August 8, 2011
The stock market plunged 635 points today. Here's one reason why the collapse might get much worse...
I realize that my headline is alarming. If it's even possible to be more alarmed, after today's events!
Let me first provide some context.
Saturday's article of mine asserted the following belief:
"I doubt S&P would've downgraded America without the approval of the government (regardless of the fact the White House publicly claims to dispute the downgrade)."
And why would the US want to be downgraded?
I asserted that the two most likely reasons are:
"1) Default. Purposeful default.
A downgrade suggests a deteriorating debt situation, and paves the way for further downgrades that the US government could use to justify a future decision to stop repaying its debt.
After all, the US would want it to appear as if they have no choice but to default. Otherwise, America's creditors, such as China, might want to go to war!
A benefit of default is simple: America wouldn't have to pay back the money borrowed!
2) Near default.
Near default could justify the US government making dramatic reductions in entitlement spending, as they claim that they need to use that money to instead pay down the debt. "
Today's Market Crash
Flash forward to today.
Only one business day after the downgrade, the stock market's Dow Jones Industrial Average collapsed by 635 points, the sixth largest point drop in history.
And that's when it hit me:
If indeed the US government is planning to eventually default on its debt and be downgraded further, the government would more easily be able to justify a default if the stock market had severely shrunken by then.
After all, it's easier for the government to say that it can't pay its debts if the stock market has collapsed, because the government could simply say:
"We would have to raise taxes drastically in order to pay off our debt, and our people's finances are in no shape to justify increased taxes."
Conclusion
So, another ominous sign:
The market fall may continue for quite some time...
The stock market plunged 635 points today. Here's one reason why the collapse might get much worse...
I realize that my headline is alarming. If it's even possible to be more alarmed, after today's events!
Let me first provide some context.
Saturday's article of mine asserted the following belief:
"I doubt S&P would've downgraded America without the approval of the government (regardless of the fact the White House publicly claims to dispute the downgrade)."
And why would the US want to be downgraded?
I asserted that the two most likely reasons are:
"1) Default. Purposeful default.
A downgrade suggests a deteriorating debt situation, and paves the way for further downgrades that the US government could use to justify a future decision to stop repaying its debt.
After all, the US would want it to appear as if they have no choice but to default. Otherwise, America's creditors, such as China, might want to go to war!
A benefit of default is simple: America wouldn't have to pay back the money borrowed!
2) Near default.
Near default could justify the US government making dramatic reductions in entitlement spending, as they claim that they need to use that money to instead pay down the debt. "
Today's Market Crash
Flash forward to today.
Only one business day after the downgrade, the stock market's Dow Jones Industrial Average collapsed by 635 points, the sixth largest point drop in history.
And that's when it hit me:
If indeed the US government is planning to eventually default on its debt and be downgraded further, the government would more easily be able to justify a default if the stock market had severely shrunken by then.
After all, it's easier for the government to say that it can't pay its debts if the stock market has collapsed, because the government could simply say:
"We would have to raise taxes drastically in order to pay off our debt, and our people's finances are in no shape to justify increased taxes."
Conclusion
So, another ominous sign:
The market fall may continue for quite some time...
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