Understanding US credit rating downgrading logically.

Greetings to readers,

Let me discuss on recent issues of USA.

The USA downgrading is major global shock to investors. I have gone through various articles and speeches of experts in industry. I want to briefly discuss the issues here.

We all like money. We are pleased when money has inward flow. So in order to welcome new funds, most of the fund managers speak / write positive out of USA downgrading event. Very few accept that it is hard to predict what can happen in short and long run. The financial downgrading of such a large country is very rare event. For almost all, it is the first time experience. This has not happened to USA ever in history even during Great Depression (1929-1933) or during Dot-Com bubble (2001) or during recent recession (2008-2009).

I am jumping in to express views this crowd, but differently.

As I said, I cannot predict much on financials and economics; I prefer to submit my views with applying logic. So my following views are based only on logic and no weightage is given to other factors. (I believe that in long run logic exists).

• The downgrading of USA is shocking for USA administration too. It is possible that some soft/hard actions being taken by them to ease the situation. Even a minor outcome will be cheered by all.

• The money is with government (which is in debt) and the money is with financial institutions (received as investment from investors). I believe that financial institutions have their own goal to give higher returns to their investors. So on short run, they are expected to remain in cash to meet possible redemption pressure from investors (this has happened during Dubai and Greece crisis). But in long run, they will eye on opportunities available in emerging countries. I believe that there will be first major detachment of financial institutions from USA market. (Weightage to US is likely to reduce).

• The US market is still trading at high PE level, which I believe will rationalize. In such condition, US market will squeeze and emerging market will grow.

• The downgrading will have pressure on government mechanism. Strict policy decisions are expected. The likely hit will be US citizen, the economies mostly depending on export to US and industry depend on US consumption. I believe that too strict actions will harm other economies.

• The US government will become strict on financial discipline. The possible areas are US import, outward investment and unnecessary consumptions / spending.

• The non US rich economies will eye and search for more safe growth opportunities. Emerging economies seems to be best market destination.

• The dominance of US dollar as international currency will be at shaken position. Euro itself is in poor condition. Chinese currency Yuan is not acceptable to all due to non transparent policies of china. Then which currency will trade primarily? Is Gold prices still boom? All very hard to predict.

In conclusion, if few lines to be said, I would say,

“Nothing will be zeroed down. The best act at panic situation is to cool down. Nobody knows what will happen. Everybody predicts for their own benefit and within their knowledge circle. So it is better to believe in God. The world is not going to end.

My best wishes to all of you and apologies for the dark side of future which I don’t know but dare to write some lines.