Wednesday, August 10, 2011

The next trigger(s)

The US got downgraded to a AA+ from a AAA. This has been very big news. Does the US deserve a AAA?
I will try answering this (after reading something that Felix Salmon had posted) by saying that a nation can default if it is unable to meet its obligations. It is unable to meet its obligations if it cannot (due to currency/ liquidity related woes) or if it chooses not to. What happened a week ago was that the US was on the brink of a default because its political system was on the verge of choosing not to meet its obligations.
The US can never default because of the former reason because its debt is in its own currency. By continually debasing its currency, it is reducing the appeal of its paper held by outsiders - but the US will always be able to pay its creditors in USD whenever the need arises; unless politics or legal mechanisms intervene.

That being said, the US could deserve a AAAA (as Warren Buffet remarked), or a lower than AAA because its political will is eroding.

So, the downgrade by S&P was one of the triggers that caused the next phase of the Great Downturn to start... the triggers which will follow this are:
1. Another country being bailed out in the EU, or Germany's refusal to allow a bailout, or a country leaving the currency union. I would club all of these outcomes as one trigger.
2. China disclosing data. This could be related to its correct inflation, its correct NPAs, its cross-holdings of national assets through international conduits, its steady diversification of money into real assets or into gold.
3. Unrest due to unemployment, economic stagnation, food shortage, or the like. We have witnessed that in the Middle East and surprisingly, most recently in the UK!

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