Wednesday, December 7, 2011

12 Eurozone Downgrade Shock Waves Could Slam Into US Economy

Standard & Poor's missed the point when they "only" put 15 Eurozone nations on credit watch for possible near term downgrades. In this highly interconnected world - most of Europe can't be put on credit watch without putting much of the world on credit watch, with the United States being particularly vulnerable to global "contagion" risks.

Twelve possible implications for the United States are concisely explored herein. These "shock waves" include everything from the value of the dollar, to unemployment, gas prices, stock prices, derivatives, US bank stability, inflation, retirement investing, Federal Reserve reactions, the US deficit and credit rating, the potential criminal prosecution of S&P, and more.

Each potential "shock wave" assumes: a) that Eurozone leaders fail to credibly reach consensus; b) that this political breakdown does lead to an actual credit downgrade; c) that several European nations default on their debts; d) that there is least a partial collapse in the value of the euro; and e) that this all leads to a major downturn which materially reduces the size of the European economy. Those assumed events will not necessarily happen - much is still in play - but if even a partial Eurozone collapse does occur, then the resulting "shock waves" could rapidly change lives, standards of living, and investment values in the US and around the world.
1. US Dollar, Short Term

The US dollar's value as the world's reserve currency is likely to be substantially strengthened in the short term, as a panic-stricken globe seeks refuge from the euro collapse. The buying power of the US dollar may surge in this global rush for safety.
2. Consumer Prices

The rapidly rising value of the US dollar would have the immediate effect of making almost all imports cheaper to buy, and so a trip down the aisles of Wal-mart may for a brief period become less expensive for the American consumer. The price decreases could be exacerbated by exporters from around the world engaging in vicious price competition within the US market, trying to keep their factories going and to offset the loss in consumption in Europe.

Expanded Analysis Of Shock Waves 1-4
3. Unemployment

Because of the combination of the surge in the value of the US dollar and the reduction in the size of the European economy, US workers may face devastating job losses in two major categories: exports to other nations, and goods consumed in America.

American workers in export-driven industries will lose jobs because dollar-priced US goods will be more expensive for the rest of the world to buy. This decreasing competitiveness will be compounded by a drop in consumption in the huge European markets, resulting in less US exports. There is also the third danger of a drop in overall global consumption, as the result of exporting nations losing employment on a global basis.

No comments:

Post a Comment