On Friday, for the first time in history, ratings agency S&P downgraded America's credit rating from AAA to AA.
I believe it to be an ominous sign. Ominous for those who lent to America's government, and perhaps ominous for lower and middle class Americans.
I would like to go on record with a prediction:
America will likely either 1) default on its debt over the next several years or 2) will use a deteriorating credit situation as an excuse to dramatically reduce entitlements and benefits paid to Americans (such as Social Security).
I doubt S&P would've downgraded America without the approval of the government (regardless of the fact the White House publically claims to dispute the downgrade).
I doubt S&P is fully, or even mostly, independent of outside influence. After all, isn't S&P the same organization that foolishly granted AAA ratings to extremely risky mortgage related securities? Was S&P motivated to be honest then? Highly doubtful.
Corruption is rampant in the finance industry. I work in the stock market. I know. As for government, do I even need to convince you that corruption is rampant in that industry? (Given lies, kickbacks, bribery, intimidation and shady connections, I'd say "industry" is an appropriate term for government!)
Now, I'm not saying that it's 100% certain that S&P is corrupt; that it's 100% certain that the government has influenced S&P. How often can you claim anything with 100% certainty?
I'm just saying that I believe it to be likely. As in, the odds are greater than 50%.
So, if S&P downgraded America's credit rating with US government blessing, what's the end goal?
Again, I see two scenarios as being the most likely:
1) Default. Purposeful default.
A downgrade suggests a deteriorating debt situation, and paves the way for further downgrades that the US government could use to justify a future decision to stop repaying its debt.
After all, the US would want it to appear as if they have no choice but to default. Otherwise, America's creditors, such as China, might want to go to war!
A benefit of default is simple: America wouldn't have to pay back the money borrowed!
2) Near default.
Near default could justify the US government making dramatic reductions in entitlement spending, as they claim that they need to use that money to instead pay down the debt.
A previous article of mine examined the two scenarios. Now that S&P has downgraded the US, I feel confident that the US government has likely given the green light.
After all, if the US isn't hoping to achieve one of the two scenarios, why allow the S&P downgrade?
Well, here's one possibility, although I feel it's not as likely as the two I provided. Still, it's fairly likely:
The US government may want to test out how the market responds to a downgrade, to help determine whether the costs of a downgrade (increased interest rates, difficulty in finding people who will lend to them) would be worth the benefits of a future default (not having to pay back the debt!)
It doesn't matter whether you are a foreigner who owes the US government money, an American who owns US Treasuries, or a regular American:
The S&P downgrade is certainly an ominous sign.