Perspectives on the global economic meltdown- (Nov 28 2010)

[Neshant]

The only thing I agree with you is "making """A""" car is not hard"

That's what I'm saying. Making 'a' car is not hard. Making a best selling, very reliable car will be more difficult. But nothing is impossible nor is going to take 20 years to master.

My old company tried to reduce the cost of a front cover of an engine by outsourcing it to China. Even though the part looks simple (at least visually) compared to other parts of the engine it was not easy to manufacture.

I can't see how a cover can be considered a challenge to manufacture. It surely is not going to take 5, 10 or 20 years to create one that works adequately. While I agree that its not good to underestmate the challenge from a reliability point of view, I don't think it should be exhaggerated either.

This is why I said that it is more of an art as you have to make a lot of adjustments before you reach your goal. I have not read a book so far that teaches this kind of stuff. The more experience you have the "adjustments" will get quicker and easier.

Certainly it takes some time to get something done perfectly, but that's a development cycle any tech company putting out a product will go through.

Cars are pretty complex. I am assuming that you are not an engineer based on your post.

I am one and I even had a little involvement in the auto industry in the recent past. The stuff i do now however is pretty complicated by comparison to the auto stuff. That is why I don't consider car related engineering insurmountable. Of couse I understand the devil is in the details. Even integrating off the shelf stuff requires paying close attention to getting everything working smoothly and reliably. That being said, I'm not talking about engineering from the materials & mechanical prespective however which I don't know balls about. But seriously, its not like they are have to get scientists in to invent a new type of plastic or metal in a lab or discover some revolutionary scientific principle by colliding atoms in a particle accelerator or something.

There are some parts in a car (best example fuel injection systems) where there are only very few suppliers in this world.

Again not insurmountable.

The manufacturing know how is also foreign. I have heard cases of complete assembly lines designed and supplied by foreign companies to China. IMO this does not make them a manufacturing powerhouse..

This is not because they can't make it but probably because its cheaper to buy it off the shelf.

BTW OT but I hope you heard in the video that they will use German machines for the Bosch plant in India.

That machine which they showed in the video is not impossible to build. Me and my crew could probably build it. Will it be as good right off the bat, maybe not. But it will be comparable. Its just that Tata may not want to wait around for 2 years for us to build it all and iron out the bugs. But this ain't no 20 year effort.

The last thing that we need is to buy into the notion that it takes decades to do everything. By the time we finish doing whatever that is, it will be shipped straight to a museum because it will be obsolete. We'll end up like the banking & financing "industry" where paper is just going round and round, everyone is taking a cut & making up fancy terminology but no real work ends up being done.

[devaraj_d]

The only thing I agree with you is "making """A""" car is not hard"

That's what I'm saying. Making 'a' car is not hard. Making a best selling, very reliable car will be more difficult. But nothing is impossible nor is going to take 20 years to master.

Cars are pretty complex. I am assuming that you are not an engineer based on your post.

I am one. The stuff i do now however is pretty complicated by comparison to the auto stuff. That is why I don't consider car related engineering insurmountable. But seriously, its not like they are have to get scientists in to invent a new type of plastic or metal in a lab or discover some revolutionary scientific principle by colliding atoms in a particle accelerator or something.

There are some parts in a car (best example fuel injection systems) where there are only very few suppliers in this world.

Again not insurmountable.

The manufacturing know how is also foreign. I have heard cases of complete assembly lines designed and supplied by foreign companies to China. IMO this does not make them a manufacturing powerhouse..

This is not because they can't make it but probably because its cheaper to buy it off the shelf.

The last thing that we need is to buy into the notion that it takes decades to do everything. By the time we finish doing whatever that is, it will be shipped straight to a museum because it will be obsolete.

What will you buy? 'A' car or 'The' car?

I am just curious for you have belittled the work that we do What kind of stuff do you do?

Automotive companies do engage in fundamental research. Please go through http://www.tytlabs.co.jp/eindex.html

Of course not insurmountable otherwise we will not have them. But they are extremely complex to both design and manufacture.

Not really. AFAIK no assembly line or manufacturing line for automotive stuff is available off the shelf as each engine family or vehicle family is different.

OT. I once visited the Deutsches Museum in Munich. They have engines that were built for the first time and you can also see many WW2 aircraft engines. They are still amazing. If I build something and if it ends in this museum even a Nobel prize is not so rewarding for me.

[Neshant]

I don't belittle it. But like I said, its a gross exaggeration that things take 20 years to get working.

What will you buy? 'A' car or 'The' car?

Obviously 'A' car.

'The' car would be a Formula-1 which I don't think I could afford.

'A' car is what you are building for the Indian, Latin American, most Middle Eastern & Asian and African markets anyway. Probably European markets too as their economy slides down the drain and luxury vanishes from their vocabulary.

Nothing has to be gold plated in any sense of the word. It just has to work with reasonable efficiency and reliability. That's the job of the design team & engineers. Now if they can't do that or claim it takes 20 years to do that, you got the wrong guys working for you. They need to be in banking.

[RangarajanA]

Catching up in design, engineering and core sciences and general infrastrucuture is hard to do. Perhaps not the 20 years, but certainly a significant effort. We will always have a hard time winning when the other guys have a head start. Our goal should be to figure out areas where the game itself has changed and focus on those areas. For eg. the mobile phone business -- we were able to catch up in telecommunications as the original investment of the industrialized world in land lines etc was of no use. We did not have much catching up to do. Same in the IT industry.
We should be looking out for these opportunities..
Just a newbie posting, so please bear with me.

[Neshant]

Interesting quote from one of the Presidents of the US - Andrew Jackson.

Eerily familiar in its relavance today. He highlights how commercial banks which setup the central bank use paper money as a means of offloading their losses onto the public. He also highlights how this fraud attracts people in the form of the banking `industry` who profit from it and have a vested interest in perpetuating this dishonest system.

Back in his day, the equivalent of the Federal Reserve was called the Second Bank of the United States - also a private banking cartel. He ultimately shut the bank down which I`m certain is the same fate the Federal Reserve will meet. Bernanke better be taking plumbing classes at night to plan for a new career.

"The paper system being founded on public confidence and having of itself no intrinsic value, it is liable to great and sudden fluctuations, thereby rendering property insecure and the wages of labor unsteady and uncertain.

The corporations which create the paper money can not be relied upon to keep the circulating medium uniform in amount. In times of prosperity, when confidence is high, they are tempted by the prospect of gain or by the influence of those who hope to profit by it to extend their issues of paper beyond the bounds of discretion and the reasonable demands of business; and when these issues have been pushed on from day to day, until public confidence is at length shaken, then a reaction takes place, and they immediately withdraw the credits they have given, suddenly curtail their issues, and produce an unexpected and ruinous contraction of the circulating medium, which is felt by the whole community.

The banks by this means save themselves, and the mischievous consequences of their imprudence or cupidity are visited upon the public. Nor does the evil stop here. These ebbs and flows in the currency and these indiscreet extensions of credit naturally engender a spirit of speculation injurious to the habits and character of the people. We have already seen its effects in the wild spirit of speculation in the public lands and various kinds of stock which within the last year or two seized upon such a multitude of our citizens and threatened to pervade all classes of society and to withdraw their attention from the sober pursuits of honest industry. (its where a career in banking inevitably leads)

It is not by encouraging this spirit that we shall best preserve public virtue and promote the true interests of our country; but if your currency continues as exclusively paper as it now is, it will foster this eager desire to amass wealth without labor; it will multiply the number of dependents on bank accommodations and bank favors; the temptation to obtain money at any sacrifice will become stronger and stronger, and inevitably lead to corruption, which will find its way into your public councils and destroy at no distant day the purity of your Government."

Andrew Jackson, Farewell Address, 1837

[sumishi]

^^ In a muchos related vein, for those interested, here is a transcript of "The Money Masters" by Bill Still, a 1996 documentary, on India-Forum. clicky

[Neshant]

Eliminate the uncertainty about the debt problem by eliminating the debt cealing.........

This from the same rating agency that stamped trillions of worthless mortgage backed securities as AAA rated investments leading to the economic crash.

----------------------------
Ratings Agency Suggests US Eliminates Debt Ceiling

Ratings agency Moody's on Monday suggested the United States should eliminate its statutory limit on government debt to reduce uncertainty among bond holders.The United States is one of the few countries where Congress sets a ceiling on government debt, which creates "periodic uncertainty" over the government's ability to meet its obligations, Moody's said in a report.

http://www.cnbc.com/id/43790768

[Neshant]

China based rating agency downgrades US credit rating from AAA to AA.

2. There is a lack of endogenous driving force in the U.S. economy, which highlighted the insufficiency of the U.S. capability to create real wealth, and when the U.S. government is forced to tighten up its monetary and financial policy, the U.S. economy will slow down in the next two years. The 2.9% real economic growth in 2010 was largely attributable to the favorable monetary and financial policy, and the efficiencies of the U.S. primary industries are still low. The unemployment rate, as high as 9.5%, together with the ever-declining real estate market, has suppressed the domestic demand of consumption and investment in the U.S.. Influenced by the rising pressure of inflation and the worsening financial status, the government will have to tighten up its monetary and financial policies, which in turn will remove the stimulating effects on the economy................

3. The extremely low level of interest rate and the preference for risky investment that was encouraged by the quantitative easing policy will allow the U.S. continue its development model which relied heavily on virtual economy, which also increases the possibility of another financial crisis like the onethat  happened in 2008. Since the U.S. adopted the quantitative easing policy, its financial industry has been growing at a speed largely disconnected from its real economy................

6. . The government will continue its practice of borrowing new money to repay the old debt...........

Read it all :
http://www.dagongcredit.com/dagongweb/e ... web_e_zxzx

As I've said, since the year 2000, there has not been a single new productive industry generating high paying jobs that can drive the US economy. The financing, banking & high rolling are not real jobs generating anything productive. Its paper shuffling & fancy terminology and as it turns out offloading losses onto the real economy sinking it even faster.

Something real needs to come along soon or the US will be up the creek at the rate its spending.

Meanwhile US politicians, listening to equally clueless economists, have no clue what drives an economy. They seem to think its investing more in infrastructure, road & bridge building, repaving runways at airports... etc None of that is productive use of money unless there is a demand for it from the productive economy.

Too much banking is ruining America's economic future.

[Neshant]

though i lost much respect for Warren Buffet after he was found hollering for a bailout of his tanking investments back in 2008, here's an interesting quote from his papa.
------------

Howard Buffett: Warren Buffett's father a staunch gold bug.

"[W]hen you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty...

"The subject of a Hitler or a Stalin is a serf by the mere fact that his money can be called in and depreciated at the whim of his rulers. That actually happened in Russia a few months ago, when the Russian people, holding cash, had to turn it in -- 10 old rubles and receive back one new ruble. Under such conditions the individual citizen is deprived of freedom of movement. He is prevented from laying away purchasing power for the future. He becomes dependent upon the goodwill of the politicians for his daily bread. Unless he lives on land that will sustain him, freedom for him does not exist."

"I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it, unless you are willing to surrender your children and your country to galloping inflation, war and slavery then this cause demands your support. for if human liberty is to survive in America, we must win the battle to restore honest money. There is no more important challenge facing us than this issue -- the restoration of your freedom to secure gold in exchange for the fruits of your labors."

[sumishi]

...
------------
Howard Buffett: Warren Buffett's father a staunch gold bug.

"[W]hen you recall that one of the first moves by Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize known as human liberty...

"The subject of a Hitler or a Stalin is a serf by the mere fact that his money can be called in and depreciated at the whim of his rulers. That actually happened in Russia a few months ago, when the Russian people, holding cash, had to turn it in -- 10 old rubles and receive back one new ruble. Under such conditions the individual citizen is deprived of freedom of movement. He is prevented from laying away purchasing power for the future. He becomes dependent upon the goodwill of the politicians for his daily bread. Unless he lives on land that will sustain him, freedom for him does not exist."

"I warn you that politicians of both parties will oppose the restoration of gold, although they may outwardly seemingly favor it, unless you are willing to surrender your children and your country to galloping inflation, war and slavery then this cause demands your support. for if human liberty is to survive in America, we must win the battle to restore honest money. There is no more important challenge facing us than this issue -- the restoration of your freedom to secure gold in exchange for the fruits of your labors."

That, IMO, is the golden truth, for those in love with Fiats and proselytizing Ambassadors.

[Prem]

http://thinkprogress.org/economy/2011/0 ... -treasury/
29 Companies Had More Cash Than The U.S. Treasury As Of July 13
As of July 13, 29 public companies had more cash on hand than the U.S. Treasury Department, according to the site Zero Hedge based on numbers from Capital IQ. It’s a stark reminder that if Congress refuses to raise the debt ceiling, the government won’t have nearly enough money to continue funding essential services and programs.In the first half of July alone, Treasury cash balances were depleted from from $130 billion to just $39 billion. That means the most powerful nation on earth currently is tied with Google for the amount of cash that it has, and is less flush than Bank of America, JP Morgan Stanley, and Goldman Sachs, among others.

[abhishek_sharma]

Debt and Delusion: Robert J. Shiller

The Too-Quiet American: Jagdish Bhagwati

[sumishi]

Perhaps not posted earlier.
A nice animation: The American Dream. [The "Useless Middleman Sector" for Dummies]

[Satya_anveshi]

Hello folks,

Why is this eery calm on this thread when the decibel level has gained so much among elected jokers and press in the US? Sign of resignation that ceiling will increase or of anxiety/suspense among the participants?

IMO, the debt ceiling will increase and the real issue, as many of you may be aware, is only the extent of the raise and to what extent the taxes will be raised on the rich.

Repubes would like to raise enough so as to keep the issue alive during the next elections and have a fair chance to fight it. Dem-rats would like a free pass for the next elections even as they put shanghai statistics to shame.

How will market / world react if there is an increase? How is that reaction going to differ by the magnitude of the increase? Is increase the good news (more drugs to the addict)?

However, I am curious about two things a) market reaction thus far and beyond b) world wide reaction thus far and preparedness of an alternative. Will US make a call that the current debt is unpayable let alone increased debt passed on future gens. So, what are the chances (however slim) of this happening? Do benefits outweigh costs of US default? What signs (if not already present) to watch that might indicate US is heading in that direction? How might US go about defaulting? Can it insulate internal economy from the fallout that may result from the default?

more questions but will be interest to see some perspectives. As I said earlier, this $hit came just soon enough in our growth trajectory to do anything about it but support US debt binge for now even at our own costs.

[shyam]

watch the video from 5:40 onwards, for 3 minutes.

[Airavat]

US Treasuries decline after talks failure over debt ceiling:

Jim Rogers, the investor and author of the book “Hot Commodities,” said he is betting Treasuries will fall. “The U.S. will default one way or another,” he said in an interview July 22 in Singapore, where he is based. The “default” may come in the form of a debasement of the currency as the central bank pumps money into the economy to spur growth, Rogers said. Money managers are becoming more bearish on Treasuries, a survey by Ried Thunberg ICAP Inc. shows.

[Neshant]

Who has been buying all the long term US treasuries (10 and 30 year) ?

How has the yield on it not manage to rise ? Is the market betting on a deflationary depression or is it yet another thing the Federal Reserve is rigging.

[abhischekcc]

I remember reading a couple of years ago that the slack in demand from the Chinese was being picked up by Britain and the Caribbean islands. The later is a just a front for black money from various countries, especially Britain.

So I guess the old money bags are propping up a failed economy. If something terrible should happen to USA now, all the money Britain stole from us would be vapourized.

[Inder Sharma]

Who has been buying all the long term US treasuries (10 and 30 year) ?

How has the yield on it not manage to rise ? Is the market betting on a deflationary depression or is it yet another thing the Federal Reserve is rigging.

No sir. The belief in the US debt market is that : were the debt ceiling not to be raised in time, then the GOTUS would have to resort to QE3 to meet its obligations, thus avoiding the default.

While this may have a potentially inflationary outcome for the emerging markets, but it still has a benign prospect for the US gilt. Hence the US gilt yield moderation.

[VikramS]

US Treasuries are currently under owned by Pension Funds, and individual investors. Many prefer the bonds of big multinationals which yield better and are perhaps more safe since they are leveraged to global growth.

If and when Treasury yields rise, that portfolio allocation may change.

Also Barron's had an article that the laws may be rewritten to require tax deferred retirement plans to hold a minimum amount in US Treasuries (10-20%) to continue their tax deferred status.

So there are a LOT of ways domestic demand for US Treasuries will emerge or can be created. When you are the reserve currency and the biggest military power, you can kick the can in a lot of ways; perhaps till the point where the can itself starts leaking and decaying.

Those reading the last rites of the US Treasury bond markets have been wrong and will continue to be wrong for sometime. Until a viable alternative emerges. And there is no viable alternative on sight. China can't even sell its domestic bonds.

In perhaps 15-20 years, India might start being seen as a suitable alternative. Her economy is not tied to exports or commodities, there is reasonable transparency, the rule of law, and by that time, the world's 2nd or 3rd largest economy.

While asset prices may vacillate, over the long term, of all major global markets I am the most bullish about India.

[paramu]

No sir. The belief in the US debt market is that : were the debt ceiling not to be raised in time, then the GOTUS would have to resort to QE3 to meet its obligations, thus avoiding the default.

No sir. Raising debt ceiling is a prerequisit for QE3. Without raising it, treasury can't sell additional bonds to Fed through its middlemen, so called primary dealers. We were told that through QE, Fed buys treasury bonds from banks to create liquidity. In reality, banks just flipped over the low yield treasury bonds to Fed as soon as they could.

[Inder Sharma]

No sir. The belief in the US debt market is that : were the debt ceiling not to be raised in time, then the GOTUS would have to resort to QE3 to meet its obligations, thus avoiding the default.

No sir. Raising debt ceiling is a prerequisit for QE3. Without raising it, treasury can't sell additional bonds to Fed through its middlemen, so called primary dealers. We were told that through QE, Fed buys treasury bonds from banks to create liquidity. In reality, banks just flipped over the low yield treasury bonds to Fed as soon as they could.

Fed can do an electonic expansion in the M3 requiring no debt issuances. Q3 in different form.

[Neshant]

Looks like fancy footwork for what's basically a robbery scheme.

[shyam]

Fed can do an electonic expansion in the M3 requiring no debt issuances. Q3 in different form.

Don't they already do that? Didn't Fed stop publishing M3 numbers to not scare people?

[abhishek_sharma]

A great divide holds back the relevance of economists

There’s zero accountability in economics

Economic specialization is a feature, not a bug

Krugman says Thoma’s right, except when he’s wrong

Larry Summers: ‘I think Keynes mistitled his book’

[Purush]

Gujarat Automotive Gears has $86 billion in assets? WTF?
http://investing.businessweek.com/resea ... er=GATG:IN

OPEN
763.00
PREVIOUS CLOSE
763.95
DAY HIGH
763.00
DAY LOW
741.00
52 WEEK HIGH
07/8/11 - 844.90
52 WEEK LOW
08/9/10 - 287.50
MARKET CAP
266.7M
AVERAGE VOLUME 10 D
193.1
EPS TTM
168.49
SHARES OUTSTANDING
350.0K
EX-DATE
08/10/11
P/E TTM
4.5x
DIVIDEND
50.00
DIVIDEND YIELD
0.39%
In INR

[paramu]

^^^ Care to explain.

How does INR 266.7M become $86B?

[Purush]

Er.. that's my question too.

[svinayak]

Nomura Research Institute’s Richard Koo says that what the world is experiencing right now, a “balance sheet recession,” is different from traditional recessions. However, Japan recently experienced a similar type of recession, and Koo says we can learn a lot from that country’s experie

Worth watching!


http://www.ritholtz.com/blog/2011/07/ri ... recession/

[svinayak]

'Dollar Trap' Ties Reluctant Foreign Central Banks To U.S. Treasurys
Wall Street Journal - Min Zeng - ‎33 minutes ago‎
Foreign central banks are the true giants of the market for US Treasury bonds, so the US government will be relieved that the dispute over the nation's debt ceiling hasn't sent these deep-pocketed bondholders running for the exits.

http://www.wallst.net/

[svinayak]

http://economicforumonline.org/_source/ ... ilemma.pdf

The Dollar Dilemma
The World’s Top Currency Faces Competition
Barry Eichengreen

[Neshant]

Ron Paul: "Default Is Coming"

Rep. Ron Paul (R-TX) explains why default by inflation is worse than default by not raising the debt ceiling.

Rep. Paul also talks about how the devaluing of the U.S. has led to record prices in gold bullion.

"Default is coming. The only argument that's going on now is how to default, not send the checks out or just print the money. In all countries our size, they always print the money," Paul said.

"They're going to raise the debt limit, and then they're going to print the money, and then they'll default by inflation, and that's much more dangerous than facing up to the facts of what's happening today."

http://www.realclearpolitics.com/video/ ... oming.html

[Singha]

http://money.cnn.com/2011/07/29/news/in ... ?hpt=hp_t2

moodys downgrades spanish provinces.

includes castilla (madrid) and catalonia (barcelona) too.

[svinayak]

http://www.bibliotecapleyades.net/archi ... hitman.pdf

Economic hit men (EHMs) are highly paid professionals who cheat countries around the globe
out of trillions of dollars. They funnel money from the World Bank, the U.S. Agency for
International Development (USAID), and other foreign "aid" organizations into the coffers of
huge corporations and the pockets of a few wealthy fami-lies who control the planet's natural
resources. Their tools include fraudulent financial reports, rigged elections, payoffs, extortion,
sex, and murder. They play a game as old as empire, but one that has taken on new and
terrify-ing dimensions during this time of globalization. I should know; I was an EHM,
I wrote that in 1982, as the beginning of a book with the working title, Conscience of an
Economic Hit Man. The book was dedicated to the presidents of two countries, men who had
been my clients, whom I respected and thought of as kindred spirits — Jaime Roldos, president
of Ecuador, and Omar Torrijos, president of Panama. Both had just died in fiery crashes. Their
deaths were not accidental. They were assassinated because they opposed that fraternity of
corporate, government, and banking heads whose goal is global empire.
I was persuaded to stop writing that book. I started it four more times during the next twenty
years. On each occasion, my decision to begin again was influenced by current world events:
the U.S. invasion of Panama in 1989, the first Gulf War, Somalia, the rise of Osama bin Laden.
However, threats or bribes always convinced me to stop.
In 2003, the president of a major publishing house that is owned by a powerful international
corporation read a draft of what had now become Confessions of an Economic Hit Man. He
described it
as "a riveting story that needs to be told." Then he smiled sadly, shook his head, and told me
that since the executives at world head-quarters might object, he could not afford to risk
publishing it. He advised me to fictionalize it. "We could market you in the mold of a novelist like
John Le Carre or Graham Greene."
But this is not fiction. It is the true story of my life. A more coura-geous publisher, one not owned
by an international corporation, has agreed to help me tell it.
This story must be told. We live in a time of terrible crisis — and tremendous opportunity. The
story of this particular economic hit man is the story of how we got to where we are and why we
currently face crises that seem insurmountable. This story must be told be-cause only by
understanding our past mistakes will we be able to take advantage of future opportunities;
because 9/11 happened and so did the second war in Iraq; because in addition to the three
thou-sand people who died on September 11, 2001, at the hands of ter-rorists, another twentyfour
thousand died from hunger and related causes. In fact, twenty-four thousand people die
every single day because they are unable to obtain life-sustaining food.1 Most im-portantly, this
story must be told because today, for the first time in history, one nation has the ability, the
money, and the power to change all this. It is the nation where I was born and the one I served
as an EHM: the United States of America.

[ranjbe]

US real GDP, based upon revised figures is less today than it was four years ago (2007).

http://www.economist.com/blogs/freeexch ... y?fsrc=nwl

[SwamyG]

All I need to know is what should I convert my dollars into? Methinks, I should buy tonnes of good drinking water & some good bodyguards to lead a life full of tension and takleef. What have we humans reduced this World to.

[Christopher Sidor]

Taking a Closer Look at the Result of a Credit Downgrade

NYT is running this story, on why US Politicians are playing chicken with the Debt Downgrade threat of certain ratings agency.

“The fundamental strength of the U.S. economy and widespread perception of the U.S. sovereign as a high-quality credit is likely to persist for the foreseeable future, even in a moderate downgrade scenario,” Fitch said in a note in July on the consequences of a downgrade.

The experience of other nations that have been downgraded, including Japan and Canada, both downgraded more than a decade ago, suggests that investors do not necessarily react by demanding higher interest rates.

Agreed on the first point. Amerika due to its sheer size and breadth of economy is the biggest guy on the block. But I disagree with the second statement. The difference between JAPAN and US is that in case of JAPAN a massive amount of Debt is being held by domestic investors. In case of US a significant amount of Debt is being held by outsiders, like the east Asian nations, certain european nations and also Gulf countries. They are the jokers in the pack. How will they react to this downgrade ?

Finally, there is widespread skepticism that S & P will follow through on its downgrade threat.

Arnaud Mares, head of sovereign strategy at Morgan Stanley, told investors during a conference call on Thursday that a downgrade primarily would undermine S & P’s credibility.

“A downgrade of the U.S. government would, in our view, not cause that many investors to dispose of their Treasuries,” Mr. Mares said. “We think it would accelerate the ongoing trend toward less reliance on ratings in regulation and investment mandates.”

“So the effect,” he said, “would be more on the use of ratings than on the market itself.”

This is the meat of the article. Standard & Poor is being threatened over here. Not explicitly. The function of credit rating agencies or the reason of their existence is legislation enacted in US. If there were changes in the legislation then these companies might go out of business. After all if one is choosing between staying in business and well sticking to ones principles, what would one do?
The ratings agency made their choices way back in early 2000's, when they decided to give a rating of AAA to certain mortgage backed bonds. Bonds that even they did not understand fully. Even in India during the later boom years, certain companies gave construction companies like DLF, Unitech, EMMAR-MGF, etc stellar ratings based on dubious valuations of their so called "Land Bank".

So will rating agencies make a similar choice this time ?

[vera_k]

Read the statement issued by China. Treasury buyers willingly took a seat at the rodeo and are along for the ride.

[Satya_anveshi]

one aspect of this debt /deficit charade is to restore some semblance of credibility to these scamming ratings agencies which was all in the mud as they rated fictitious quality CDOs/MBAs AAAs and sold it to institutions WW. This smoke and mirrors show is to hand them the mike and make some right noises.

Mind you, these rating agencies are a critical part of how the investment industry/over all WW economy operates so it is all in the game.

IMO one of them will have an opportunity to downgrade (even as the other two try to neutralize the resulting negative impact - let's see how) but it is still going to be tricky in terms of the overall sentiment it will result in investors' minds (now and in short/medium term).

BTW: corporations are planning (beyond the anticipation phase) for a lot of headwinds in the near term Q411 and into FY12. Sit tight and hang on to the seats/jobs as we all did in the FY09/1H10. Let's hope it is not going to be that bad.

[Neshant]

So will rating agencies make a similar choice this time ?

Nope. Rating agencies are highly biased in favor of their "employer" the US govt.

These jokers rated TRILLIONS of dollars of mortgage backed securiteis as AAA investments which blew up destroying millions including pensioneers. The US govt has shielded them from prosecution for blatant fraud and none of the rating agency CEOs have gone to jail.

Obviously they are not going to bite the hand that feeds them.

You have to do your own due diligence when assessing risk these days and not trust rating agencies. I classify them under the useless middleman sector known as financing & banking.

If these rating agencies could predict risk ahead of time as they claim, they would not be in the rating business, they'd be in the investing business betting on market crashes ahead of time. Fact is however that they gave many entites triple A ratings (based on triple A bribes) right upto their crash and this time it will be no different.