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The Economy Has Imploded and We’re All Going To Die… (Not Really)

by on August 8, 2011

The End Of The World:

OK, not really. A top credit rating agency, Standard and Poor’s (S&P), has downgraded the U.S. as borrowers from the top rating of AAA to AA+. Yep, the same ones that gave AAA ratings to banks that sold garbage mortgage-backed securities that led to the last recession (Don’t trust me? Hear it straight from Matt Damon). So what does this mean for us? Should we be stuffing cash in our mattresses and learn to speak Chinese?

Don’t cash out your 401K for kindling just yet. Warren Buffett, this pretty smart businessman, thinks the downgrade doesn’t make sense. Of the $47 billion his company, Berkshire Hathaway (BRK-B), has in cash and cash equivalents, $40 billion of that is in short term Treasury bills that he has no plans to sell. “Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you’re talking about inflation, that’s a different question.”

So America’s still good for every dollar it’s lent, but what happens if we have to print money at a faster rate to continue to pay our debts? That’s where the problem of inflation comes in. Chris Baines, writer for The Motley Fool, agrees with Buffett that the U.S. can’t default, but worries that if the credit market sees inflation coming, they can demand much higher interest rates. America is having a hard enough time balancing the budget as it is, without raised interest rates factored in. So while this downgrade to our credit rating makes a nice headline and we all agree inflation could become an issue in the future, the real story is how investors are actually reacting.

They’re freaking out. The long term Treasury bond ETF (TLT) is up almost 3% today while the S&P 500 is down almost 5%. So while S&P is saying there is a slight chance America could default on its loans, investors are taking their money out of stocks and putting them into long term treasuries? When the market loses its mind, it is an opportunity for us nerd investors to take advantage. Our favorite stocks are going on sale!

If you’ve been thinking about getting into the stock market, you might want to start taking a look at some of the really big, strong companies (blue chips) to invest in. What are you looking at? Thinking about making a first trade? Are you buying today or taking a wait-and-see approach?

Twitter @jontrainor