Prediction for Monday - Panic!

Think Chicken Run -- "We mustn't panic...we mustn't panic...AHHHHHHHH!"

The most predictable of all disasters is coming on Monday, with the S&P rating agency downgrading US government debt on Friday night.

I don't blame S&P, because they are right, after all, about the fundamental inability of the US government to live within its means.  Still, the timing could have been better, coming on the heels of the "deal" to cut government spending and raise the debt ceiling.  Republicans angered me throughout the debate by insisting that revenues should not be part of the equation.  That posturing looks even more short-sighted now, with the threatened downgrade the government was hoping to avoid happening anyway.  If revenues are not included in the equation, there is no way to get to $4 trillion in deficit reduction over 10 years, as S&P has essentially demanded.  At least one commentator I read agrees that financial brinksmanship is not the way to go, and that politics are the reason for the downgrade, not economics.

Still, one wonders if there will be a sell-off in stocks -- after all, if investors start selling US stocks, where will they put their money?  Traditionally, when stocks go down, the price of US bonds goes up, as people look for "safe havens" that can protect their money.  If US government bonds are no longer the safe haven, what is?  Gold is already pretty darn expensive.  Does China, which sharply criticized the US government and the American people in an official news service article, have the economic clout to become the world's safe haven?  They have had spectacular growth over the past few years, but do they have the stability and trustworthiness the world economy expects?  After all, much of their economic growth has depended on selling to the US market, along with "pegging" their currency to match the dollar to keep exports from China to the US artificially cheap.  That trade factor may be changing, with China developing its own internal markets, but there are still about $300 billion a year worth of exports to the US in goods alone built into the Chinese economy.  I'm certainly no expert on the world economy, but that seems like a pretty big number to me.

So, I'm predicting a panic of a more political kind on Monday -- panic that elected officials of all kinds will be held to account for the economy in 2012.  Let's hope they all are, but let's be real -- elected officials are panicking all the time about their prospects for re-election.  So this is one prediction that almost has to come true.