Moody's Next Epic Failure: 'U.S. Remains a Solid AAA Nation'

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 an 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 Ahmadinejad - nobody complained when Bush stole 2 elections at hair's width, while Ahmadinejad 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,

...[T]hat 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 "it 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.

Comments

[Ben Gee:]

If the US credit rating is AAA, either the world credit situation is in much worse shape than I thought or there is something not right about how credit ratings are made. If printing trillions of dollars do not reduce the US rating, I do not know what will.

Jun 24 07:04 AM

[Dave Wrixon:]

>Oh, and don't forget that "it is critical that we maintain confidence in our currency," Volcker said.

Sorry, Paul, close, but actually it is important that others maintain confidence in your currency. Trust me they do not rely on Moodys to tell them what is going down!

Jun 24 07:26 AM

[Dave Wrixon:]

Well to the extent that the outcome of this chirade actually matters, I think it requires re-writing of the US Constitution. But it is only those that think Uncle Sam is a real life character that believe in this nonsense.


On Jun 24 07:04 AM Ben Gee wrote:

> If the US credit rating is AAA, either the world credit situation
> is in much worse shape than I thought or there is something not right
> about how credit ratings are made. If printing trillions of dollars
> do not reduce the US rating, I do not know what will.

Jun 24 07:28 AM

[Joe222:]

"The US army will continue to bomb, maim and probably torture people who ask nothing else than to be left alone in peace."
Glad to see you're an expert on all things, not just economics, and feel comfortable slinging mud at american patriots in an article about ratings. Stick to what you (profess to) know, and don't disparage those who risk life and limb to keep you safe in your bed at night and comfortably wearing your crisp, expensive shirts.

Jun 24 08:55 AM

[Righteous Dude:]

Yes, the USA is a "AAA" entity

So is Enron, Vahejo California, FNMA, FHLMC, and all those wonderful CDO deals Moody's assured us for years were solid as rocks

The real "story" here is: why does anyone still care what Moody's thinks?

Jun 24 09:38 AM

[will28307:]

"The US army will continue to bomb, maim and probably torture people who ask nothing else than to be left alone in peace." - The Prudent Coward.

You have no idea what you are talking about. I'm guessing you haven't seen any of this for yourself, so I would assume you got your information from CNN, BBC, FOX, etc, which all have a AAA credit rating with Moody's.

Jun 24 10:36 AM

[SoCalSailor:]

American patriots? They don't risk life and limb to keep me safe in bed at night. . .They risk life and limb to prop up the oligarchy, to steal other peoples' resources, etc. Of course, they do this due to the policies of the oligarchs, and if they were thinking about it, they might reconsider killing people for the greed of others.

The policies of the oligarchs are the reason the economy is in shambles for the majority of the people in the U.S. The FIRE economy is hollow now and always has been. How could you possibly run an economy based on finance, insurance, and real estate? Only by being thieves. These thieves wear fine clothes and talk in their own jargon, but they are just thieves.

On Jun 24 08:55 AM Joe222 wrote:

> at american patriots in an article
> about ratings. Stick to what you (profess to) know, and don't disparage
> those who risk life and limb to keep you safe in your bed at night
> and comfortably wearing your crisp, expensive shirts.

Jun 24 10:37 AM

[swaps:]

The government has to spend for its burgeoning aging population because the Social Security tax - 13 + percent of annual wages - was already diverted and spent on the military industrial complex, an out of control disability program, corporate welfare and constant attempts to repair recurring widespread damage by the private Federal Reserve bank.
Oh, I forgot. The goverment is also broke because it stupidly pays interest on accumulated deficits. Richard Russo determined annual federal tax revenues are just enough to cover the interest on the federal government's outstanding debt. And that's all. So the government has to borrow for the current year operations, in effect, adding it to the rising bar tab.
Any household that had to spend all of its income on debt service would be declared insolvent.

Jun 24 10:43 AM

[ERCaptain:]

The reason that the USA maintains it's AAA rating in spite of the debt ratios or increasing total debt is it's taxing authority. As long as the rating agencies see that the government maintains it's presumed ability to tax it's way out of the hole, they can keep their rating.
Spending, deficits AND taxes need to go down.
The irony of this whole mess is that SF reserve paper on the effectiveness of government spending firmly refutes the keynesian methods effectiveness when contrasted with tax breaks.
The government is doing the most inefficient method of stimulating the economy, and will probably stiffle growth when they try to tax and fee their way out of the mess they are creating.
HELP!

Jun 24 12:52 PM

[Chandragupta:]

No need to take Moody's seriously. When Timothy Geithner told a group of Chinese students that Chinese assets in US were safe, they burst out laughing. They know more than Moody's.

Jun 24 01:19 PM

[Dave Wrixon:]

I see Citi are awarding themselves generous salary increases to make up for the bonuses they didn't earn.


On Jun 24 10:37 AM SoCalSailor wrote:

>
> American patriots? They don't risk life and limb to keep me safe
> in bed at night. . .They risk life and limb to prop up the oligarchy,
> to steal other peoples' resources, etc. Of course, they do this due
> to the policies of the oligarchs, and if they were thinking about
> it, they might reconsider killing people for the greed of others.
>
>
> The policies of the oligarchs are the reason the economy is in shambles
> for the majority of the people in the U.S. The FIRE economy is hollow
> now and always has been. How could you possibly run an economy based
> on finance, insurance, and real estate? Only by being thieves. These
> thieves wear fine clothes and talk in their own jargon, but they
> are just thieves.
>
> On Jun 24 08:55 AM Joe222 wrote:

Jun 24 01:27 PM

[a. palmer jr.:]

I don't think "broke" is an AAA rating. Broke is CCC/ccc or lower. But AAA is what my Lehman corporate bond was rated when I bought it so maybe broke is AAA.

Jun 24 03:08 PM

[Moon Kil Woong:]

What does AAA mean? I know AAA eggs are nice big eggs with a nice big yolk. I suppose AAA is analogous to laying a big one in the financial world. Let's test the theory that AAA means a big lie. AAA in mortgage bonds meant that you got the lowest yield with the highest risk for the asset class you were buying. AAA for re-insurers meant you had the least money to pay your claims. AAA for GMAC, GE, and AIG meant they were the most successful at lying to regulators and their investors about how safe they were, how much reserves they had, how safe they were, and how profitable they were.

Yes, AAA seems to imply the highest grade of lying. Bernie Madoff must have been a AAA type of guy indeed.

We don't really need to asssign letter grades to things anymore. we are not in school and are all adults. If your bonds carry any countrparty or default risk above inflation that's the level of your default or counterparty risk (duh). According to this theory (I call this a theory since someone apparently disagrees since we have stuff like ratings agencies) no matter what Moody's says, clearly long term treasuries are not riskless (although they may be AAA according to the analysis above). Anyone beg to differ?

Jun 24 11:52 PM

[secmaven:]

Hark, Hark the dogs do bark
The beggars are coming to town.
One in rags, one in tags,
And one in a velvet gown.

Jun 26 01:59 AM