Submitted by Jen Jones on Mon, 08/15/2011 - 8:20am
U.S. Credit Downgrade Ramps Up Fears of Another Recession
Standard and Poor's recent downgrade of U.S. government debt is capturing headlines across the country and around the world. And with the major agency’s actions to cut the United States government’s top credit rating, financial experts and commentators are finding themselves increasingly concerned that the American economy is headed back into another economic downturn.
According to a new repot from The Huffington Post, “The announcement that the rating agency had reduced the U.S. government's AAA rating for the first time in history came after days of punishing declines in the stock market, and has now cast a shadow over economic prospects in the months ahead. A recent stream of indicators has provoked concern that the economy could be headed for another recession, with the growth rate slowing considerably, unemployment stubbornly elevated and the stock market swooning. Some experts say the downgrade could be the final trigger, making credit more expensive and sowing broad unease. ‘People will be pulling money out of equity markets, out of commodity markets, and putting it into cash -- essentially, stuffing money in your mattress,’ said Andrew Lo, a professor of finance at the MIT Sloan School of Management, in an interview Saturday. ‘This is the worst thing to have happened, given the weak economy we already have.’ ‘Some straw has to break the camel's back,’ he added. ‘This may be the straw.’”
This dismal U.S. credit news comes as June unemployment figures signaled a dismal outlook for the job market and the recent “11th hour” debt deal created doubts of the nation’s ability to further stimulate the weakened economy. Add to these fiscal realities the fact that the U.S. gross domestic product is barely growing, the home prices are falling and the manufacturing sector is suffering, there is little relief in sight.
As HuffPost put it, “In the coming week, the downgrade could cause a period of selling, as investors shun risk. Stocks, commodities and the U.S. dollar might all take hits in the coming days, experts said. Over time, a downgrade could increase the federal government's cost of borrowing by $100 billion a year, said Terry Belton, global head of fixed income strategy at JPMorgan Chase, in a conference call last week. As the federal government reduces spending, the fiscal health of states and localities could suffer. Many cities depend on states for aid, and some states in turn depend on the federal government. If those governments face increased strain over the coming years, their credit ratings could also be vulnerable.”
With months of slow growth and internal shocks from states’ beleaguered budgets, wounding the country’s extended economic outlook to a critical extent, many are wondering how they can make it through another prolonged economic downturn.
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