. If investors and central banks can’t get AAA protection for their money in America, they will simply turn to other countries that still retain a top credit rating. The safety of dollars and treasuries already held by other countries will come under question. In response to the S&P downgrade, China, our largest creditor, has openly stated that U.S. securities can no longer be trusted, and that the dollar must be replaced as the world reserve currency. If the dollar does not take an immediate dive starting this week, it certainly will over the course of the Fall season. There are, indeed, many direct consequences in light of a U.S. downgrade. Anyone who says otherwise is living in dreamland.

3) European Union Feeling The Pain

The EU is on a direct interception course with disaster, just as we are, however, being that the U.S. dollar is a widespread world reserve currency, all nations will be affected by our particular downgrade, as opposed to the Greek downgrade, for example, whose effects were minor in comparison.

The European Central Bank has initiated its own TARP measures, and due to the quickening implosion of Spain and Italy, is fully prepared to print fiat Euros in a desperate attempt to control the damage. European reliance on the American consumer has proved fatal. The result is an ever expanding avalanche of fiat on both sides of the Atlantic in an insane race to the bottom between our respective currencies. This development fits perfectly with the IMF plan to introduce Special Drawing Rights (the SDR) as the new global reserve currency, though I’m sure it’s all just a coincidence…

The ECB is also facing serious resistance from Germany, which has been shelling out the largest portion of bailout funds for countries like Greece, Ireland, and Portugal. Germany is tired of playing sugar daddy to the EU, which could conceivably lead to a breakup of the union itself, even with the implementation of fiat injections.

4) Blame Game Overdrive

The blame game is about to get ugly. When economic catastrophe is on the line, civility goes out the window. Who will be the primary target besides ratings agencies? Why fiscal conservatives, of course! Obviously, the Tea Party is full of “terrorists”, and real conservatives are the true culprit behind the collapse because we have this annoying tendency of pointing out that our spending addicted government is dragging us hogtied on a speedboat to Hades.

Please, America, don’t blame the Federal Reserve for feeding the derivatives bubble and destroying our currency. Don’t fret over global banks like Goldman Sachs that deliberately conjured the credit crisis. Don’t attack the government for lending a helping hand to these entities in their quest for complete financial centralization. Instead, shoot the messenger. We love that…

5) Drastic Measures

An announcement by the Fed of yet a third QE stimulus package is a certainty. If the market reaction is especially negative this week, an announcement could even be made before this month is out. I have no doubt, QE3 will be the undoing of this country. Any further devaluation of the dollar will NOT be tolerated by creditor nations who have much to lose if the process of U.S. inflation continues. Treasuries will be dumped. The dollar will be dumped. And, America will have little choice but to hyperinflate to keep up with rising debt burdens.

Those who believe that the U.S. is not expendable in terms of the world economy, and believe that foreign nations will continue pouring money into our coffers because they “have to”, are kidding themselves. We are dealing with an engineered global shift. For central bankers, the U.S. economy is no less expendable than an aging sports car. It can easily be replaced with something newer, shinier, and more compact. Something that will get more girls. The call for “international regulation” of U.S. finances will become the rallying cry of elites across the planet, as well as the largest holders of our exponential debt. The current system will be sacrificed to make way for an IMF controlled body of unaccountable economic overseers.

This is not theory. This is not conjecture. This is reality. The credit downgrade of the U.S. is a concrete trigger point that sets all of the above proceedings in motion.

People will ask for hypotheses on time frames for the events above. I don’t have any, though this week’s market attitudes will be revealing as to the speed that events will take shape. So many interacting factors are present that any specific time predictions on the progress of collapse would be unrealistic. For the short term, watch Federal Reserve activity carefully. Introduction of new QE will be extraordinarily volatile. For the long term, watch wholesale and retail prices of goods, along with treasury auctions and foreign flights from U.S. bonds. One thing is certain, the final half of 2011 will be remembered as a historical turning point for us all.  That said, the trials ahead were never the issue. That which is most important is how we RESPOND in these moments. How we adapt. How we function. How we fight back. Disasters do not make history. We make history. As overwhelming as the currents of such events may feel, in the end, they are subservient to the actions of resolved men. Nothing is fated. The conclusion depends upon us.

You can contact Brandon Smith at:  [email protected]

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  1. Davis

    And Now Back To Our Previously Scheduled Program…. Part Three

    Last Thursday was ugly. Today was even uglier, and predictable. Tuesday may well be chaotic. The Japanese markets are already down 5%, South Korea’s are down 9-1/2%. Chinese inflation numbers have come out at 6-1/2%, much hotter than the expected rate of 4-1/2%. Euro zone futures are already down nearly 2/3 of Monday’s total loss. US markets may not have time to wait for the FED’s Open Market Committee before reacting. Helicopter Ben may be forced to release some absurd statement by 7:00 AM in order to try and stem the tide of panic.

    QE3 to infinity and beyond! Will it work? I have my doubts, but putting the printing presses into hyper drive is the only card he has left in his hand. Gold as of posting this just after midnight was at $1767.40, going through Jim Sinclair’s $1764.00 parabolic break number. http://www.jsmineset.com/ Got physical?

  2. Hoppe

    The stock market is finally coming to terms with what we have known for a while, but wanted to ignore. Our capacity as a nation to manufacture anything of value, besides Big Mac’s is so severely limited that we have little to offer as exports, that any other country cannot make for themselves – cheaper. The market decline is a statement on our economic weakness. Otherwise, with a weaker dollar due to a rating cut, we should be able to sell more abroad. At lease that is how it has worked in the past. But now, with this race to the bottom for currency valuation,(world wide) the market must tag along.

    There is just too much currency in the world markets, and the Central Banks have to keep putting in more. All the world’s currencies are being inflated.

    The two things that absolutely must happen to fix this;

    First, we must accept as a leader, people like Ron Paul, who will free us from the grip of Central Bankers.

    Second, we must limit the power of the 50% of Americans who enjoy what I have come to call “representation without taxation”.

    If the Tea t were really terrorists, they would be throwing these crooks overboard instead of tea bags.

    If the Tea Party are “terrorists” the Democrats, are murderers, who support abortions

    Chances; slim and none.

    • mile

      but the fact that the top 2 percent own and control 80 percent of everythimg makes me wonder your brainwashing or financial condition that may be only great enough to be paid cannon fodder mouthpiece blather for the top 2 percent…….moronic….

  3. james

    WOW ! eyes wide open today. scary.
    more then just another artical.

    • Greg

      Thank you James.

  4. Art Barnes

    Greg, the Fed and old print’n Ben will be putting out some obscure statement today which can be interpreted fifteen ways, which in reality can only mean QE3 is off and running. Poor old Ben can’t talk straight, it probablly took ten talks to wife before she understood he was trying to propose. Yes, the coming QE3 will be the real downgrade of America, it will as Mr. Smith brought out land us straight into out of control inflation and seal the future of the dollar and with it the middle class. I say the middle class because the elite have options, offshore bank accounts in other currencies, etc. But the great middle class will be no more, and with it will go the strengh of the country. “Pulled from both ends, the elite at the top and from the poor at the bottom, it could not hold on to itself” may be a future quote from a historian discussing in some history book about this era and the demise of the middle class. This is, as Mr. Smith discussed, the realization of the end game as we know it. I blame our politicians, the MSM, the elite, Wall Street, and the banks for the demise, but most of all I blame ourselves for putting up with all the crazy rules, laws, fees, permits, regulations, greed of our fellow countrymen, and the court’s who uphold such laws that make no sense for its demise.

    But as to Mr. Smith’s article, in my mind the only thing that is really about to happen is more of the same just excelerated from the foregone conclusion of putting up with all those shit rules and regulations since about 1970 when our jobs took a hike overseas with government approval. Lets not fool ourselves in blaming others, we knew when we were ask to get into the boxcars it could not turn out good even if the signs said “train to la la land”. America, you blew it, you let it go, you are to blame, you did not stand up, all you did was pay up when you should have said enough allready. Where is a national day of strike, where are the protesters out in front of the banks, what happend to taking it to the streets in peaceful protest, where are my fellow Americans who still have a spine? Yes, Greg, we are to blame, no one else.

  5. Doug Cowlthorp

    Unfortunately for you in the U.S. and the rest of us in the world (especially in Canada where I live), there needs to be a new revolution of sorts to end the insanity of our Governments. I don’t mean with the use of arms, although it may come to that, but the Politicians have got to start being told in no uncertain terms that we have had enough of the BS they keep feeding us. Has anyone been put in jail over the morgage and insurance fraud scams of a couple of years ago? I didn’t think so, yet BILLIONS have been given to these same people by the politicians that have received donations from these same companies. Coincidence? Enough is enough. I hate to say it but the U.S. has to make a choice. You cannot have the largest military in the world and universal healthcare as well. You need to pick one or the other. We need to stop the big Government in all countries. It is doing nothing for hard working poeple other than giving our hard earned money to the people that feel entitled or do not want to work for a living. I think your country especially is going to feel a lot of pain before any of this is resolved. Hold onto your hats boy’s and girls’s, this isn’t going to be pretty.

  6. Fluffy

    “We are dealing with an engineered global shift.”

    When does the Federal Reserve Charter expire? I heard the date was 2012 or 2013. If FED Charter does expire, then could the engineered global shift be happening because the US people will not allow the Charter to be renewed? Are we being prepared for when the Charter does expire? Could one of the “Too Big To Fail” banks become America’s new national bank?

    • mile

      yeah BofA and its communist real estate forced into its asset book,

  7. Jan

    The multi-national corporations have left the country, taxes and regulations have strangled industry. The reduced taxes should not be social security & Medicare, but the corporate tax rate to encourage the multi’s to come home again. A tax holiday should only be allowed if invested in jobs expanded or new US factories, not bonuses and bigger dividends. To those who do not want to give corporations a tax break, these guys have taken one already by off-shoring shell companies and keeping their profits out of the US. The corporations that pay the taxes are small business corporations.

    The US could tell the multi-billion dollar non profit foundations and charities to kick lose some cash or start paying income taxes on any amount over and above five years operating expenses. They are tax free to do the things government cannot, not to build huge endowment funds with those contributions.

    QE-III will only be more dead end money into banks that won’t lend, states for dead end services that do not produce new revenue and projects that will take too long to get off the drawing board.

  8. M SMITH

    Greg, it feels as if we are being marched off to the killing fields. I see the violence across the UK this morning & I worry about a friends safety, she is young & has never seen so many in such a mood that leads to riots! She’s in Manchester & I have not been able to reach her, I wish I could tell her things would be safer if she came here, but just how long before all hell breaks lose in our own back yard? How do you advise those that would not believe me 5 yrs ago? All you can do is to give them yours & sites like Jim’s & say catch up,fast!

    Obama has made a fool of Americans who though he would be different, yes he’s for change if you call walking the line for his best supporters! Why he has put the blame on Bush, the Tea Party & any other group is his way to stay in power.

    A man off the streets of NYC just summed up Obama’s policies, 10 years of lost production, no growth for the pillars that made the USA great, not breaking up the TBTF corporations & Investment Banks, grabbing the tax payers monies to save those TBTF Bankers in Europe & the USA was the nail in the USA’s coffin, he also said why we ever trusted our monetary system to a bunch of bankers who reside in other nations, have the ability to print money out of thin air & then sell it to the host nation with interest is insane, when we could have done the same thing but congress would have to stand true to the Laws set by our Constitution, he even went on to say,I am done, I am quiting no more of this insane trading only to see the primary dealers do no wrong in the courts eyes, I’m going to retire with my family out west far away from all this he said they said crap. No one knows what the other is doing in Washington DC except regulating the USA out of any form of recovery. I wounder really how he felt?

  9. Bob

    oil down ,it’s seems everything is expendable. everyone is waiting for the feds words like the ranch hands waiting for the supper bell. Nothing wrong with being a ranch hand but it’s better to own the bell.

  10. Mountainaires

    Super guest post, thanks!

    Today we saw an incomprehensible rally in equities following The Fed’s statement that we’re in a double-dip recession–oh, of course not in those words, but you know how that works, right?–and that The Fed has learned to stop worrying, and love a deflationary depression–despite 3 NO votes. And, all those “opportunity” exhortations at CNBC worked their magic apparently. Some people just never learn do they?

    Next time you hear “Brace for Impact,” you better add a helmet. And there WILL be a next time.

  11. Art Barnes

    Greg, the market just closed up 430 points and gold only went down about $3.00. In my mind that means that this is a bear rally in the making as I have outlined before. Further, the Fed cannot predict interest rates for two years in advance, you remember for decades it was a quarterly prediction, now a two year prediction, impossible! This thing is a “Brandon Smith” to be sure. Thanks for the info. Art

  12. george

    How to balance the budget:
    STOP all Foreign aid
    STOP all PORK..Do my tax dollars really need to subsidize alcohol production for gasoline to be crappier?
    Remove all but token military force from Korea, Japan and Europe
    Redo tax code: if there was a flat tax the rich still pay more as they make more and a small national sales tax [OK, I’d like a constitutional amendment on this one so the bastards in Congress can’t change it with ease]
    Redo Social Security…I am in my fifties and don’t expect the future value of dollars to come close to the present value of what I put in
    Health care redo #2: Heck, we can save a trillion dollars or so over ten years by flushing Obama care! Do I really need to pay for illegal alien health care?
    Now was that so hard?

    If you own a business, would you be hiring anyone with the clowns in Washington passing 2,000+ page bills that people are still finding bad things for the average citizen in it? You know, ”you have to pass it before you can see what’s in it”. Don’t we pay these clowns in Washington to KNOW WHAT THEY ARE PASSING and HOW IT WILL IMPACT THE ECONOMY AND THE CITIZENS?

    Contrary to Al Gore, there is no lock box and we are broke. It shocks me when I hear “We need more spending” to stimulate the economy. Did you benefit any for the two or three? I don’t know any one that did that isn’t a banker. They could have given every legal [US Citizen] family unit $10K, and would have saved 100s of billions.
    How do you give people ”breads and circus” when you are out of bread?

  13. george

    Greg, Thanks for putting Brandon on the Watchdog

  14. Jerry

    America and the rest of world needs to get rid of the Keynesian fractional reserve banking system controlled by the Rothschild cartel. Iceland is the only country to have big enough ballz to do it. Are we a bunch of whimps, or are we just uneducated in economics? All this arguing when all we need is a 100% reserve currency monetary system. It worked with Ben Franklins Colonial Scrip. It worked for Abraham Lincolns Greenbacks, and even JFK starting printing silver backed notes. Of course the Banksters killed Ab and JFK, and the colonies got a revolutionary war. Sure the banksters won’t like it again because they lose and the people win.

  15. Timmr

    This is all so downright sad and disappointing that this once great nation has come to this! Where’s the Secret Service in all this? Aren’t the supposed to protect the currency from counterfeiters?

    • mile

      bailed out a trillion dollar company with 87 billion dollars …at gunpoint and demanding control….hahahahaha………………..

  16. Jan

    I read a question we all need to ask our elected representatives – send an email, make a call or write a letter – this is all about options: The question: Would you vote to cut social security to fund wind farms? So simple, we fund many private enterprises at the expense of social services. The jobs wind power produce are very limited and too costly when the nation is broke.

  17. blt

    And this is what happens when 535 oh wait, 536 CROOKS are in power. Plain and simple. We let it happen, the ratings of the super bowl and the kardashian’s should be enough proof. No one knows how to do anything anymore, (kids I mean) and its time we felt the pain of being ignorant. We think this is bad now, just wait till my generation takes office. I love my friends, but they’re so ignorant (not stupid) its scary that they are MY freinds. Coast to Coast AM and USA Watchdog instead of tv, math books and hand tools instead of x-box’s and ipads. Thats the way out. Look to our parents for leadership, not politicians. thanks greg.

  18. Mitch Bupp

    The FED has alrady signaled that more QE corporate welfare is on the way for those all ready hoarding cash …… I don’t know how these banksters expect even the dumbed down American voters to by this BS since over the last month about all of the talk about how corporations have trillions sitting on the sideline … cut them off … only fund small business …..

  19. mile

    BofA usually buys off the boards of other banks to sell them the bank at bottom tick dollars and with offers of board seats, , whats with this governmental sitting in on the board of B ofA..?

  20. gman

    “Those who believe that the U.S. is not expendable in terms of the world economy, and believe that foreign nations will continue pouring money into our coffers because they “have to”, are kidding themselves.”

    hardly. without the u.s. and european markets the chinese and other world “miracles” grind to a complete halt and they all go back to their rice paddies. the chinese have raised 200 million peasants to the middle class but there are 600 million more coming and the chicoms are under pressure to sell sell sell export export export no matter what it takes to keep them happy. I’m certain that no matter what grand imf plan is in the background the chinese don’t are a whit about it. it’s the united states and the dollar, or nothing.

    • Greg

      Amen to nthat Gman!!

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