The US downgrade on account of high debt is likely to create more negative impact on equity markets as compared to treasuries. We witnessed consistent two-year rally in risk assets and reached very close to financial recovery, but the support was built on straw and sticks, not on bricks. The problem of excessive debt is global and it is not just US stock markets at stall speed. It is prevalent from Brazil to China and also in other parts of Europe as well as Asia.
The economy of US is budding at 2 percent rate and policy makers believe that even this number is difficult to sustain. It is all because of poor housing market, storms of soaring unemployment rate and the harbinger of debt crisis that pose in Europe. As of today, the national debt of US has amounted to $14 trillion, a number that augments to $4 billion per day. This puts the national debt of America on 22nd position as a percentage of entire GDP. Economists of all nations think that national debt is the paramount factor affecting economic crisis and pausing stock indices, if government does not take necessary steps to achieve long term fiscal stability.
Higher debt increases the possibility of defaults and even most upright borrowers may not be considered as creditworthy. When lenders curtail their lending capacity, it would have direct impact on consumption and investment into the market. It eventually results in deficiency in demand, credit defaults and high unemployment, if the downturn is so grim because of high debt. Higher the intensity of debt, bigger is the financial drop for the larger size of economy. Larger the financial drop, more the possibility that borrowers will default their payments on contingent debts. Thus, higher debt induces economical fragility, obstructs financial growth which in turn creates stock market volatility, as investors doubt their financial competency and they prefer to sit on cash.
The concept of stall speed is not something only related to the stock indices. When we talk about recession, it doesn't mean that only the stock indices or shares are at stake. We can utter possibility of recession when financial deficit is at 9 percent on account of high debt, unemployment rate is soaring and more than 25% of homeowners are already near home foreclosure.
Policymakers haven't taken right approaches while taking the lending decisions and dealing with the problems of global economy which shuffled the debt around it. The practice of throwing money at every problem has not worked out. The issue is not related with money but it is pertaining to the structural challenges and impediments that need specific solutions.
