US to Lose AAA Rating?

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The US is about to lose its AAA financial rating .

The thought ‘no shit’ is the first to come to mind.  These people are printing money faster than Bolt might run the 100 metre dash, and they don’t seem to show any concern what-so-ever that the meltdown in the markets is structural and that the cause is the Federal Reserve.  It is not the solution.

I’m sure we can examine the cause for some time.  The root for me is greed, but maybe some of you have other opinions?

For the effect?  The end result of this?

Most analysts will immediately say that the US will have to increase interest rates in order to attract more buyers of their own toxic debt.  As credibility goes down, rates have to go up to reward capital suppliers for greater risk.

Another important impact is that the value of the US dollar (say, compared to a basket of other currencies) will plummet.  It’s had a brief run upwards, largely because of the need for derivatives traders to cover positions over the last 2-6 weeks.

If you’re wondering why the dollar will fall despite the fact that it’s jumped a little in the last few weeks, just think in terms of supply and demand.  The Federal Reserve and the US government have made commitments to possibly double or triple the volume of ‘cash’ in the marketplace.

The simple laws of economics cannot be ignored:  with excessive supply comes a drop in value.  The vast supply that has been created will trickle into the system over the next 2-6 months and the result will be to ‘lubricate’ the US economy.  I don’t think we’ll see a hike in inflation within the US for some time, given that there are so many other structural issues now (no housing market, no auto demand, etc).

As the US dollar drops, remember my term for what will come next:  ‘interflation’.  This is the exporting of inflation to the rest of the world at the benefit of the US as a result of most commodities being priced in US dollars.  Because we’re still stupid enough to tie all of the international prices of commodities to a single currency (ie. the US dollar), the prices of all of these will take the exact opposite turn.  They will increase as the dollar falls.

So … enjoy the cheap gas and low-cost rice and corn while you can because they’ll return to the price levels that they were back in early 2008.