More of an embarrassment and a bad look but...

The Fitch downgrade of the US government's credit rating is more of an embarrassment and a bad look than any reflection on the ability of the US to pay back its creditors in full both coupons and principal. That is because when you have all of your debt denominated in your own currency and you have a printing press, creditors will always get there money back. The question though will always be, what does the US government have to pay for that borrowing in terms of interest expense and what is the value of the US dollar one receives back. 

The first two reasons cited for the downgrade make perfect sense, "The rating downgrade of the US reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden." The last factor was, "The repeated debt limit political standoffs and last minute resolutions have eroded confidence in fiscal management." The issue I have with that third reason is politics is politics and things always go down to the wire. Anyway, Treasury yields and the US dollar aren't blinking but I do expect the quiet response today not to be the ongoing case, particularly with the dollar. 

US debts and deficits have never mattered in terms of us losing the confidence of creditors but I continue to wonder if this time things begin to matter. Foreign central banks at least for years have sharply reduced its purchases of US Treasuries so they at least have lost some confidence and more so after the US and EU froze Russian assets. We of course also have the Fed essentially selling Treasuries, banks stuck in long duration Treasuries and MBS and a massive amount of Treasury supply coming, with the Q3 need about $260b more than what was anticipated in May to $1t just as we need as many buyers we can get. Thankfully the private sector and state and local governments have sharply stepped up its purchases as the government crowds out private sector financing due to the attractive risk free rates. Faith in the finances in the US government will also be reflected in the value of the dollar and we'll see how that plays out. I expect gold to be a beneficiary of the continued deterioration of US finances. 

Here are some earnings related comments and other things: