Don't Quit Your Day Job…

Carnivals and featured links for the week!

We recently covered a lot of the fallout from Standard and Poor’s recent downgrade of the debt of the United States. The United States has 50 states which also issue their own debt, and get their own credit rating from the credit ratings firms. Luckily (this time) the legwork has been done, and I’m able to just link you to the primary source, the Tax Foundation! So view on to see the credit ratings of the states.

On August 15, 1971 something very interesting happened in the world of currency – the United States, under President Richard Nixon, removed the dollar from the gold peg.  Foreign traders were able to redeem their dollars for gold at a rate of $35 per ounce.  Nixon dropped the gold peg in the face of rising inflation and in response to other nations also leaving the gold standard set up in 1944 at the Bretton Woods meeting in New Hampshire.  The event, known as the Nixon Shock, instantly devalued the debt and left the dollar as a fiat currency – with nothing backing it up.  However, the dollar also found itself in a unique position as the reserve currency which other nations used to back up their own currency.

Here at DQYDJ, we retrieved Standard & Poor’s AAA ‘Domestic Ratings’ for sovereign debt on the morning of 8/11/2011.  Here’s  the list of ‘AAA’ rated sovereign debt issuers you have already seen at our site: Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Hong Kong, Isle of Man, Liechtenstein, Luxembourg, Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, and the United Kingdom.  We told you the other day that the only thing that really matters is the yield – the price at which a sovereign can issue debt.  Let’s dig into that further!

DQYDJ: surprising our readers with yet another week where we submit articles to a carnival!  Maybe we’ll keep it going this time.

It’s been two full market days since S&P cut the debt rating of the United States one notch from AAA to AA+… and for one day at least, it was looking like S&P had the stock market by the nose.  Two days later we can finally take a look back at what happened since we’ve had two trading days, a rest in between, a Federal Reserve statement, and a speech from the President.  To wit: the S&P 500 Index closed at 1199.38 on Friday, 1119.46 on Monday and 1172.53 on Tuesday.

Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Hong Kong, Isle of Man, Liechtenstein, Luxembourg, Netherlands, New Zealand, Norway, Singapore, Sweden, Switzerland, and the United Kingdom.  What do all of these sovereign states have in common?  As of yesterday, Standard and Poor’s rates their debt as a lower default risk than debt from the United States.

Anytime there is a ‘Grand Bargain’ in American politics pundits like to rush to one particular question: Who won and who lost?  Although many editorials have approached the question from the political side, little attention has been paid to the macro vision.  After the market rout yesterday, maybe we have our answer?  The loser of the debt limit showdown was us.

Great attention in major media sources has been called to the recent dip in oil prices (CL1Q) which peaked at over $114 per 159 liters of light crude. It is hovering around $94 now, which is a decrease of over 16% from the peak. Traditional thinking claims that gas prices typically peak in the summer months due to more gas being used during holiday travel times such as the 4th of July and Memorial Day (and Earth Day: irony?). One of the recent developments is a claim by OPEC companies that the International Energy Association (IEA) released emergency oil stocks to alter the oil prices. In response, some observers believe that Saudi Arabia will not follow through on their promise to increase oil production by as much as originally claimed (some reading here and here). The confusion as to how each individual country will respond to this creates very different incentives for each of the countries in OPEC.

A recent article reviewed the new debt agreement as follows: “It’s like a 400-pound man boasting that he plans to drop 20 pounds over a decade, while his doctors warn about the risks of losing weight so fast.” I found that analogy grossly misinformed. It’s much more like a 400-pound man who is gaining 50 [...]