Moody's Next Epic Fail: "US Remains a Solid AAA Nation"

Wednesday, June 24, 2009

While the currently ongoing two-day meeting of the Federal Open Market Committee (FOMC) is probably not only discussing the state of the US economy but also how to maintain the global attraction status of its only product, Federal Reserve Notes (FRNs) in unlimited amounts which they prefer to call the primary global reserve currency, it is difficult not burst into full laughter about rating agency Moody's stance.
According to a Reuters report from Tuesday,
Moody's Investors Service said on Tuesday that the U.S. government's triple-A credit rating was safe but added that it could be at risk if Washington were unable to bring its public debt back to a downward trajectory.
Financial markets have repeatedly been spooked this year by concern that triple-A rated governments such as the United States and Britain could face credit ratings downgrades as they borrow heavily to spend their way out of recession.
"The U.S. government triple-A is safe," Pierre Cailleteau, team managing director of Moody's Sovereign Risk Group, said at a media briefing on sovereign credit ratings held in Tokyo.
Moody's has a stable outlook on the U.S. rating, which indicates a change is not expected over the next 18 months.
I wonder why there are still people around who believe any of the wrong commonplaces rating agencies release to the public while cashing in megabucks from those being rated. A look back in recent financial history should make investors or those who manage the money of investors reconsider their belief into institutions that have failed at all times.
Moody's had completely missed the rapid deterioration of Latin American finance in the 1980s after overlooking the US savings & loans crisis at the same time.
They were asleep at the wheel when the collapse of the Asian tigers in the early 1990s began and slept during Russia's bankruptcy in 1996, only to awake to see the multi billion failure of Long Term Capital Management in 1998.
That must have been such a shock that Moody's was paralyzed during the popping of the Internet bubble in 2000 and Enron's fraudulent bankruptcy a little later. Oh, let's not forget such sovereign risks like Argentina that went bankrupt twice within a decade.
But maybe this was a long term strategy so that bankers, whose literacy appears to have been limited from AAA to C, had a well paid scapegoat when the subprime crisis developed into what is now seen as the worst financial crisis in mankind's history (just wait a little, mass poverty in the Western world will come soon enough.)
If the US Is AAA, Everybody Else Is Eligible for AAAA
It defies any logic that the most indebted country in the world running the biggest triple deficits of all is still considered a AAA risk. If this rating is based on any rationale, we can all go and ask for a quadruple-A. Or do you run bigger deficits, owe more money and outsourced all your earlier sources of income like the USA does?
Add in that the government big-wigs like Treasury secretary Timothy Geithner, his commander-in-chief Barack Obama plus their little helper in the Federal Reserve, Ben Bernanke are a trio of one-trick ponies. (Please click all links to save me reposting what was clear as early as 2005.)
Having to fund two wars in the name of petro-theism while being confronted with an imploding economy that would look so much worse weren't it for the limitless army spending and the growing number of public employees - who will blow up future pension liabilities into the quadrillions - does not exactly look like a strategy that may improve the state of the United States.
Having deindustrialized (save for the arms and surveillance industry) what was once the greatest power of the world I wonder what Obama has up his sleeves to turn around the epic disaster he inherited from George W. Bush.
So far all we have seen is a backtrack on most changes he promised ahead of the election. The US army will continue to bomb, maim and probably torture people who ask nothing else than to be left alone in peace. An extension of the army engagement in Iraq, more soldiers for Afghanistan and moves to topple Iranian president elect Ahmadi Nejad - nobody complained when Bush stole 2 elections at hair's width, while Nejad repeated his 62% majority - may be a boon to the military-industrial complex but won't pull the US out of its down spiral.
As we have arrived in the age where trillions are the new billions - without the financial industry noticing it - the USA looks like every empire in decline: too many armed conflicts, a profligate government overspending and a general downtrend in public education (because this sector is bankrupt too) accompanied by monetary inflation has always ended in disaster. Americans can only console themselves with the fact that all central banks print money at full speed despite the economic contraction.
At least Moody's does not see the AAA rating of the de facto bankrupt US carved in stone, said Cailleteau according to Reuters,
There were possible risks that could lead to a downgrade.
"That will happen for two reasons. Either our assumptions in terms of debt reversibility prove to be wrong. That is, in fact the U.S. government is unable to bring public debt back to a downward trajectory," he said.
The other reason would be if the United States' ability to raise a large amount of debt at a low cost were to be put at risk, Cailleteau said.
"It could be put at risk if the U.S. dollar was severely challenged as the main international reserve currency," he said.
But the possibility of the dollar being replaced as the main international reserve currency in the near future was a "pretty remote risk," he added.
What I am missing in Moody's explanation is whether gold could not have a shining comeback as reserve currency. It was former Fed chairman Alan Greenspan who bent the truth when saying,
"I think central banking has learned the dangers of fiat money."
Worldwide exploding money supply despite being stuck in a recession that may see a little bounce later this year before we begin to see the signs of a true recession tells me the opposite.
By adapting zero interest rate policy central banks have outmaneuvered themselves. The only weapons left are their digital printing presses and the belief of the people that these colourful debt papers will somehow retain their purchasing power. This cannot happen and the Weimar Republic is the example that scares Germans until today.
While the official world tries to discard M3 money supply growth as an outdated indicator I point you to this story (CNN online page gone by now) where former Deutsche Bundesbank president Hans Tietmeyer - 15 years ago the second most powerful central banker in the world - is described as a central banker who was "trained in the monetarist school that teaches rapid money supply growth is a sure predictor of inflation and requires a firm policy response."
We have not yet seen anything that would somehow resemble the iron grip of the German Bundesbank.
It has always been a miracle to me which set of figures the rating agencies apply to arrive at their always too late conclusions. Maybe they publish how they arrive at their ratings in order to be able to follow their school of thoughts and formulas.
White House Economic adviser Paul Volcker, pitying Bernanke, warned already 3 years ago in a Bloomberg TV interview,
that inflation should be taken most seriously and that an improvement in this year's budget deficit would be wiped out by permanently higher social spending on an aging population. Oh, and don't forget that "is is critical that we maintain confidence in our currency," Volcker said.
I could not agree more despite the current asset deflation that inflation will become the most hated word of 2010.


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