There are those, this week, that said the downgrade of the U.S. credit rating will be a “wake-up call” for Washington politicians. Some pundits claim this might pull both parties together, get something done for the good of the country, and finally deal with the immense problem of debt spending and entitlements. I think this will end up becoming a battle cry for both Democrats and Republicans in the 2012 election. Both are blaming one another for the downgrade. Yesterday on “Meet the Press,” Senator John Kerry (D) trotted out some new partisan language and called the S&P action on U.S. debt a, “Tea Party downgrade because a minority of people in the House of Representatives countered even the will of many Republicans in the United States Senate who were prepared to do a bigger deal.” Speaker of the House John Boehner (R) said this weekend, “Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground.”
The political sniping over the weekend signals that both parties know the economy cannot be fixed anytime soon, let alone before the 2012 election. So, the blame game is what we will be stuck with as the American economy continues to sink. Forget about the “Select Committee” of 6 Democrats and 6 Republicans getting any deficit reduction deal. The fight over spending cuts and tax increases is stuck in a feedback loop. That is part of the reason why S&P cut the credit rating of the U.S. Nothing is going to get done on the debt, at least not before the country goes off a financial cliff. In cutting U.S. debt, S&P also ultimately cut the value of the dollar. Almost all borrowing costs at all levels will rise, and the dollar will sink right along with the slowing economy.
Economist John Williams of Shadowstats.com has been warning for months about a sudden dollar sell-off. According to Williams, $12 trillion liquid dollar assets are held outside the U.S. (dollars and Treasuries). If the holders of these assets throw in the towel and cash out, there could be a severe dollar sell off. That could spike inflation, cause interest rates to surge and eventually plunge the country into a hyperinflationary depression, according to Williams. A special Shadowstats.com report put out yesterday said, “Lack of confidence in the U.S. dollar has been pushed to a new and more dangerous nadir in the last two weeks. Dollar selling has been exacerbated by the contentious and virtually meaningless debt deal negotiated by the President and Congress, by Standard & Poor’s downgrading the rating on U.S. Treasuries to “AA+” from “AAA,” and by mounting market recognition of the ongoing U.S. economic and systemic-solvency crises. Pending still is the Fed’s move to QE3.
The dollar’s back is close to being broken. Despite near-term interventions and extreme volatility, the heavy dollar selling that follows will be highly inflationary. . . “
The kind of impact we are going to have will not be like flying into the side of a mountain. It will be the kind of crash that skids over land, clipping trees and buildings until the plane ends up wingless in a smoldering heap. I just hope the fuel tanks don’t ignite when the long rough ride is over.