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GDE:ZINE

Addicted To Debt China calls the U.S. out on it’s extreme debt after S&P announcement.

Downgraded

Standard and Poor’s downgrades the credit rating of the United States from AAA to AA+, but is it fair?

Special Edition


GDEZINE August Special Edition

U.S. Loses it’s Top Credit Rating, Says S&P By Teo Tarafas

The harrowing ride is over, America. At least until Monday, when the markets open again, bringing the possibility of another terrifying week on Wall Street. The markets closed up on Friday, but just after 8pm, the S&P announced a historic downgrade of the country’s government debt from AAA to AA+, suggesting that Uncle Sam’s IOUs should not be considered the safest investment in the world. Earlier in the week, a barrage of bad economic news, fears about a double-dip recession, Europe’s debt woes and the lingering hangover from Washington’s frustrating debt limit debate sparked massive selling. By week’s end, a mind-boggling $1.2 trillion in market value was erased from companies, according to the broadest indicator of the stock market, the Wilshire 5000 Index, leaving untold damage to American’s retirement nest eggs.

And even though investors could take some comfort in the Dow Jones industrial average closing higher yesterday by 61 points, the relief was short-lived, as S&P announced it’s grim decision to downgrade U.S. debt - the first such downgrade in American history - after the markets closed. The agency provided an advance copy of its findings to the Treasury Department, where officials pointed out S&P made a $2 trillion math error, the Wall Street Journal reported. Still, even after acknowledging the error, S&P chose to move ahead with the downgrade, explaining its reasoning in a lengthy release that cited last week’s U.S. debt ceiling showdown, and slim deficit reduction package of $2.1 trillion over 10 years. S&P blamed both Democrats and Republicans for their failure to compromise on more substantial long-term deficit reduction. In Washington, the Treasury Department and Federal Reserve sought to assuage fears, with the Fed putting out a


GDEZINE August Special Edition

hasty note saying government bonds and other securities would still be counted as AAA-. Back on Wall Street, things were more jittery: Wells Fargo said it expected “further pressure” on the dollar and financial bloggers openly feared an all-out panic come Monday. After all, the broader market did not manage to mirror the Dow’s performance yesterday, with the S&P 500 closing down by 0.69 to 1,199 and the Nasdaq by 24 to 2,532. In the first minutes of trading, and in a whiplash turnaround from Thursday’s 513 point freefall, the Dow jumped up excitedly over 160 pointed on better-than expected U.S. jobs data. Employers added 117,000 jobs, beating forecasts for a 75,000 increase and giving investors reason to smile after weathering a tumultuous week.

The excitement lasted all of 30 minutes before the Dow snapped downward again - plummeting by 500 points - on fears of a worsening European debt crisis. Then, unofficial news broke that the European Central Bank was ready to buy Italian and Spanish bonds in exchange for Italian reforms, buyers staggered back in and the index see-sawed back up. The volatility index, or Wall Street’s ‘fear gauge” surged to 32.05 in afternoon trading. Anything above 30 indicated heightened anxiety. If the day ended with pale-faced traders reaching for their Dramamine, it also left many Americans surveying the damage to their retirement. “Yes, I’m worried,” said Catherine Shinners, 56, whose savings are mostly in the stock market. “If you are like me, not only anxious about your 401(k) but your pension fund, you are also anxious that companies won’t be hiring this fall, but cutting back instead.”

Wells Fargo said it expected “further pressure” on the dollar and financial bloggers openly feared an all-out panic come Monday.

Shinners’ work contract as a marketing consultant in Palo Alto, California expires in a month and she is increasingly nervous about landing a new job. She’s not the only one worried. Karin Risi, head of Vanguard’s Advise Services group, said she has been hearing increasingly from clients concerned about their portfolios. “Clients are understandably emotional and distressed. This is tough for all investors, but particularly for retirees who may not have the benefit of a long investment time horizon,” she said. “But we’re reminding all of our clients that cashing out often carries it’s own risk,” said Risi. “It’s incredibly difficult to pick the precise ‘right time’ to abandon equities.” While the advice to stay the course may be sound, it isn’t particularly comforting. Many Americans looking for a job today were burned by the recession, despite saving and spending conservatively. They have already had to eat into their savings. Preserving what remains had become nerve-racking in a volatile stock market. “We didn’t buy a new car every two years. We didn’t take exotic trips to Hawaii. We put money into our 401(k) and drove our cars into the ground,” said Shinners. Glen Gilmore, 48, a Rutgers University professor and former mayor of Hamilton, N.J., sid the week’s volatility has prompted him to read more about global news, given some of the market gyrations were about worries in Europe. “It made it painfully clear to me that we’re all so incredibly connected,” Gilmore said. “No nation is an economic island.”


GDEZINE August Special Edition

“ADDICTEDTODEBT”

China tells US to 'cure its addiction to debt' By Teo Tarafas

China, the largest foreign holder of United States debt, said Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the rating agency Standard & Poor’s downgraded America’s long-term debt. The harshly worded commentary, which was released by China’s official Xinhua news agency, was Beijing’s latest effort to express its displeasure with Washington. Beijing’s reaction to the downgrade was the harshest among foreign leaders. Officials in Japan and France said their faith in the United States government remained strong. The Australian prime minister, Julia Gillard, warned against overreacting, while the Indian finance minister, Pranab Mukherjee, said the downgrade had created a “grave” situation, one that would require some time to analyze.

Though Beijing has few options other than to continue to buy United States Treasury bonds, Chinese officials are clearly concerned that the country’s substantial holdings of American debt, worth at least $1.1 trillion, are being devalued. “The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers. Beijing, which did not release any other official statement on the downgrade, called on Washington to make substantial cuts to its “gigantic military expenditure” and its “bloated social welfare” programs. The commentary serves as a sharp illustration of how the United States’ standing in the world is sliding and how China now views itself as ascendant.


GDEZINE August Special Edition

While Washington wrangles over its debt and deficit problems and the European Union struggles to deal with its own debt issues, China is sitting on the world’s largest foreign exchange holdings, and its economy is growing at close to 9 percent. The country is also once again racking up huge trade surpluses with the rest of the world. Beijing does have its own worries, like soaring inflation and housing prices and an overheating economy. Policy makers are also trying to deal with the accumulation of huge foreign exchange holdings. Trade and current account surpluses have helped China accumulate the vast foreign exchange reserves. It has invested much of those reserves in United States Treasury bonds, largely because the American market has long been considered the safest and most liquid bond market in the world. Analysts say that China can also buy bonds in the European and Japanese markets but that those two markets are not big or liquid enough to absorb China’s fast-accumulating foreign exchange reserves.

Beijing policy makers are discussing ways to diversify the country’s foreign exchange holdings away from dollars and also how to encourage Chinese companies to invest some of the foreign reserves overseas. But because China has about $3 trillion in foreign exchange reserves, there are few places big enough to invest those holdings safely outside of United States Treasuries, even though it looks as if they may lose value. Analysts say that if China pulled back from buying Treasuries, the dollar would weaken and America’s borrowing costs would rise sharply, but that would also hurt China’s existing holdings. And so until China can find a way to slow its accumulation of dollars or find alternatives, it is likely to be the largest buyer of Treasuries. Still, government leaders here increasingly sound as if they are losing confidence. “International supervision over the issue of U.S. dollars should be introduced, and a new stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country,” the Xinhua commentary said.


GDEZINE August Special Edition

Heat continues in South, breaks into storms in Northeast O.K. City Expected to Reach 109 Degrees From Reuters

An unrelenting heat wave continued across the southern United States on Saturday, promising more of the tripledigit temperatures that have roasted the region for weeks. Forecasters predicted the heat and dryness will continue in the area at least through next week, though they looked for remnants of former tropical storm Emily to bring some rain to coastal Florida on Saturday night. In the Northeast, extreme heat that has marked the summer weeks was abating, with temperatures expected to dip into the low 70s Fahrenheit in Trenton, New Jersey in the evening to give residents an escape from what AccuWeather.com forecasters called a "heat bubble" that had blistered the area in July.

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Looming thunderstorms also threatened parts of the Northeast and Midwest on Saturday. But in the hot, dry South, the heat raged early in the day. In Oklahoma City, the temperature was expected to hit 109 degrees, forecasters said. At a national prayer rally in Houston's Reliant Stadium, temperatures outside pushed into the upper 80s by mid-morning and humidity soared -leading rally leaders to encourage attendees who were planning to fast throughout the day to reconsider if they get too hot. "Drink water, do what you need to do, don't worry about what others are doing," Luis Cataldo of the Kansas City International House of Prayer told the thousands gathered at the indoor stadium. In Dallas, temperatures were expected to top 100 degrees for the 35th consecutive day, and no relief is in sight for at least another week, according to AccuWeather.com forecasters. Temperatures had already reached 94 degrees in Little Rock, Arkansas, by

10 a.m., where a heat advisory was in effect. Highs were expected to hit 102 degrees, according to AccuWeather.com forecasters. Severe storms elsewhere The forecast was much different in the North and Midwest. "There will be scattered thunderstorms spanning pretty large real estate from the Northeastern states through the Ohio valley and Tennessee Valley," said John Racy, a lead forecaster at the National Weather Service's Storm Prediction Center. Parts of western New England down to the mid-Atlantic area will also be affected, Racy said. Severe storms are also expected in Minnesota and Wisconsin and to the south in parts of Nebraska and Kansas. North Dakota had severe storms on Friday, but the system moved east on Saturday toward the upper Mississippi valley, Racy said. Storms were forecast to bring heavy rains, hail and damaging wind gusts in cities such as Minneapolis and Omaha, according to forecasters.


GDE:Zine August Special Edition