SEC Probes Trades Before S&P Cut U.S. Rating

By Kevin Freeman
blog
September 20, 2011Sep 20, 2011

The SEC is looking to see if news of the downgrade leaked in advance to the benefit of "insider traders." At the same time, there are probes into whether the downgrade was motivated by more than analyst opinion. For example, could a bearish hedge fund have encouraged S&P to downgrade at a specific time?

The fact that S&P downgraded U.S. debt should not have been a surprise. Regardless of Obama administration complaints about the downgrade, the U.S. debt situation has dramatically worsened. Endless projected trillion-dollar deficits provide sufficient justification for a negative outlook. In fact, some question whether the SEC probes are politically motivated as "payback" for the downgrade. There is little doubt that the topic will be heavily discussed in the 2012 Presidential campaign.

From the perspective of national security, however, the situation is even more serious. As we have long covered in our writings, our markets and economy are prime targets for those who would do us harm. We have documented the vulnerabilities exposed in the 2008 market collapse and the ongoing calls from elements in Russia, China, Venezuela, and radical Islamists to remove the dollar as the world's reserve currency. Enemies of the United States are well aware that the dollar's reserve currency status allows our Treasury to borrow money at very low rates. The S&P downgrade was another step along a path to the dollar losing that status.

Our national debt and deficit problems are severe and must be addressed. The more frightening fact, however, is that this is true even though our Treasury can borrow money for 10 years for under 2%. Just two years ago, the Greek government was able to borrow cheaply as well. Their two-year interest rate was under 2% in late 2009 and reached 80% last week. It is unimaginable that U.S. rates would reach those levels. But, if the dollar lost reserve status 8% could happen. Imagine how that would worsen our debt problems.

Our enemies are more than aware of this vulnerability. Osama bin Laden famously said that "Al Qaeda's supporters are ‘aware of the cracks in the Western financial system as they are aware of the lines in their own hands." ‘" The Chinese PLA has stated that "‘Financial warfare (in which a country is subjected without a drop of blood being spilled)' means entering and subverting banking and stock markets and manipulating the value of a targeted currency." Both Al Qaeda and the Chinese PLA clearly understand that collapsing the U.S. economy would be far more effective than a direct military attack.

The bottom line is that our debt and deficits are much more than an economic or political problem. They are a national security risk and must be addressed.

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