The emperor has no clothes! The U.S. may have trouble repaying its debt!
Finally, someone had the audacity — and the power — to tell the truth. And the truth made a big difference in the global financial markets on Monday.
On April 18, Standard & Poors, the company that rates all kinds of bonds, downgraded its outlook for U.S. government debt from “stable” to “negative.” The unprecedented warning negatively impacts the market value of all outstanding government debt, and if S&P takes the next step and actually downgrades the U.S. debt rating, it would force the Treasury to pay higher interest rates to borrow money.
Interest on the national debt is the third-largest federal spending category. In the last 12 months, the Treasury has paid more than $400 billion in interest — and rates are currently at historically low levels. A ratings drop could cost the taxpayers billions in extra interest payments every year. Worse, the higher rates needed to entice borrowers also would negatively affect our economy.
The United States still maintains its “triple A” bond rating, but the downgrade warning signifies concern that Congress will not act prudently to rein in deficit spending.
In its statement, S&P emphasized “the importance of timely bipartisan cooperation and action on fiscal reform.”
Standard & Poor’s warning came the same day the Chinese central bank said it would take additional measure to fight inflation by increasing its banks’ reserve requirements, thus slowing lending in China’s economy. The combination of the news sent the U.S. stock market plunging at the opening, fearing a significant business slowdown.
The possibility of an austerity program in U.S. government spending, combined with the Chinese intention to fight inflation, raised the specter of a global economic slowdown. That put downward pressure on oil and it caused prices of industrial commodities such as copper to fall.
But the big move came in gold and silver. Gold hit new highs. And silver has more than doubled in price in recent months, closing at more than $50 per ounce in recent days.
These two metals represent a haven for those seeking protection against both inflation and financial uncertainty. Silver is more volatile, perhaps because of its lower price — and because it also has a large industrial usage.
Of course, there is some irony in the fact that S&P is the company that failed to recognize the dangers in the mortgage-backed bond market until that disaster overtook them. Still, its warnings are heeded both by market participants and — hopefully — by Congress.
The financial markets finally put a price on the antics in Washington. And a very expensive price it will be. That’s the Savage Truth.
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