<html> <head><style type ="text/css">body { font-family: "Bloomberg Prop Unicode I", Verdana, sans-serif; font-size:125%; letter-spacing: -0.3pt; color: #FF9F0F; background-color: #000000; text-align: left; } p {line-height: 1.25em; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" );} h1, h2, h3 { text-align: left; font-weight: normal; color: #FFFFFF; } h1 { font-size: 130%; } h2 { font-size: 115%; } h3 { font-size: 100%; } #bb-style { font-size: 90%; max-width:900px; width:expression(document.body.clientWidth > 900? "900px": "auto" ); } b, strong { font-weight: bold; } i, em { color: #FEC54A; } pre { font-family: "Andale Mono", "Monaco", "Lucida Console"; letter-spacing: -0.3pt; line-height: 1.25em; } table { border: 0; font-size: 90%; width: 100%; margin-left: auto; margin-right: auto; } td, tr { text-align: left; } td.numeric { text-align: right; } a:link { color:#53B2F5; text-decoration: none; } a:visited {color:#53B2F5} a:active {color:#53B2F5} a:hover {color:#53B2F5} </style> </head> <body> <p>By Francis Wilkinson</p>&#xD; &#xD; <p>While many Americans brace for a downgrade of U.S. debt, Congress's Tea Party contingent is not alone in questioning whether things might not be all that bad. In the Financial Times this week, <a href="http://www.ft.com/intl/cms/s/3/16deafb6-b7a6-11e0-8523-00144feabdc0.html#axzz1TQPfWcIH">LEX</a> raised the possibility of "an ironic twist" in the event of a ratings downgrade, with investors fleeing to safety by investing in&#xA0; . . .&#xA0; more U.S debt:</p>&#xD; &#xD; <blockquote> <p>"A US downgrade might cause Treasuries to rally as riskier assets were dropped. A bet against the richest and most powerful country on the planet is never a safe one."</p> </blockquote>&#xD; &#xD; <p>Mark Gongloff in the Wall Street Journal's<a href="http://blogs.wsj.com/marketbeat/2011/07/25/the-us-can-lose-its-aaa-rating-without-the-world-ending/"> Market Beat</a> blog had similar thoughts:</p>&#xD; &#xD; <blockquote> <p>"The reality is that US Treasuries, federally guaranteed mortgage-backed securities and agency debt account for 53 percent of all triple-A assets in the global bond universe, according to Nomura. There are few other places to go."</p> </blockquote>&#xD; &#xD; <p>Gongloff cites a BMO Capital Markets analysis stating that:</p>&#xD; &#xD; <blockquote><p>"Ten years have passed since Japan lost its AAA rating and while its 10-year yield still remains close to 1% its currency has not been negatively impacted, but rather it is near the strongest levels of the decade.</p>&#xD; &#xD; <p>Therefore while a credit downgrade would create a long period of uncertainty before all the implications became clear, there is precedent to suggest that rates may not spike higher as some market participants are expecting and the world&#x2019;s reserve currency may remain unaffected."</p></blockquote>&#xD; &#xD; <p>University of California-Berkeley economist,<a href="http://delong.typepad.com/sdj/2011/07/debt-ceiling-watch-ezra-klein-makes-a-mistake-nobooy-knows-department.html"> blogger</a> (and Bloomberg View <a href="http://www.bloomberg.com/news/2011-07-05/the-sorrow-and-the-pity-of-another-liquidity-trap-brad-delong.html">op-ed</a> contributor) Brad DeLong says those shrugging at a downgrade may be right, but when you're traveling to distant galaxies with a terrestrial map, there's no telling where you'll end up:</p>&#xD; &#xD; <blockquote><p>"The fact is that nobody knows what will happen to the Ten-Year Treasury yield if S&amp;P downgrades the U.S. credit rating.</p>&#xD; &#xD; <p>1. The interest rate on the Ten-Year Treasury bond could spike.</p>&#xD; &#xD; <p>2. The interest rate on the bond could even fall -- more chaos means a weaker global economy, and in a weaker global economy in the absence of inflation you should be holding more U.S. Treasury bonds, not fewer.</p>&#xD; &#xD; <p>3. The interest rate on the bond could stay where it is, as the two types of fear offset each other.</p>&#xD; &#xD; <p>4. The interest rate on the bond could stay where it is as markets laugh at S&amp;P's chutzpah, at the institution that claimed that MBSs were safe now claims that U.S. Treasuries are risky.</p>&#xD; &#xD; <p>5. Demand for U.S. Treasuries could fall, but the yield could stay the same as some other large actor -- the People's Bank of China or the Federal Reserve -- steps in and buys long-term Treasury bonds in order to stabilize the market.</p>&#xD; &#xD; <p>I have talked over the past two weeks to at least one investor with substantial positions who himself is confident that each of these is the likely possibility.</p>&#xD; &#xD; <p>The future is wide open.</p>&#xD; &#xD; <p>Uncertainty is massive."</p></blockquote>&#xD; &#xD; <p>While granting several universes full of Rumsfeldian known unknowns, Bloomberg Businessweek <a href="http://www.businessweek.com/magazine/tim-durham-the-madoff-of-the-midwest-07282011.html?campaign_id=rss_search">contributor</a> Annie Lowrey of <a href="//www.slate.com">Slate</a> nonetheless<a href="http://www.slate.com/id/2300207/"> insists</a> that some aspects of this manufactured crisis are clearly understood.</p>&#xD; &#xD; <blockquote> <p>"Nobody really knows what would happen.&#xA0; . . .&#xA0; But we know its risk: a recession," she writes. "And we know how we got here: idiots."</p> </blockquote>&#xD; &#xD; <p>Of the varied analyses on offer this week, that one seems destined to stand the test of time.</p> </body> </html>