The United States may lose its AAA rating by defaulting on its debt and it will be very hard to get that rating back. Lawmakers are at an impasse on agreeing on terms to lift the government's $14.3 trillion debt ceiling and avoid an Aug. 2 default.
Republicans and Democrats want to lift the ceiling but disagree on how to reduce the deficit in exchange for lifting the White House's borrowing limit. Congress and Senate will probably strike a deal and lift the ceiling. But US may not do it in time, and credit ratings agencies may strip the country of its AAA ratings.
You don't get those back that easily. I don't think US are going to work their way back to AAA. Any downgrade I think is ultimately going to be based more on fundamental issues. US have a huge debt now almost eight times of their tax revenues. That's massive. It's fundamentally a toxic asset.
A downgrade won't mean the end of the world for the financial system. Economists at the ratings agencies themselves have said that much. But Americans will feel the pinch when investors demand higher interest rates in U.S. debt auctions, which will trickle down to loans like mortgages and student loans.
Any kind of nick does do long-term harm to the US credibility, but is the immediate impact catastrophic? No, of course not. But is the long-term blow to the US reputation a problem especially if the american economy sees more inflation and other problems? It just piles on. If it was the only problem, I wouldn't worry about it. But it's indicative of a much larger problem ahead. Global financial markets should get ready"
After default, the United States enjoys the unique position in that the Federal Reserve can print money and buy U.S. Treasurys to keep them as affordable for the government as possible. The problem with such a move is that it would threaten to pump up inflation rates even if it does prevent ratings from falling too far below AAA.
If US have any real trouble selling of their bonds, Ben [Bernanke] will just step in and buy them with printed money. And there's really no limit to that other than when he does that, that's going to create inflation. But in the short term, that limits the amount of downgrades you can get. The longer-term problem is more insidious, and that's inflation. From Sept 2008 to Dec 2010,monetary base increased from $851 billion to $2.03 trillion. An increase of 138.6% in a span of 27 months. Inflation would threaten the financial stability of USA.
USA is heading for default like situation in the next 9/12 months. Ignore Aug 2, more troubles ahead for US administration and Ben Bernanke. You bet
Disclaimer: This is just a research piece and not an investment advice. All financial transactions carry a RISK
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