US GOLD STANDARD AAA DOWNGRADED

Was it a surprise, if you ask me, the answer is no. It’s only a matter of when.

Finally the credit agencies have the courage to downgrade the credit rating of the world’s biggest economy. S & P can no longer ignore the ballooning US debt crisis and it cannot be blind to the financial significance and the impact to the rest of the world. It cannot repeat the same mistake again. They were caught sleeping for not downgrading the housing loans prior to the sub-prime crisis in 1997. The subprime crisis causes the collapse of Lehman Brother and shattered so many Wall Street financial institutions such as AIG as well as many big banks around the world.

The significance of this downgrading signals the beginning of the decline of the American economy. It is an official acknowledge by an American rating agency that all is not well with the US economy. Had it be any other countries, the downgrade would have been as fast as it downgraded Greece and Iceland.

How the downgrade will impact the equity market may not be known in the short time. As the market open tomorrow in Tokyo and Seoul, then Singapore, Hongkong and Shanghai, the market will speak. It could be a kneejerk reaction for sharp sell down but I suspect the market has already factor in the downgrade. But the long term outlook cannot be good and this may signal the beginning of the bear market.

The currency market is where the greatest impact will be. Bond prices and yield will be adversely affected. Borrowing cost in American will have to trend up eventually. The commodities market will track and mirror the global economy. Slowdown is definite; it is only a matter of how slow.

The US dollars have been the reserve currency of the world since WW2. No other currency as the size, depth and clout as alternative. It has been the currency of trade by default. At this point in time, there is just no replacement. It is for this reason that the US currency is able to withstand the pressure of falling rate resulting from it spirally debt to almost unsustainable level.

The impact of the falling in value is wide ranging. The major US creditor like China, Japan and many developing countries will be major loser. As the value of the currency fall, American will become poorer and can consume less. When it buys less, the rest of the world will be affected. And so this will be a vicious cycle and world economy will suffer.

It is not really a pleasant scenario we would like to experience.