The Stampede Rages over Debt and the Recessive Climate

It’s time to read Rudyard Kipling and keep our heads when everyone around us is losing theirs.

Investors ignored the United States debt qualification reduction formulated by Standard & Poor’s and, in the middle of the collapse of world stock markets, tried to find refuge in what they see as active securities — among those, United States bonds. Gold passed its historic maximum of $1,700 and the dollar rose at the global level, while the Wall Street panic index grew Monday by almost 36 percent.

There are two large groups identified as related to the causes of the current global uncertainty: one is linked to the debt and deficit of the developed countries and the other is a growth problem.

S&P’s decision, which was not supported by its colleague Moody’s, evaluated the sustainability level of the liabilities in the hands of the public over the gross domestic product, which today is in the range of 66 percent and is projected to rise to 75 percent by the end of the year.

Has there been any self-criticism by any business that allowed the mix of AAA products with junk bonds in 2008 in collateralized debt obligations?

Standard & Poor’s downgraded the United State’s debt grade from AAA to AA+ in a resolution that seems to be a political demonstration against the interaction between the two political parties. It’s also urgent that this country raises its taxes, something that the Republicans and the ultra conservative tea party reject outright. In spite of the bad news, investors ran to buy U.S. debt, something that lowered the bond rate to 10 years. For the market, U.S. bonds continue to be the most secure in the world. Uruguayan bonds felt the flight-to-quality pressure and operated on the downturn.

In Europe at this time, the Central European Bank announced that it will buy all the Italian and Spanish bonds necessary in order to avoid the specter of default that hangs over Greece. At least for right now that soothed the bondholders, but it is difficult to know if it will have a lasting effect. As a counterpart, stocks, whose value depends on the performance of the economy and businesses, plummeted from the tremor of a global recession. The indicators of economic growth are bad in the United States (1.3 percent in the first six months) and in the majority of the European zone, with the exception of Germany. The lesson is that there is a lack of confidence about recovery and even more so, investors fear a recession. The price of commodities fell, but not by dramatic levels. At the same time, the dollar rose in the majority of emerging countries, including Uruguay.

The herd makes the ground shake and everything falls to the ground. As Rudyard Kipling said in his poem “If,” “If you can keep your head when all about you / Are losing theirs … you’ll be a Man, my son!” [http://www.kipling.org.uk/poems_if.htm]