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S&P downgrades U.S. government bonds, stock market tanks

By Masao Suzuki |
August 9, 2011
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San José, CA - On August 5, Standard and Poors, commonly known as S&P, downgraded U.S. government bonds from the highest rating AAA to the second-highest AA+. At the same time the S&P called for even more austerity, saying that $4 trillion in cuts in U.S. government spending were needed, not the $2 trillion agreed upon earlier in the week. S&P criticized the U.S. government for not making cuts in Social Security and Medicare. In addition, S&P said that the federal government spending cuts needed to come sooner, increasing the chances of a new downturn in the economy, or the feared ‘double-dip’ recession.

Recently, a number of weak economic reports, including ones showing that production of goods and services and job creation had slowed this year have raised the chances that the economy would go into another downturn, or what is called a double-dip recession. Mainstream corporate economists, who are usually optimistic about the U.S. economy, have said that the chances of a double-dip are as high as 40%.

If the economy did go into another downturn, it could be much worse than the last downturn that bottomed out in 2009. While there is no financial bubble in the housing market and trillions of dollars of bad mortgages, there is a brewing financial crisis in Europe as country after country is losing its ability to borrow from wealthy investors. First Greece, then Ireland and Portugal, and now Spain and Italy, have had to turn to other European governments and the European Central Bank (ECB) to get help in borrowing more.

The U.S. unemployment rate is still over 9%, about twice the unemployment rate when the recession began in December 2007. Short-term interest rates have been cut to almost zero, leaving the U.S. Federal Reserve unable to lower interest rates to boost the economy through monetary policy. There is also almost no chance of more government spending, or stimulation through fiscal policy, with the Tea Party/Republican control of the House of Representatives and the Democratic leadership’s commitment to more spending cuts. Without government aid, the next downturn is more likely to follow the path of Great Depression of the 1930s, with a vicious cycle of job cuts leading to less spending leading to even more job cuts.

Another downturn in the economy would also be bad for corporate profits, which is why there was a drop the stock market on Aug. 8. Stocks around the world fell Aug. 8, with the broadest measure of the U.S. stock market, the S&P 500, falling almost 7%. Early in the morning of Aug. 9, in Asia, stock markets continued to fall, with the worst hit the South Korean stock exchange, down 8%.

The stock market fall is likely to speed up the trend of corporate layoffs. A number of large corporations, including banks such as HSBC, high-tech firms such as Cisco and Research In Motion (makers of the Blackberry), bankrupt retailers like Borders, and drug company Merck have already announced thousands of layoffs. More corporate layoffs will come as businesses try to maintain or even increase their profits in a slowing economy.

While the corporate-dominated mainstream media is full of headlines about the fall in the stock market, there are few headlines about the millions of Americans who have been out of work. Unless and until the federal government turns away from its current path of austerity and increasing the insecurity of working Americans, and starts to spend more to create jobs, the economy can continue to weaken.