Is the US Debt Crisis an Economic or a Financial Crisis ?

ForexNewsNow | Published on August 12, 2011 at 10:52 am

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While many attribute Wall Street’s massive decline on Monday to Standard & Poor’s decision to downgrade the US Debt Rating, experts and American officials disagree. They point to indicators such as Dow Jones, S&P 500 and NASDAQ that had already begun to fall before the announcement of the decision. Both Republicans and Democrats say that the decision was not the cause of the drop on Wall Street, but instead just a symptom of the larger economic crisis at hand.

A closer look reveals that Investors lost confidence at the moment of the publication of very concerning growth data that showed a +0.8% increase in the first semester. It should be noted that a  +0.8% increase is viewed as negative growth since it takes one point to offset the demographic increase. Thus, the US Debt Crisis appears to be the result of long-term trends in the US economic and political system rather than an immediate financial panic.

Yet most troubling for financial analysts is that current market sentiment shows a distinct lack of confidence in the markets. There is a widespread perception that President Obama’s measures to overcome the 2007-2009 Financial Crisis have produced inadequate results, while the recent Deficit-Cutting plan approved in Congress also fell short of improving the situation. For many analysts, the immediate future of the American economy seems bleak and full of uncertainties as inadequate and misguided budget plans appear to threaten the weak recovery and force the market into a double dip recession.

It is the combination of these factors which led Standard & Poor’s to downgrade the US’s Credit Ranking for the first time in 70 years – not the fear of a sudden default. While this was largely the reason touted in the media as the breaking point for the US credit rating, closer analysis shows that the downgrade had been coming since 2007, when the US first experienced its current troubles.

While the US economy still has a long way until full recovery, the US’s credit downgrade should not be misconstrued as a signal that the US economy is headed for financial collapse, but instead it should be viewed in the larger perspective of the overall economic downturn the US is currently experiencing as it attempts to recover.

 

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