US Credit Rating is downgraded from AAA to AA+

Michele Constantini PhotoAlto Getty Images

Downgrade is due to concerns about US political instutions

China Calls for a new Reserve Currency

Standard and Poor's statement
"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011".

"The outlook on the new U.S. credit rating is negative," the S and P said in its statement, "a sign that another downgrade is possible in the next 12 to 18 months".

On Aug. 2, President Barack Obama signed legislation designed to reduce the fiscal deficit by $2.1 trillion over 10 years. But that was well short of the $4 trillion in savings S and P had called for as a good "down payment" on fixing America's finances.

The financial commentator Daniel Gross summarizes the political situation in his blog of 6 August
"The fiscal clown show continues. A few days after Congress and the White House agreed to raise the debt ceiling and cut spending, Standard & Poor's has downgraded the United States of America's credit rating from AAA to AA+.

S and P, which covered itself in a substance other than glory during the mortgage crisis, may have a poor record and strange methodology when it comes to sovereign ratings. France, which has a far higher debt per capita ratio than the U.S., still enjoys a AAA rating. And a downgrade, alone, doesn't mean U.S. interest rates will spike - on Monday or at any time in the future. Japan's credit rating was downgraded several years ago, when the interest rates its government paid on bonds was already extremely low, and they've generally trended lower in the years since.

But Congressional Republicans deserve much more of the blame. For this calamity was entirely man-made - even intentional. The contemporary Republican Party is fixated on taxes. It possesses an iron-clad belief that the existing tax rates should never go up, that loopholes shouldn't be closed unless they're offset by other tax reductions, that the fact that hedge fund managers pay lower tax rates than school teachers makes complete sense, that a reversion to the tax rates of the prosperous 1990's or 1980's would be unacceptable.

In the past two years, this attitude has combined with a general hostility to playing ball with Democrats on large legislative issues, a near-blanket refusal to conduct business with President Obama, and, since the arrival of the raucous Tea Party freshman, a cavalier attitude toward the nation's obligations. It was common to hear duly elected legislators argue that it wouldn't be a big deal if the government were to pierce the debt ceiling and default on its debts".

Other rating agencies hold their fire for now and China proposes a new reserve currency

The other two major credit rating agencies, Moody's and Fitch, said on Friday night they had no immediate plans to follow S and P in taking the US off their lists of risk-free borrowers.

China, the world's largest holder of US debt, had "every right now to demand the United States address its structural debt problems and ensure the safety of China's dollar assets," said a commentary in the official Xinhua news agency.

"International supervision over the issue of US dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single country," the commentary said.

In my view China should put their money where there mouth is!

So far they have been content to stand back, sell their goods and bank the profits without taking any of the responsibility. Why don't they take the initiative and try to lead the world?  At the moment the Yuan is a pegged currency, only recently tradeable outside China!  How about starting by exposing the Yuan to the markets so that it can find its true value instead of giving themselves the unfair advantage of an undervalued currency? 

Is China prepared to guarantee a new reserve currency?  I think it's their turn to step up to the plate!

Meanwhile the markets tumble everywhere!