A ratings agency lowered its rating on Portugal by one notch to AA-. In 2009, Portugal had a deficit representing 9.3 percent of its national income. How does the U.S. compare? The following charts would indicate that the U.S. is in worst shape than Portugal:
Our total government debt(excluding unfunded liabilities) is at 90%+ of our GDP and rising:
Expect the ratings agencies to lower the credit rating of the U.S. I suspect there has been pressure by those in power to delay this eventuality. This is no different than compelling the Financial Accounting Standards Board (FASB) to delay its rules concerning worthless debt on the books of banks carried at the original cost.
If sovereign debt’s rating is lowered, the interest costs increase. The rating reflects risk. The Federal Reserve has managed to keep the borrowing costs of the U.S. at an artificial low. If the borrowing rate of the U.S. went up by 1%, the annual borrowing costs on the U.S. debt would increase by $140 Billion. Last month alone, the U.S. deficit increased by $221 Billion, the largest monthly increase on record! This will push the annual deficit above Portugal’s percentage.
Everyone knows that the globe is headed for another financial crisis, bigger than we have ever seen before. Nobody knows when it will occur but once the music stops, the big money will quickly grab a seat and leave the rest of us standing.
U.S. bonds will have pressure placed on them by the bond market. Inflation will ramp up with commodity prices heating up. Wages will not keep up since the unemployed workers will give up increases just to keep their job.
The Administration is inadvertently helping those of us investing in hard assets. Their inflationary spending policy increases the price for commodities at a faster rate than other sources of income. This is reflected in stock prices, dividends, and the price of the commodity itself. All gold producers are making money at $1,100 gold. $17 silver generates notable profits for the producers as well. What other sector is receiving a premium for its product? If you bought gold 265 days ago, your investment is up 17%
Sovereign debt downgrades will act as a warning signal of the impending crisis. Be vigilant.