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U.S. Credit Rating Downgraded Again, QE3 Cited as Cause

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QE3 will "hurt the economy," drive down the value of the dollar, raise commodity prices, and do nothing to spur GDP.

 

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Ratings agency firm Egan-Jones on Friday downgraded the U.S.'s credit rating to "AA-" from "AA," citing the Federal Reserve's decision to go through with a third round of quantitative easing (or QE3).

The agency claims QE3, which is open-ended and unlimited, will drive down the value of the dollar, raise commodity prices, and do little to increase real gross domestic product.

Here's the statement:

... the FED's QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities).

The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power.

Hence, in our opinion QE3 will be detrimental to credit quality for the US.

[...]

From 2006 to present, the US's debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%.

We are therefore downgrading the US country rating from "AA" to "AA-".

Not familiar with Egan-Jones? You may recall they were the firm that downgraded the U.S. last July even before Standard & Poor did.

"Regardless of who does the downgrade, you have to pay attention -- maybe they’re not as well known, but Egan Jones has been ahead of the pack for a while,” Joe Saluzzi, co-manager of trading at Themis Trading told CNBC.

Moody's Investors Service rates the U.S. "Aaa," Fitch "AAA," and Standard & Poor's rates the U.S. "AA-plus." Each rating has a "negative outlook."

Follow Becket Adams (@BecketAdams) on Twitter

(H/T Zero Hedge). This story has been updated.

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