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Sentiment was weak early after Moody’s said credit risks have grown for the United States and the other largest issuers (Germany, France, & UK) of sovereign debt, even though the AAA ratings of those countries remain intact. Report also mentions other selected AAA countries, including Spain and the “less fiscally challenged” Denmark, Finland, Norway and Sweden. The global economic recovery remains “fragile” in several large, advanced economies, most of which have also implemented the most aggressively expansionary fiscal and monetary policies, Moody’s said.

The AAA ratings of the U.K. and the U.S., which currently have the most stretched debt affordability, continue to be supported by substantial debt reversibility. In light of the muted recovery, discretionary fiscal adjustment (or debt reduction, increased taxes) is now the principal means of repairing the damage that the global crisis has inflicted on government balance sheets. A key issue is whether governments are able and willing to implement such unprecedented adjustments, such as the austerity measures taken by Greece. Growth will support some governments’ adjustment plans more than those of others, but no government can rely on it. These governments also face a challenge in timing these fiscal adjustments, as tightening fiscal policy before private demand has become self-sustained could undermine the recovery and damage governments’ power to tax. Postponing fiscal consolidation is also risky, as it could force central banks to take the initiative, (which would require to raise interest rates and force inflation) the ratings company said. At the current elevated levels of debt, rising interest rates could quickly compound an already complicated debt equation, with more abrupt rating consequences a possibility.

In my opinion, due to the upcoming House and Senate campaign set for November, higher taxes won’t come from the Federal level as it’s a reelection year. The tax overhaul will not take effect as this too will undermine recovery. In the near term, the Fed Fund rates will be pushed higher to offset the deficit. Inflation is another term for “hidden tax”. What other way would we be best to pay trillions dollars of debt? Devalue the dollar. This decade will be an experience of rising costs. Inflation isn’t all that terrible if you take into consideration that stock prices will go up – because prices must be adjusted for inflation. Tomorrow’s value of stocks will be valued at today’s realistic value. Though you may have garnished 100% gain in the long run, but when you computate inflation into the price, you may come up with a disappointing return. Gold may be the best hard asset to own in the long run!

Tags: Debt, England, france, germany, gold, inflation, Moody's, rating, spain, uk

This entry was posted on Monday, March 15th, 2010 at 4:36 am and is filed under Commodities, Contributors, Debt, Economics. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.