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Saturday, August 6, 2011

Credit Freeze Looms As S&P Downgrades America

Late Friday,  the credit ratings division of Standard and Poor's (S&P) downgraded United States government debt from AAA to AA+ on account of the recent budget deal.  One stock analyst calls this a "game-changer."

This promises to pop that bubble in United States Treasuries, with recent days seeing short-term Treasuries yielding virtually zero.  Moreover, one bank in New York City, the Bank of New York, is now charging high net-worth individuals about 0.13% merely to park their cash at that institution.  That is a development which suggests some investors are willing to accept a nominal loss -- never mind the real loss after real inflation is factored in -- in exchange for the relative security of knowing they will get back about 99.87% of their deposit.

Other recommended coverage of this late-breaking news is available at http://www.wsj.com.

I sense and predict a new credit crunch, similar to what happened in 2008.  What is different this time is the breadth and depth of the degree to which people are hoarding cash and other liquid assets. 

The combination of the downgrade, increased capital requirements and growing realization of the gravity of the national debt will, in my estimation, prompt banks to curtail lending.  This will adversely impact the real estate market and, quite frankly, any business which depends on loans for capital investment, or even for revolving loans to meet ongoing, ordinary expenses.  Payroll would be an excellent example.

The result is likely to be a second recession.

Eric Dixon is a New York lawyer who handles business due diligence, personal due diligence and investigations, threat and risk assessments, strategic analysis and crisis management -- including litigation stress management -- for clients.  Mr. Dixon is a 1994 graduate of Yale Law School and has represented about two dozen political candidates, committees and party organizations. 



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