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Economics forecasters on cable television seem to be of two minds ever since Standard and Poor’s downgraded the US debt rating from AAA to AA+. Some sound more like doomsday prophets, claiming the American economy is due to crash into a smoldering sea of ash and brimstone. Others, such as the stocks and investing specialists on Fox and MSNBC, come across as hype men for Wall Street, claiming that S&P are simply playing politics and that the US is still the champ and can take on all challengers.
Nobody is answering the question most Americans are asking:
How does this downgrade impact me now and in the near future?

REAL EFFECTS OF THE US DEBT DOWNGRADE

The hype men at Fox and MSNBC and the doomsdayers both look pretty wrong, as it turns out. The market has continued on as before, gaining a bit some days and losing others. Actually, this is exactly what several prominent academic and foreign economists expected.

The downgrade is largely misunderstood amongst the public, because people on television are trying to make sure you are not informed! Debt downgrades are not actually catalysts for economic change – they are symptoms. It’s just like a report card. You don’t do poorly in class because you got a bad grade. You get a bad grade because you were doing poorly in class. The United States was rated too highly, so S&P gave them a new report card.

In the short term, the real effect of the downgrade is small. Over the next few years, everything should continue as normal. However, if the US is not upgraded or is downgraded again, it will be a sign that the US economy is really ailing.

One sign of this is the continuing increase in the value of gold and silver, which are setting all-time highs right now. Because the trustworthiness of the US dollar has been falling, more banks are trading in gold and silver. The bank of South Korea has actually changed all its holdings from US dollars to gold and is storing them in the UK.

MORE PRESSING FEARS

You should be more worried about the trading value of US currency than our country’s debt rating. The US economy has largely been artificially stable because the dollar has a privileged status as trading currency. If that goes, then the US economy will come down to earth. But it won’t happen overnight.

We will probably see steady market decline, say the academic economists at leading institutions in the US. Derivatives are built with triggers tied to debt. If financial institutions are downgraded as well, banks will demand more collateral and the market will begin to decline with falling derivatives. (more…)

We need to go back to basics to understand what the decision really means on the deductible. The idea of insurance is very simple. If you don’t have a policy, you carry all the cost of loss. That means, if anything goes wrong, you pay out of your own pocket. Think of this as self-insurance. But, if you belong to a group that shares the cost of loss, this can save you money. Let’s say you insure your vehicle along with several thousand other people. Not everyone will have an accident so, when it comes to dividing up the cost of replacement or repair among all the members of the group, you all pay less than if you were uninsured and had an accident. Everyone pays a little, but the unlucky ones claim back a lot. This is a great system. For those of you who like politics, it’s a perfect example of socialism in action. It redistributes money collected by the group to those who need it most.

For those of a libertarian persuasion, belonging to a communist conspiracy like this is outrageous. But then consider the reality. In all but three states, it’s mandatory for all drivers to carry insurance. The politicians in these states have insulted the people by forcing a socialist plan on to them. Worse, these politicians do it in the name of financial responsibility. The argument goes as follows. In our great country, we have a rule that if you are at fault, the courts can order you to pay compensation to everyone you have injured. As a government, we discussed whether to pass a law forcing you to save money just in case you get sued. That would mean, every year, you have to produce your bank account to show a minimum amount in place. The government decided this infringed your liberty. Everyone should be free to spend as much of their money as possible. But you would be financially irresponsible if you do not have some money available just in case you’re sued. So making you pay a few dollars a year to carry insurance is the least invasive way of protecting your privacy. (more…)