Archive for Monday, August 8, 2011

Kansas University business professor offers thoughts on US credit rating downgrade

August 8, 2011


Christopher Anderson, a Kansas University business professor, offered a few thoughts on Monday on the credit downgrade and market situation.

• A primary factor in the decision to downgrade the country’s credit rating is the ratio of the country’s debt to its gross domestic product, Anderson said. He said that people can forget about the denominator in the equation, the GDP. If the nation slips and enters another recession, it will have a direct effect on the rating, even if the country takes debt reduction measures.

“That will be that much harder to catch up,” he said.

• Occasionally in the past, a downgrade can be neutral or even good news for a government, he said, as it will free up a government to take actions it had been avoiding to maintain its good credit rating.

Japan, for example, weathered a similar downgrade it received in 2002, he said. The U.S., however, has a number of factors that make it unique, he said, making comparisons to other countries difficult.

• The markets are falling, but Anderson said it likely wasn’t the downgrade by itself that had investors concerned as much as political gridlock in the United States, other debt issues in Europe and a heightened concern about the growth potential of the economy.

“For the short term, just hold on tight,” he said. The slumping market will allow some investors an opportunity to go bargain shopping on stocks, but people are still flocking to treasury bonds, which are still seen as the safest bet, he said.

• As more people invest in treasury bonds, interest rates are falling, too, he said. For people who have good credit, this shift offers another opportunity to refinance mortgages at historically low rates, Anderson said.

• Uncertainty is definitely ruling the day, he said. The VIX, an index that is a measure of how volatile the market is, has doubled since last Wednesday.

“There’s a hell of a lot of uncertainty right now, because people don’t know what this means,” he said.


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