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This Week in Your Wallet: August 9, 2011

I am writing this to you Monday morning.  The markets – which haven’t opened yet – are indicating down.  That’s no surprise.  Although S&P telegraphed exactly what it was going to do where the downgrade was concerned (telling Congress it needed to see $4 trillion in debt reduction in order to avoid it, a number Washington didn’t meet) this morning the markets – and the downgrade which happened Friday evening — were the lead story.  So, I wanted to spend this week walking through what this likely means.

Q: Why were we downgraded?

As I noted above, the budget deal was not to S&P’s satisfaction.  But this is not just about that one deal, it’s about a lack of confidence that Washington – which is behaving like a dysfunctional relationship – can fix the problem.  We are spending more than we are taking in as a country.  That has to change and it’s up to Washington to change it.  Moody’s, which reaffirmed its AAA bond rating on August 2, also said at that time it has a negative outlook for the US.  Why? Politics.  The fact that Washington can’t get along could potentially take the rating down.

Q: Why should we even listen to S&P?

A: In his New York Times column Monday morning, Paul Krugman argues that we shouldn’t – noting, and rightly so, that S&P and the other ratings agencies were at least in part to blame for the mortgage debacle that took the housing market to its knees.   He, too blames politics – not the economy – for this rout.

Krugman writes: “These problems have very little to do with short-term or even medium-term budget arithmetic. The U.S. government is having no trouble borrowing to cover its current deficit. . . No, what makes America look unreliable isn’t budget math, it’s politics. . . The truth is that as far as the straight economics goes, America’s long-run fiscal problems shouldn’t be all that hard to fix. It’s true that an aging population and rising health care costs will, under current policies, push spending up faster than tax receipts. But the United States has far higher health costs than any other advanced country, and very low taxes by international standards. If we could move even part way toward international norms on both these fronts, our budget problems would be solved.”  Read the rest of his excellent column here.

Q: Is this going to push us into recession?

A:  Many respected economists, including Moody’s Analytics Chief Economist Mark Zandi, don’t think so.  In an interview on Bloomberg TV Monday morning, he pointed out that American businesses are in very good financial shape.  With the cash they’re carrying on their balance sheets, it’s not a question of if they can go out and hire – but when.  Washington finally seems to understand that jobs, jobs, jobs have to be the story.  If our government can push corporate America in the right direction, perhaps we’ll dodge the bullet.

Q: What does all of this mean to you?

A: The upshot is that interest rates will likely go up. How much? We don’t know – since this is only one ratings agency and since we have not seen the Chinese (who own a lot of our debt) moving to sell, probably not all that much.  But you may see increases in mortgage rates, credit card rates, car loan rates over the short term.

Q: And what should it mean to your portfolio?

A: For that answer, I’d like you to read my first column as the new Personal Finance Editor for Newsweek magazine.  It spells out how I think you protect your portfolio in these troubling times. Click on over.

Have a great week!


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