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The economic impact of the S&P downgrade

A trader works on the floor of the New York Stock Exchange.

Tess Vigeland: What a week, huh? How y'all doing? We thought the market nuttiness would finish out the week, but no, Standard & Poor's had a different idea. Late Friday it downgraded the credit rating of the United States from AAA to AA+. We've asked our New York bureau chief Heidi Moore to help parse what this means. Hi Heidi.

Heidi Moore: Hi Tess.

Vigeland: All right, so the U.S. has had its credit rating downgraded by the S&P. I don't know, is this like us tanking our credit score as consumers? How worried should we be about this? Time to hit the panic button yet?

Moore: Sure. Well, it's not great for us. It's definitely going to be a little bit more expensive for us. If you have a mortgage, if you have a car loan, if you have a student loan -- any kind of debt -- you'll probably see the interest rate tick up a little bit.

Vigeland: And why is that?

Moore: Well what has happened with the credit score being cut is basically we're going to have to pay more in an interest rate to finance our debt as a country. And when the whole U.S. pays a higher interest rate, so does everyone in it. So if you have a mortgage, if you have a car loan, if you have a student loan, you're going to see your interest tick up. Hopefully, if everything remains rational, it won't be too much because we've seen this coming for four weeks. This isn't a big surprise. Nobody woke up this morning and realized we could be downgraded. So hopefully, it will all be in a nice, rational progression from here until we get our house in order.

Vigeland: Well, you're ascribing rational progression to a system that showed us this week that it's completely irrational. So when we look at this kind of adding to the pressures of what's happened over the last week, what is Monday going to look like? Do we have any idea what's going to happen over the next 72 hours?

Moore: We probably don't know, but what we do know is because all of this has been talked about for about four weeks now, people in the markets are completely rung out. Right? They're humans like everyone else. So they've been thinking about a downgrade for four weeks, they've had time to prepare. The next couple of days may give them some more time to think, but they can't do anything about it. They can't really trade anything until Monday. So maybe by that time, everything will be a little bit more rational. And I know that that sounds weird, but consider that we are the world's only hope right now. If you think we're irrational, look at Europe!

Vigeland: You know, you and I talked on Thursday after that crazy day on Wall Street, and I asked you: What are you doing with your money? And you said, "You know what, I'm sitting tight." Well 24 hours later, we had this downgrade happen. Anything change for you?

Moore: Nothing changes for me. But if you're a consumer and you have Treasury bonds, you have municipal bonds, you have any kind of bonds in your portfolio, you might see some changes. But what we see -- even in the biggest market changes -- is that over time they shake out. And over time, the markets get even better. So it really doesn't pay anybody to sell right now because they're just going to take losses, and there's a chance that they could rebound.

Vigeland: All right, thanks so much Heidi.

Moore: Thank you.

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Was I hallucinating or did I hear a phone interview with David Beers on today's show? Where is that represented here????

"If you have a mortgage, if you have a car loan, if you have a student loan -- any kind of debt -- you'll probably see the interest rate tick up a little bit." -- If people behave irrationally, a word repeated a number of times by Heidi Moore it's probably because of her irrational assertion above. People with fixed rate mortgages, car loans, or even student loans will see no uptick in their interest rates. That's why fixed rate mortgages are called FIXED.

When I heard the statement, "If you have a mortgage, if you have a car loan, if you have a student loan -- any kind of debt -- you'll probably see the interest rate tick up a little bit" I immediately wanted to know, how can this happen if my mortgage has a fixed rate? They can't raise the rates on fixed-rate mortgages, can they? And what if I had a car loan also at a fixed rate -- how would they be allowed to raise that? I can't believe NPR allowed the interviewee to say this without asking a question to clarify about fixed-rate loans!

IT'S TIME TO PANIC.

I'm an avid follower of marketplace. I listen to all your shows -- morning report, marketplace and especially marketplace money -- truly a bright spot in my weekend.

Anyhow your shows have helped me to develop a financial "awareness" much more than I could have developed on my own. So I feel compelled to return the favor: ITS TIME TO PANIC. And here's why:

Our economy, currently, could not be more like the RMS Titanic on the fateful eve of April 14, 1912. Like the Titanic, the conventional wisdom (by "very smart men", I might add) is that the US economy is "unsinkable" because of its many safeguards and size. And just like Titanic, we've been warned of impending danger directly in our path. And just like Titanic we're dismissing those dangers with hubris and indifference.

"Attention Titanic -- this is the SS Amerika warning you that large icebergs lay directly in your path!"
"Attention US Economy -- this is the global economy warning you that severe financial obstacles lay directly in your path!"

Glacier#1: The US Debt bubble.

Somewhere in the last 30 years we figured out how to hyper-inflate our standard of living through profligate use of debt for guns, wars and over-generous social welfare programs. And just like a crackhead who got hooked after just one hit, we too are deep in the throes of addiction -- and denial. When this iceberg hits the reality of our exaggerated net worths will drop precipitously.

Glacier#2: China

Currently we are are witnessing intellectual theft on a mind-blowing scale by our #1 creditor -- China. Do we think they're studid? Did we think they would keep buying our debt forever and not demand anything in return? China is quietly and surreptitiously stealing entire industries right from under our very noses! Whether its medical imaging, biotech or x-ray scanning devices, they are co-opting our most prized tech and rolling out lower-priced knockoffs to our most valued foreign trading partners. When this iceberg hits, we we will find that no one wants what we have to sell at any price.

Glacier#3: US "Education"

Here in the US we couldn't be bothered to educate our youth (esp. in the inner cities) in any sort of way to make them globally competitive. We're a nation of x-box playing retards who are not so good in the math and the sciences. This iceberg has already hit, as unemployment continues to hover in the high 'teens. Expect damage from this to only get worse.

Ironically, the downgrading of the US credit rating was *NOT* one of these cataclysmic events. In keeping with the Titanic analogy, the credit downgrade is akin to the ship's rudder falling off. The debt crisis debacle demonstrated beyond a shadow of a doubt that this vessel is unsteerable. So here we are, careering at full steam into an ice-field in an unsteerable ships, while all the polly-anna's tell us "Relax -- she's unsinkable."

My best advice is this: PANIC. Not loudly. And not rashly. But quietly make your way to the exits, making sure your life preserver is close at hand. And keep your lifeboat in sight at all times. Practically here is what this means:

1. Buy gold -- and lots of it. $1700/oz *is* reasonable, given where the price is headed (I expect a peak of around $2700/oz in the next 2-5 years). Expect more ham-fisted, ineptitude from the people who brought you QE1 and QE2. Expect the sequel: QE3. And QE4, etc. Currency devaluation is the only bullet left in the gun.

2. Only hold on to stocks that you really, really, really really, really believe in. And I mean really. Healthcare and energy are good bets, as are those with an unbroken track record of generous dividends. And even for those be prepared to take a 40%, 20-year haircut. And what ever you do, don't buy into any IPOs -- not facebook, not linkedin -- don't drink that dot-com Kool-Aid!

3. Short term, move into cash. There will be bargains to be had, for sure -- but after considerable market turmoil and carnage. But beware -- there will be stomach churning turmoil as many seemily rock-solid companies suddently go belly-up. Not to mention the ever-present threat of currency devaluation. So stay "flexible".

4. If you can't find stocks amidst the turmoil, buy real estate or other hard, appreciable assets.

Wall street is very adept at sending coded signals to its own as to when to get out of the market -- and here's one:

Jonathan Golub, the chief U.S. market strategist at UBS in New York said: "I’m reluctant to overreact to some shorter-term weakness, no matter how real it is, because the market has proven to be unbelievably resilient. If you would have been acting that way for the last two years, you would have gotten killed by this market."

With that, you've been warned.

Does Standard & Poor's statement include any recognition that if they had done their job properly in regard to rating mortgage securities this current downgrade may not have been necessary? They are one of the culprits in bringing on the recession, and any story about them ought to at least make mention of their past negligence.

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