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S&P’s Downgrade of the credit rating and Expats Living In The Philippines

The value of the dollar has a major impact on the quality of life for American expats living in the Philippines. The value of the dollar doesn’t just affect those of us living in the Philippines of course, it affect all American expats around the world.

bernanke effects expats living in the philippinesWhen S&P lowered the USA credit rating last week I thought it would have very little impact. I think their lowering of the rating would been seen by investors as a joke. I saw it as a way to gain publicity and I still think that.

If S&P was going to lower the US credit rating, the time to do it would have been before the debt ceiling was raised. They themselves indicated that if the US came close to the deadline they would lower the debt ceiling. The USA came within a day of that deadline. Of course, had the USA not raised the debt ceiling a decrease in the USA credit rating would also be warranted.

So, what happened to the value of the American dollar after the S&P lowered the US credit rating? The value of the dollar rose significantly. The reason the value of the dollar rose is because it caused investors to see a dimmer outlook for stocks. The Bank of American lost more than 20% of its value during the first week of August 2011. So far, banks have been the hardest hit after the US credit rating was lowered.  The US stock market has been in a broad and sharp decline this week.

A major part of this decline is the because of the lowering of America’s credit rating but many economic indicators may be signaling a second recession is at hand. The two things combined are behind the demise of the US stock market this week.

Currency trading for the dollar to Philippine peso August 11, 2011 is 42.5802. A week ago, the dollar was threatening to dip into the 40.95 level.

When S&P lowered the US credit score, investors reacted by loaning money to the USA. Yep, a lower credit rating caused investors to sell stocks and take the proceeds and give it to the American banking system.

They did that because it caused investors to fear the stock market more, they know the USA will pay its debts but one can loose money in the stock market. Earning a low rate of interest is still better than loosing money. Investing more in Treasury Bills lowers the supply of cash.  Thus the value of the dollar goes up.

Stock market investors are now looking to the Fed to help them.  Most are crying for the Fed to return to printing money or another round of quantitative easing or QE3. However, others warn that QE3 will make matters worse.

When the Fed prints money it is inflationary.  That is felt most in commodities with an immediate affect on oil prices. As oil prices rise, Americans are spending more of their money for electricity and gasoline, leaving less for other areas.  Areas that would help promote growth in American industry.  A weak dollar means higher oil prices. If you don’t understand the relationship between a weak dollar and rising oil prices You can read this article to help.

It is difficult for an expat living in thePhilippinesto be a fan of quantitative easing. After the value of the dollar as been assaulted over the last year my objectivity on the matter may be gone. I see lots of investors now seeking QE3 but I don’t see any reasons given for it other than to cause a rise in stock prices. Maybe it is time for Uncle Sam to butt the hell out. It is in no position for another stimulus package. QE3 will drive oil prices up and further damage other markets. There may be nothing to do but weather the storm out now.

The USA needs to raise revenue but a tax increase in these times is also detrimental. Perhaps it is time to let the invisible hands do their work. Perhaps it is time for politicians and the people that elect them to understand they don’t have all the answers and they can’t solve all the problems.

 I usually scoff at the economic doomsday prophets but I am becoming worried too. Rome came tumbling down, The USSR crashed in a very rapid way could it happen to the USA too?  It could but I will not be joining the chorus of those that predict you should sell all your assets, buy gold and move to a mountain top or to Asia. If companies in the US can be too big to fail, the USA is too big for other countries to allow it to fall.  If we fail, everyone fails.  The USA will recover but it won’t be soon.

Bernanke says there is little hope of the USA raising interest rates before 2013. The US can’t do another stimulus package but it can print more money. If they do it, I hope it at least helps but I have strong doubts. I know it wont help me other expats living in the Philippines.

 Living in the Philippines With a Weak Dollar

A strong dollar improves the lives of American expats living in the Philippines. A dollar with a weaker value can make it harder for those with the smallest of incomes. Those in the midrange might have to cut back on a few trips. They may have to put off buying that expensive camera they want. A weak dollar means less opportunities. It isn’t the end of the world, money still goes further here. Some say it doesn’t for them. When they try to tell me it doesn’t go further for me, they simply don’t know what they are talking about.

Higher oil prices in the USA means that advertisers are willing to spend less money on advertising and potential expats find it harder to buy my eBook.

Last week, Rueters sent a tweet that appeard to say the Fed had decided to start QE3. I tweeted back to them something like “Hey, expats are people too!”  haha The story didn’t actually say that. Tweeter doesn’t give one much space in a tweet so you have to condense things.

It was some financial guru that indicated the Fed should start QE3, he had some ties with Bernanke and I think was a board member with the Fed at one point. Many former board members came out this week saying the Fed should embark on QE3.  Bernanke said the Fed would start QE3 if the markets fell enough.  What enough is, I don’t know.  I no longer care where they go, I’ve had enough of the printing of money.  Let the invisible hands do their job.

Some people say QE2 and the stimulus package didn’t work because the economy is performing worse than expected. That is incredibly simplistic and probably short sightedness caused by the disease of partisan politics.

There is no doubt in my mind the USA would have gone into a recession without the Federal government taking aggressive action. It was the right thing to do and the stimulus bill was probably not big enough!  That too is hard to know. If we had spent even more money our debt would be even higher if we had the same growth rate.

The only way to get out of this mess is for the economy to grow. The Bush tax cuts helped the economy grow; the economy was headed into a recession at the time. However, once the money was spent, it was gone and the debt was still there. The growth put off what was coming.  It fixed nothing. They were great for the short term. The cuts were very bad for the long term.  Those cuts will expire in 2012 which basically means a tax increase. I sure hope the economy is better then but right now, that looks doubtful.

An American expat living in the Philippines should probably accept that the dollar will be low for a while. So many still think the Philippines is manipulating the value of the peso to dollars currency trading.

As for the lowering of the US credit rating, it seems to have helped American’s living in the Philippines this week.  It may have helped it long term but I doubt it.  Investors are a fickle bunch.  Two months ago the majority were screaming to end QE2 early. Two weeks after it ends, they are screaming for the Fed to start it all over again.

If the USA continues to focus only on the short term and China keeps working on the long term, Americans living in the Philippines and every where else can expect poor results.

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Filed under: Living In The Philippines

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