This week, the global economies survived the United States debt fiasco only for markets to plunge off the proverbial cliff this Thursday. Most markets, including the United States’ S&P 500 and the Dow Jones Industrial average, were down 3-5%. Talks of a double-dip recession or an outright depression increased. But how bad are things, really? And what are the “safest” investments right now? Finally, what will happen now that Standard and Poor’s has downgraded American Treasuries/debt?
The Current Mood
A “contagian” of systemic financial trouble and a strong likelihood of default has affected most of the European Union. But while traveling through the U.K., and Germany last week, two of the admittedly strongest economic European nations, I did not witness the signs of increasing poverty that I often do even on the eastern seaboard of the United States. There were very few vacant shops, less homeless people, and nicer cars on the road. Of course, this is a very subjective perspective. European countries as diverse as Portugal, Italy, Ireland, and of course Greece, are on the road to default or knocking at the door.
Back home, in the United States, the once unthinkable has happened: one of the major credit reporting agencies, Standard and Poors, has dropped the U.S.A’s always sterling AAA credit rating down to AA+. The real question, of course, is what affect does that have on the United States and the global economy?
Many people are aware that a downgrade in credit rating means that the United States will be seen as a riskier debtor, and that the U.S., will therefore have to pay a higher interest rate when borrowing. There remains a fear that China will sell all of its treasury bonds and call for its debt–a move that could equal default for the United States. But while researching this issue, I learned of another, equally frightful possibility…default by internal investors.
What I mean by “default by internal investors,” is this: most mutual funds and other investment vehicles require that most or all of the investments are contained in AAA investments. Now that the United States has been downgraded by the Standard and Poor’s (with the other two agencies likely to follow suit)– this too could create a run on treasury bills/other U.S. investments that could lead to default.
This is not dissimilar, perhaps, from what occurred with the hyperinflation of the Weimar Republic, in Germany. The reparations due from World War I were demanded by the victors, and this caused a period of rapid–yes even extreme, inflation. Of course, the United States’ greatest debtor, China, is none too happy with the downgrade either.
Considering the fact that United States employment rates hover above 9%, and that other major indicators such as the housing market remain stagnant at best; it is clear that the United States–and global economies are in a very difficult situation right now.
How to React
I am not a financial expert, and I truly believe that how one should react is entirely tied to their own current situation. What I am seeing from many investors I talk to or read about, however, is that they are running to hard assets, such as gold, silver, real estate, or other commodities. For this reason, gold and silver (although certainly not real estate), are at all-time highs.
When there is a widespread, international economic crises, it’s difficult to find any “safe investment.” When a major agency such as the Standard and Poor’s downgrades the United States debt–causing the supposedly “safest” of investment (U.S. Treasuries) to be called into question, then it’s certainly one of the toughest times in recent history to know where to put your savings.
It’s clear that the world-wide economic crises is not going to be resolved any time soon. Since 2008, we have been dealing with what will likely later be referred to in history books as a Depression. It is entirely possible that the future will be even more strained than the present.
How are you dealing with the latest bad news? How are you investing your monies? Thus far, I’m staying the course. Will that be, in hindsight, a terrible mistake?
Let me know your thoughts on the global debt crises/systemic global financial issues.
Also, if anything I have written in this article is not factually correct, or if I missed anything in my research, please leave a comment to let me know. Thanks.