The U.S. is on the verge of a credit rating downgrade. Indeed, the newest player in the ratings game, Weiss, has already downgraded U.S. credit to just a step above junk grade. Other ratings agencies are taking a more measured approach. Moody’s and S&P have both warned of the possibility of a credit downgrade for the U.S. This would tarnish the sterling credit rating that the U.S. has had since agencies began rating the credit worthiness of sovereign nations.
Many analysts and observers still think that some sort of a deal can be reached in time to prevent the U.S. from actually beginning a default on its debt. However, even if the debt ceiling is raised this time, it might not be enough. Indeed, there is a strong likelihood that we could be right back in this position in another six to eight months. Another issue is that something needs to be done about the mounting U.S. deficit. Some combination of tax increases and spending cuts is probably needed, but there are those dead set against revenue increases of any kind. A lack of compromise means that it will be difficult to actually tackle the debt problem in the U.S.
And that means that, even if the debt ceiling is raised for now, the U.S. will still have a huge deficit. Concerns about what will happen next time will force ratings agencies to cut the U.S. credit rating.
U.S. Credit Rating Downgrade Provides You with Opportunities
Of course, a U.S. credit rating downgrade would have some very real — and very unpleasant — effects on the U.S. economy (and probably the world economy as well). But, just because things would be difficult doesn’t mean that there aren’t opportunities for those who know how to look for them. Here are some possibilities that could provide you with some chances to make money if the U.S. does see a downgrade, or even a default:
- Invest overseas: You can look into countries that have better fiscal policies, and that are more likely to weather the coming storm. An interesting choice, close to home, is Canada. Some believe that the Canadian dollar might even replace the U.S. dollar as a safe haven.
- Consider commodities: In a world that loses confidence in the dollar and Treasuries, commodities are likely to do reasonably well. Especially gold. There are especial risks with gold, considering how high the price is right now. However, if you think that the current prices are only a launch pad as the dollar declines in value, investing now might be wise.
- Shorting Treasury investments: With a downgrade, you could see indexes that short Treasuries, like the TBT, head a little bit higher.
- Buying low: At the most basic level, the stock market could very well drop quite a bit on the news of a credit downgrade or default. At the very least, you are likely to be able to scoop up some solid stocks at bargain prices.
Of course, you are always taking a risk when you invest in anything. And no one knows what will happen next. However, if you are in a position to take advantage of opportunities that crop up during times of economic upheaval, it might be time to evaluate your options. Do some research, and decide what you think is likely to happen. Then invest accordingly.
Miranda is freelance journalist. She specializes in topics related to money, especially personal finance, small business, and investing. You can read more of my writing at Planting Money Seeds.