We have told investors that the rating of US and UK sovereign debt is a farce and that they both will be downgraded.
Today the UK is on its way to joining the PIGS countries as Standard and Poor’s lower the UK’s AAA outlook from “stable to negative”. The PIGS countries are the hopelessly weak European countries (Portugal, Ireland, Greece and Spain) which have all been downgraded this year. The UK government deficit is estimated to reach £175 billion in 2009 (it will probably be a lot higher). This represents 12.4% of GDP. Total UK government debt is forecast to reach £800 billion or 57% of GDP.
In our February Newsletter, “The Bankrupt saving the Bankrupt”, we took the UK economy as an example of the bankrupt state of the world economy. Therefore, it should be no surprise to our readers that the UK will be the next country to be downgraded. So it is not the slightest bit unexpected that the UK is joining the poorest of the major European countries.
The implications of the UK downgrade are much more serious than that. In our May newsletter, “It ain’t over ’til the fat lady sings”, we stated that the US AAA rating is a farce. The US government deficit is forecast at $1.8 trillion for 2009. That is 13% of GDP. US government debt will reach at least $13 trillion, and probably a lot more, this year. That is almost 100% of GDP! So the US figures are much worse than the UK figures. It is only a mater of time before US debt is downgraded. But downgrading it to AA is just the beginning since US government paper is junk and the US government bankrupt.
Take our word, US government debt will be downgraded very soon. Either the market will force the downgrade by dumping the US dollar and US government debt or Standard and Poor’s will wake up do the inevitable deed. But a downgrade of the debt of the world’s reserve currency has such serious ramifications for the world economy that S&P’s will drag their heels and probably wait until the market forces them.
We have forewarned our investors and readers about these events for quite some time. In our Commentary last week, “Goodbye Dollar – Hello Gold“, we stated “….that the era of the dollar as a reserve currency is coming to an end soon and that the strongest and safest currency is gold”.
The wheels are set in motion and will be spinning ever faster in this coming precipitous decline of the world economy. US government debt and the US dollar are next to fall and they will both fall hard.
The only real protection in a world of collapsing currencies and assets is the only real money which is PHYSICAL GOLD.
Egon von Greyerz
Founder and Managing Partner
Matterhorn Asset Management
Phone: +41 44 213 62 45
Matterhorn Asset Management’s global client base strategically stores an important part of their wealth in Switzerland in physical gold and silver outside the banking system. Matterhorn Asset Management is pleased to deliver a unique and exceptional service to our highly esteemed wealth preservation clientele in over 70 countries.
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