Brent Shuffler, a financial analyst, accountant, businessman, speaker and official of the Barbados Co-operative & Credit Union League and Barbados Association of Corporate Shareholders, said pension funds focused outside the U.S.A. will likely show no impact.
“Those that invest heavily in the U.S. government’s bonds will immediately reflect lower valuations and credit ratings. Already, thousands of cities and municipalities have had downgrades to match the downgrade of the central government. In every country, this is well understood: the federal government usually has the highest rating and, therefore, every other business, branch of government and debt-issuing entity has a rating no higher than that of the central government. It is a tide that affects all boats, so to speak.”
Shuffler said many analysts already knew that many local governments including the state of California were in serious financial trouble and this latest downgrade “simply confirms the obvious”.
“Others, such as Weiss Ratings, an independent agency that never accepts payments from the entities it rates (unlike S & P, Moody and Fitch), rate the U.S. government as low as C and have foretold the likely bankruptcy of many local governments in the U.S. They behaved as economic expansion was the only reality and thus recession caught them unprepared. They overspent in the good times, leaving no fiscal space for counter-cyclical measures in the bad times,” he said.
Shuffler said there’s a sharply downward impact on equities as it confirmed that the federal government’s finances were in deteriorating shape and that the economy is growing too slowly to reduce the rate of unemployment any time soon.
He believes the protracted political bickering over the raising of the debt-ceiling in Washington, D.C. greatly diminished the confidence of business-people and investors and further reduced the respectability and the credibility of many politicians, especially Republicans, who were seen as being more interested in upholding their own ideology than in doing what was best for the country.
He said the Republicans are staunchly against tax increases even though the wealthiest are able to afford them. The Democrats are against reducing spending even though that it is the most obvious measure to reduce the fiscal deficit as quickly as possible.
To illustrate his point, he cited as example the annual spending on overseas wars, the Pentagon and arms “is the better part of $1 trillion!”
Shuffler said the U.S needs to reduce its spending in places such as Iraq, Libya and Afghanistan as quickly as practicable to refocus on healthcare, education and infrastructure at home.
Asked by Variety how a downgraded credit rating will impact the nation in the long term, Shuffler said, in the long term it will likely refocus attention on fiscal responsibility and hasten efforts to reduce deficits.
“So far, the growth in the private sector as measured by the number of new jobs each month has been more than enough to cover the losses of jobs in the public sector. Local governments are cutting thousands of jobs per month to reduce spending back toward their actual revenues,” he said.
He also sees a parallel attempt by the British government to cut up to 500,000 in jobs over the next four years in order to address its swollen deficit.
He said, “This likely means that the total average rate of unemployment will fall only very slowly over the next five years. In the past year, we saw a very gratifying fall from nearly 11 percent to 9 percent but subsequently some upticks in that rate. It is not a straight line to progress. So, it could very well take 5 years to return to 5 percent to 6 percent.”
He told Variety that nearly 15 million people are unemployed in the U.S. and about one-third of that number has been out of work for more than six months.
“This is one of the distinguishing features of this economic recession: it lasted longer (about three years instead of three to six months) and the recovery has been much slower. Therefore, people are out of work for years instead of months and the social fabric is weakened as unemployment benefits expire,” Shuffler said.
He said some U.S. pension funds will likely ignore the downgrade and continue their business as usual while others will be forced to reevaluate their holdings.
“They would be wise to reduce their allocation to long-term U.S. government bonds. Diversification has been discussed for decades but many portfolios still do not reflect adequate allocations to foreign investments or to equities, loans and real estate, for example,” said Shuffler.
For the Barbadian financial analyst, “being too conservative can seem wise when things are going well (e.g., a fund that is highly invested in U.S. treasuries would avoid the bear market that afflicted equities in recent years) but would prove a false security when it is downgraded.”
He also said the penalty for over-emphasis on U.S. government bonds has been a very low yield for the past several years.
He said the Federal Reserve has held its target for the policy interest rate near to 0 percent and has just announced its firm intention to maintain that level for at least the next two years.
