Saturday, 6 August 2011

Non event: S&P downgrades US to AA+

"Here is the great irony: S&P (and the rest of the ratings agencies)  helped contribute in no small way to the overall economic crisis. The toadies rated junk securitized mortgage backed paper AAA because they were paid to do so by banks. They are utterly corrupt, and should have received the corporate death penalty (ala Arthur Anderson). The good news is we have removed the requirements from SEC and other regulations that their input is ever needed; The bad news is they still have some sway. It just goes to show you that the old cliche is true: You don’t need analysts in a bull market, and you don’t want them in a bear market."

I fully agree, as usual, the rating agencies in the US have been hopelessly slow to adapt to reality. Similar to the enormous dis-service they did a few years ago rating packaged mortgages as AAA while the collateral was dubious to say the least. A huge bias due to the wrong incentive: if the agencies would offer high (unrealistic) ratings they would receive more work and thus more money.

Since US debt is nominated in USD they can easily print extra money to pay for it, unfortunately, that will lead to high inflation and thus a hollowing out of the middle class (something that has been going on for a long time). On the other hand, they could selectively default on some bonds (the ones foreigners hold), which will lead to a loss in confidence, higher interest rates and again a hollowing out of the middle class. Caught between a rock and a hard place.

Many sources have mentioned that the total US debt is actually much more than the reported 14 trillion USD due to future social and healthcare obligations. The US has lived too long beyond its means, the Quantitive Easing has postponed some problems, but solved none. The world might be heading into stormy weather, the only certainty is that after the storm Asia will be (again) in a much better shape than most Western countries.

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