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Markets Put The ‘Down’ In ‘Downgrade’

The Dow Jones Industrial Average plunged through the 11,000 mark Monday, closing more than 600 points down on the first trading day after U.S. debt was downgraded by a major ratings service.

Traders work on the floor of the New York Stock Exchange before the opening bell on August 5, 2011 in New York City.
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Above: Traders work on the floor of the New York Stock Exchange before the opening bell on August 5, 2011 in New York City.

The Dow was down more than 5.5 percent as the final numbers were being calculated Monday. Earlier, President Obama had sought to calm the market jitters, saying the downgrade was not about the nation's fiscal soundness, but about its political impasse.

"No matter what a ratings agency says, we have always been and always will be a triple-A country," he said in a White House address Monday afternoon. The United States held a AAA credit rating by Standard & Poor's from 1917 until Friday, when the agency announced a downgrade to AA+.

Obama said the downgrade was because the ratings agency "doubted our political system's ability to act."

But Obama's words did not calm the market. It swung over a range of hundreds of points during the afternoon before spiraling solidly downward in the last half-hour of trading.

Markets Fall In Europe

Earlier, European markets lost early momentum and moved sharply lower amid mounting concerns over eurozone debt woes and concerns about the U.S. market.

The European Central Bank's pledge to buy bonds from Italy and Spain pushed yields on down by more than a half-point on both bonds. Meanwhile, markets in Britain, France and Germany all lost more than 2 percent.

The finance ministers and central bankers of the Group of 20 industrial and developing world also issued a joint statement Monday saying they were committed to taking all necessary measures to support financial stability and growth.

"Europe at the moment is a much bigger problem than the United States," Tyler Cowen, a professor of economics at George Mason University, said.

"The debt issue [in the U.S.] ... becomes really serious 10 years from now, when health care costs are spiraling," Cowen told NPR. "In the short run, we have a manageable problem. In the longer run, we do not."

Sentiment in Europe was not helped by the expected sell-off at the U.S. open. Dow futures were down 2.1 percent at 11,167 while the broader S&P 500 futures fell 2.4 percent to 1,168.

Looking For A Way Out

Policymakers around the world are trying to come up with a strategy to shore up market worries over the global economy and the levels of debt in the U.S. and Europe.

Nouriel Roubini, an economist at New York University who predicted the housing market crash and recession before the vast majority of other economists, said that the credit rating agency should have waited "to see whether Democrats and Republicans reach an agreement on deficit reduction."

The downgrade, he told NPR, is going to cause a "stock market correction [and] reduce business, consumer and corporate confidence.

"Its going to increase the risk of a double dip recession if not ensure it," he warned.

Other economists think the downgrade will have little affect on interest rates.

"Global investors have little alternative but to continue to do business in dollars and store wealth in Treasuries. The bonds denominated in other reserve currencies-the yen and euro-are simply unavailable in suitable quantities," said Peter Morici, a professor at Smith School of Business at the University of Maryland.

So far, the downgrade doesn't seem to be having too much of an impact on U.S. government bonds, known as Treasuries, despite worries that it would prompt investors to demand more. Instead, yields on 10-year Treasuries actually fell.

"Early market reactions suggest that the treasury market will remain well supported," Jane Foley, an analyst at Rabobank International, told The Associated Press. "Even though there may be no sharp sell-off in treasuries this week, S&P's decision should at least provide a signal to the U.S. government that it may be foolhardy to continue to take its creditors for granted indefinitely."

Comments

Avatar for user 'tapkae'

tapkae | August 8, 2011 at 2:42 p.m. ― 3 years, 4 months ago

All this worry about double dips, recession, and the hanging on to hope for a recovery is half-amusing to me. I wish voices like Richard Heinberg's would be brought to the table as part of these discussions, and I can understand why they aren't. I think though he has the most sober picture of things, rooted in something more than wishful thinking. I know no one wants to run out and buy books like Peak Everything or The End of Growth, but for those of you frustrated with the picture today and wanting something to explain the stagnation in a larger context, I have to suggest these and his other books that show the intersection of the debt issues, the oil prices, the housing bubble, and limits to growth. Maybe it's time to consider that in this mix? Nothing else seems to give satisfactory answers.

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Avatar for user 'hopeheadsd'

hopeheadsd | August 8, 2011 at 3:26 p.m. ― 3 years, 4 months ago

tapkae- I agree with you. However there is the "daily' news which focuses on day to day occurrences in our lives, the books you mentioned are all about macro policy and macro economics.
Over the long run, everything works in cycles. Not knowing when the peaks or lows hit is what makes news albeit with some sensationalism via the media.

We are going to be in a lull for a while. It would be appear that we are only prolonging the inevitable and "buying time" at this point to see if there will be some other economic spike to make up for the losses. We have apparently run out of ideas these days it would seem.

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Avatar for user 'tapkae'

tapkae | August 8, 2011 at 6:02 p.m. ― 3 years, 4 months ago

What Heinberg is talking about is that this is NOT cyclical, namely that we are in a new economic paradigm altogether. And while I do agree that the daily news doesn't focus on the longer term stuff, even when the feature programs (PBS and larger public outlets), there isn't too often anything that "goes there" with the stuff Heinberg and others talk about—permanent declines due to having hit limits to growth. When there is a discussion of "where is it all going?" there tends to be a rather rosy picture of alternatives, substitution of one resource for another, and other things that kind of keep people at some distance from a more dire picture, and one that frankly, says things are gonna have to change at some deep level. I wish the public sources would get over some kind of hump and confront the limits to growth and use their clout to challenge the rosy and vague messages that things will get better, or as it is said, "back to normal." Normal is unsustainable and dangerous.

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