After sampling various media reportings, opinionings and discussions throughout the day, along with civilian online chatterings, it seems to me that the psychological effect of this
ratings downgrade by
one private credit rating agency has been substantial. A few observations...
1) There doesn't seem to be any serious pushback to the downgrade itself. The vast majority of journalists and pundits seem to accept this downgrade as a correct reflection of fiscal reality. I know this seems pretty obvious, but I'd expect a little more reflexive patriotism, at least from certain quarters. Or a contrary opinion to the downgrade on CNN in the name of "balanced" reporting. However, very few people, if any, seem to be suggesting that this move by S & P is anti-American, or politcally motivated or somehow fixed. And the counter-meme launched by the White House that S & P made "
a basic math error of significant consequence," while factually valid (although of debatable significance), seems to have gained little traction in the associated media and public discussion.
2) As noted upthread, China has taken this as an opportunity to give America a very loud and public spanking. The Xinhua news agency's editorial suggesting that "international supervision over the issue of U.S. dollars should be introduced," is a real jaw-dropper. China and other nations have been working steadily over the last few years to transition away from the greenback as the world's reserve currency, and it looks like they will try to take full advantage of the downgrade to further this goal.
3) The man on the street is genuinely panicked. It's as if some people have, in one day, gone through a debt crisis version of peak oil awareness shock (that feeling of utter doom you get when you first stumble upon the idea of peak oil and process some of its more dire possibile consequences). It seems that this credit downgrade has cast an even darker shadow than the economic madhouse roller coaster of 2007/8. Even some -- not many, but some -- of the posters on this site seem to have had their outlook somewhat shaken by the downgrade, and we've been talking about the collapse of the dollar (both related to and independent of Peak Oil, depending on your view), along with related collapses of the housing market and the general economy ever since I've been here, which is Feb 2006. Since even before the "first dip" of the current recession (I know we are not in an "official" recssion at the moment, but I belong to the camp that maintains the Great Recession never ended), I suspect most of us here have had a clearly marked place set aside, at least mentally, for the second shoe of economic collapse to fall. However, it seems that until this week, most of our fellow citizens were credulously and earnestly watering their own personal garden of phantom green shoots. If there's any truth to this point (point #3), then it's amazing how perception can change on the basis of a simple statement of opinion.
If the idea of a suddenly weaker American economy, with no near-term hope of improvement, continues to take hold, then I think the markets are going to take an incredible beating this upcoming week. And gold is going to shoot through $1700 like a rocket.