massornament

It will be interesting to see what happens on the various stock indexes tomorrow.  Asian markets (which opened 8pm EST today) were down and futures for the exchanges are all off.  Others are worried but many in the U.S. government and financial establishment are blaming S&P or saying its numbers are off or saying it doesn’t matter because other (major Western) debt rating agencies still have the U.S. at AAA.  Some say it will not have long-term effects and others are worried about contagion or market meltdowns and what this will do to already flagging Western economies and the still-emerging emerging economies.

From my (humble) perspective, this is what is going down:

The S&P downgrade might be somewhat flawed and comes from a flawed institution, but it is spot on and much too late.

This is, in itself, not going to be disastrous and completely crash an already declining system.  It might get ugly but it has to happen.  Bubbles need to deflate and right now there is much too much monopoly money in the system simply because Western governments are terrified of their populations realizing that their lifestyle is unsustainable and so have been (with the complicity of the financial system) pumping trillions into the financial system, and preventing losses from being counted.  That is why we don’t really have a capitalistic, free market system today because the financial systems (that which is usually but falsely referred to as ‘the market’) and politicians have colluded to keep a ‘too big to fail’ and corrupt system afloat.  Anyway, that is why S&P’s downgrade is overdue (but let’s not hope it is too late to fix the system).  And that is also why S&P’s downgrade will NOT be the cause of further financial decline… because the system is already gaining momentum downward… it is already in decline.

Yes, there are other (Western) ratings agencies that are still maintaining that U.S. government debt is AAA, but it is they who are mistaken… or, more likely, are too afraid to also admit that the emperor just might not be wearing any clothes.  (So, again, hats off to S&P for finally waking up.)

As well, S&P should not be blamed here or vilified.  It seems clear that the markets were beginning to price in the next, anticipated round of quantitative easing by the U.S. federal reserve and bailouts of the banking systems (who, after all, are the ones loaning billions of dollars to countries like Greece and Ireland and the rest of the PIIGS).  That is, the market was confident that the financial and banking system would be bailed out yet again by governments/taxpayers and therefore the market exuberance that has brought stock markets high again after the 2008 collapse was beginning to build once even more.  Essentially, this is classic market distortion and on a huge scale.  Thankfully, S&P’s downgrade seems to be one event that caused at least a little bit of reality to set in.

Sure, the U.S. economy is not a basket case and it could still pay its bills.  But the era of American Exceptionalism has ended.  The U.S. economy has been hollowed out, its financial system is rotten to the core (and I am not exaggerating here… just look into the whole murky world of financial derivatives) and what we are witnessing is the end of the American Empire.  So, what the S&P downgrade means is that it will become increasingly difficult for the U.S. to service its debt, maintain spending (to maintain its position in the world), and maintain the standard of living that most U.S. citizens aspire to.  The U.S. is now AA+ and will probably be downgraded further.  What this means is that buying U.S. treasuries will become less desirable as will the U.S. dollar.

Leave it to Zero Hedge to quickly sift through the opinion/information out there when trying to make sense of this.  The following quote comes from QBAMCO’s Paul Brodsky and Lee Quaintance, courtesy of ZH) and lucidly identifies what the downgrade means:

The stark difference separating nominal return of principal and interest from the return of inflation-adjusted principal and interest for holders of US Treasury obligations is the critical issue. The necessity to manufacture more money to service and repay existing Treasury debt suggests substantial diminution of the purchasing power of existing US dollars in which Treasury interest and principal have to be repaid. We believe unlevered holders of Treasury obligations are locking-in negatve real interest rates and levered holders of longer duration Treasury obligations are at great risk of capital loss in real terms.

What they are saying is that by purchasing U.S. treasuries one would be losing money because the U.S. government would–in the future–pay back the principle and interest in weakened, future U.S. dollars… and that is because the U.S. has to print money to pay its debt and will have to print even more in the future (since it seems incapable of dealing with its problems).  Describe this any way you want but the U.S. dollar is a bad investment that will only get worse.

What the ridiculous ‘debt-ceiling debate’ did was pretty much cement in many people’s minds that the U.S. political system is corrupt and incompetent.  It is a fascinating political system but it is ruled by political ideology and corrupting corporate interests… which means it has no seeming capacity to solve actual problems.  I watched some of the Sunday morning political shows today and it is strange how the pundits and politicians seem to be walking around in another reality.  The spell of American Exceptionalism/Empire is very strong and most inside that system just cannot get a grasp of anything else.  Call it what you want: the blue pill (or is it the red pill?), the koolaid, spectacle, the ideology of empire, but the ideal/illusion that has fed the American Dream is for some all-encompassing and continues to colour the perceptions of many inside that system.

China and other emerging markets/economies will certainly be affected… because they already have been affected.  But imagine what this means.  The U.S. consumes an enormous amount of resources and commodities.  The U.S. military spends slightly more than all of the rest of the world combined.  It is the U.S., along with other Western nations, that keeps the emerging markets humming.  China could not survive without the U.S. current rate of consumption… that is why they have been buying so much U.S. debt.  But they will be paid is the future U.S. dollar that will be worth much less than it is now and the flood of printed U.S. monopoly money also creates inflation in those countries buying the debt too (kind of a double whammy… and that is why so many countries are actively trying to devalue their currencies too).  So, when Vladimir Putin said today or yesterday that the U.S. is basically a parasite living off of other countries, he was partly right.  IN fact, it is a fascinating, abstracted form of economic exploitation.

At any rate, tomorrow will be interesting.  I unfortunately will be preoccupied for most of the day so I will not be able to follow the goings-on very closely but what is of real consequence is not whether North American markets will take a beating but the near future and whether politicians and policy makers can get their act together enough to steer us through this mess.  (My bet is that they will do nothing but jockey for political position and hand over more wealth to the financial system that got us in this mess in the first place… god help us all.)

Peace.
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