Saturday, August 13, 2011

Deficits, Debt and the Downgrade: Implications for Financial Markets and the U.S. and World Economies

All American Investor

Was Standard & Poors justified in downgrading the U.S. credit rating to AA+ from AAA? Not at this point, says an analysis by Ross DeVol, the Milken Institute's chief research officer.

The rating agency's $2 trillion mistake has rattled markets and called into question the safety of U.S. Treasurys. It has also raised further doubts about S&P’s credibility.

DeVol points out that a key measure of future solvency shows the United States' prospects are superior to those of Germany, France, the U.K., Canada and Australia — all of which S&P rates AAA. And don't forget that S&P's involvement in rating mortgage-backed securities contributed to the financial crisis.

Ross C. DeVol

"The mistake would be inexcusable for anyone completing Macroeconomics 101, let alone the credit agency that is considered the top expert in the default risk of sovereign debt."

But with the rating downgrade already done, what's ahead for the jumpy financial markets and economies at home and abroad?

• Real GDP growth: DeVol predicts real GDP growth in the U.S. at around 2.0 percent in the second half of 2011 and 1.8 percent for the year.
• Economic growth: He forecasts U.S. growth at 2.9 percent in 2012.
• Job creation: Expect job gains of roughly 80,000 per month in the third quarter, 100,000 per month in the fourth quarter and 125,000 per month in 2012.
• Double-dip recession: The probability is 35 percent if equity market valuations remain in today's range.

For more in-depth analysis, read the full report.

Original content Bob DeMarco, All American Investor