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August 8, 2011 by USA Post
The decision by Standard & Poor’s in order to reduce the rating of U.S. AAA to AA-plus shook the confidence of global investors, adding that he worries that the world’s largest economy may sink into a double-dip recession.
Investors dumped stocks and fled to safe havens such as gold, which rose to record levels of more than 1,700 and ounce. Ironically, the U.S. Treasury was not affected by the cut and remains a destination for investors fleeing the mayhem in the stock market. The yield on the benchmark 10-year bond fell as low as 2.38 percent.
With the Dow Jones crash threatens to 11,000, most of the major U.S. indices fell 3 percent to 4 percent. Stock markets in Asia and Europe also took a beating and overnight, losing 2 to 3 percent of its value.
“It amounts to a vote of no confidence in the U.S. government,” said Nigel Gault, chief U.S. economist IHS Global Insight. “The U.S. political process is currently unable to offer a long term solution to stabilize the debt.”
Despite the cuts, Mr. Gault said that investors still consider the U.S. Treasury market as “by far the largest and most liquid in the world can not be beaten, and a relatively safe haven in times of global crisis.” U.S. bonds are also benefiting by comparison with the bonds of most indebted European countries like Greece, Spain and Italy, he said.
S & P added to the pressures of the market on Monday to degrade the major financial institutions that rely on U.S. government funds, including mortgage giants Fannie Mae and Freddie Mac and most of the Federal Home Loan Banks.
Some highly rated states and cities are also waiting with bated breath to see if S & P cut their ratings because of their dependence on federal aid.
S & P warned that a further cut in U.S. qualifying could come as early as November if Congress does not meet the minimum spending cuts of about 2.1 trillion and is committed to making a commitment of debt last week. U.S. can also be downgraded further if the economy deteriorates further, creating even greater U.S. budget deficit due to lower revenues and higher unemployment costs, S & P said.
S & P executive David Beers told Reuter’s television that President Obama could stabilize the rating; by refusing to sign the extension of tax cuts President George W. Bush ‘s. The rating agency noted that both income growth and far-reaching reforms in the aid programs such as Medicare, Medicaid and Social Security are needed for the U.S. regain control of their debt and maintain or improve their qualifications in the future.
Stagnation of Congress on making those changes is what led to the disqualification. The unprecedented loss of the highest-ranking United States over the weekend seemed to do little to stop the political confrontation. Both sides continue to blame others for the loss of confidence.
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