AAA Madness: Exploding Debt Edition

 |  Includes: AGG, BND, DIA, QQQ, SPY
by: Tom Lindmark

Making the rounds right now, and well it should, is this graph and link to Tracy Alloway’s post on AAA credit (click it for the big version).

Now there has been no lack of commentary since this appeared. Felix Salmon frets that there is ultimate danger lurking in AAA rated securities. Yves Smith does her best to emulate Shana Alexander to Felix’s James J. Kilpatrick and suggests that while he is a mindless boob, the real issue is not the abundance of caution that Felix cites as the cause of the explosion of high rated debt but rather a voracious desire for such debt in order to game the system. Arnold Kling weighs in with the observation that the financial sector was the chief enabler of this explosion and cites that as one more piece of probative evidence that we have too large a financial sector.

All in all it makes for entertaining reading and each as well as others who have weighed in make good points. For myself, I see nothing but consummate bullshit in this graph. I don’t doubt for a moment that the amount of debt that has been issued over the past 20 or so years it measures has exploded. I don’t believe for a moment that the proportion of that debt that was really AAA in any way approximates what is depicted above.

What the graph does tell me is that a consortium made up of rating agencies, governments and moneyed interests have conspired to foist a great burden of debt onto the world’s economies under false pretenses. Certainly one of the great lies in economic history.