S&P downgrades its outlook on US Debt – so what?

I am probably not the first source you are hearing this from, but in case you hadn’t heard – this past Monday, S&P released a statement proclaiming that it downgraded its outlook on US debt from “stable” to “negative.”  Since the news hit mainstream media, I’ve received a few emails trying to make sense of its implications.  I’ve decided to offer my 2 cents worth below…

So what does this mean for us?

The change means that there is a one-in-three chance that S&P could downgrade the nation’s AAA credit rating within the next two years.  According to Reuters, “Of the four AAA-rated countries that S&P has placed on negative outlook between 1989 and this March, three were downgraded within 15 months on average. That would put July 26, 2012 as the date to watch for whether the United States loses the star credit status it has held since 1941.”

If S&P decides to take away the AAA credit rating, things are going to get a lot worse here in the US.  There is a chance that this news could cause fear in the market place and that could trigger a massive selling off of the US dollar.  This means that all the US dollars that have been sitting in other countries’ banks – China, Japan, etc. – would come home to roost, triggering hyper-inflation.  This would result in a MASSIVE decline in the value of the US dollar.  This is of course a worse case scenario and although it is not impossible, it is still unlikely. 

What I think is more probable is that the US will lose its AAA credit rating, but it will work out agreements with our debtors and assure the world that the US is still strong – but everything will continue get very expensive.

Financing will become incredibly costly and the price of commodities will skyrocket – gas, oil, food, etc.  Many more business will close their doors and any progress that we’ve made over the past two years will be undone.

The writing is on the wall – the dollar has cancer and while Washington is trying to balance their budget sheets, the purchasing power of our currency is literally eroding in front of our eyes. 

In my opinion, this is not the best time to be invested in cash.  I’d hold a 5-month emergency fund and put the rest in hard assets – cash flow producing Real Estate and Precious Metals – ESPECIALLY SILVER!!

I’d love to hear your feedback on this post.  What do you think is going to happen?  And what are you going to do to prepare, if anything?

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Comments

  1. Nachi says:

    Hi Arthur,
    I recently came across your website and started reading through your articles. Found this one quite interesting and couldn’t stop from asking your thought process behind recommending Silver and not other commodities like Oil ETFs, Gold, etc

    Thanks,
    Nachi

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