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US Debt Potentially Downgraded by the Chinese!
In the face of the massive economic crisis in Europe, it is very easy to forget that there is an even larger economic elephant in the room. However, recent action by the Chinese has once again brought this issue to light. While the United States avoided default narrowly several months ago, they did not reduce their major deficit spending. Consequently they appointed a “super committee” to find areas where budget cuts could be made to fix the deficit. The Republican’s response was to cut spending in several areas while the democrats suggested more tax increases. This disagreement has lead to a deadlock. No one can agree and no one is taking action.
As usual the media has missed one of the most critical pieces of news in the last several weeks. The chairman of Dagon, the largest credit rating agency in China, came out in an interview with al-Jazeera on Sunday morning stating that it is extremely likely that US debt will be downgraded even further. Over the past year China has downgraded US debt from a high AA+ down to A in two separate downgrades. While most media focused on the S&P’s downgrade, China’s downgrade is far more important. They are the largest foreign buyer of US debt and account for a third of all foreign held debt securities of the US. They are also a major holder of US currency, which means what they think is potentially the most important factor of all when it comes to managing the US debt crisis.
The Chairman of Dagon went on to say “The measures available to them [the US] cannot be effective so they have another way out which is to depreciate the US dollar, to print more money,”
Asked directly if he believed another ratings cut was inevitable, Guan replies: “I think so.”
He goes on to say: “We are continuing to monitor this closely. First of all we need to look at this year’s economic growth and then predict next year’s trends. If in the year 2012 the overall projections are not very good, meaning that the sources of payment – and liabilities – are bad and cannot be changed, or change for the worse, then we will lower the rating once again.”
If China is anywhere close on their projections, QE3 cannot be far around the corner. The US cannot afford to lose a major buyer of their debt like China. While QE may be delayed, it cannot be postponed indefinitely. The inevitable result will be additional printing or “digitizing” of money, which can only have one final outcome, inflation. As a result, precious metals will most certainly do well in the event of QE3 in the short-term, provided that no major dip in the stock market occurs at the same time.
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Josh Renfro
President & Founder
Lone Star Bullion LLC
