Why we should view the S&P downgrade as the final warning of a US default

Yesterday, Standard& Poor’s, one of the three best known credit rating agencies, downgraded the US debt to AA+ from AAA. Yes, this is a historical moment as the US debt credit has been an absolute AAA since the times of the founding fathers.
There is no question that the downgrade will cause a panic on Monday. Yes, people are not going to dump the US debt because it is still one of the most attractive assets in the world. However, bear in mind that the downgrade will increase the likelihood of a US default on its obligations. Here is why.
The AA+ credit rating means that US will likely to pay more interest on every dollar it borrows in the future. The US hardly avoided a default on Tuesday and a higher cost of borrowing is going to make the situation even uglier. We need to remember that the debt deal reached on Monday is a deal that pays the current obligations by borrowing more. In other words, US has been avoiding a default simply by relying on its low borrowing cost. The US has lost this advantage.
Secondly, with S&P lowered the credit of the US, we cannot be sure that the other two major rating agencies will not do the same in the future. Rating agencies are largely criticized by the public for their failure to perceive the risk of CDOs during the 2007 crisis. It is a positive thing for us to see that S&P has learned a lesson from these criticisms. Fitch and Moody’s will be risking their reputation if they choose to keep the credit rating of the US as it is while the country is having trouble to pay back its debt.
We will see the reaction of the market on Monday, but investors will most likely pull money out of the US stocks and bonds in seeking for a better heaven, such as gold and platinum.

US is doomed to default, may be not now, but someday in the future

The impasse of the US debt deal has driven the US stock lower today, with the NASDAQ down more than 2%. As the August deadline approaches, investors are worried that the US may not be able to borrow money legally and pay the bill on time. At this stage, I think our main concern should not only focus on whether US will be able to pay the bill this time but whether it can pay its bills in the future. Even if the politicians can reach an agreement before next Tuesday, I believe the US credit is affected.
A major problem of the US political system is that administrations, theoretically, only need to take care of this country for eight years and leave all the crap to the descendent .The US debt ceiling has been increasing constantly since the 70s and every government simply left the debt problem to the next one. Even the US is still the world’s strongest power with the highest GDP number, eventually; it will be dried up by all the interests incurred by these debts. The question will eventually turns out to be: who is the lucky president in office when this happens?
Investors like China and Japan will eventually lose confidence in the US’s ability to pay back the US treasury and choose to diversify its asset allocation. When that happens, US will be in deep trouble. The cost of borrowing will be higher. This means that US will pay more interest on every dollar it borrows. The debt burden increases with the interest and thus a vicious spiral continues.
The solution is simple but politicians are just too selfish to make it happen. The US needs a spending cut, an austerity package like the ones in Europe. However, the reality is that government is in office for a maximum of eight years, nobody would like to risk losing popularity by cutting the social benefits and increasing personal income taxes at the same time. So if that is the case, a US default will eventually happen and people will suffer, I mean everyone.
We all know that American’s living standards are largely based on borrowed money, so someday we will pay it back, in an almost cruel way.