S&P makes the same error with US debt as subprime loans

Posted on 19 April 2011 with 1 comment from readers

Ratings agencies completely failed in their duty to alert investors to the dangers of subprime loan packages. Now they are asleep on the job with US federal debt. Only yesterday did the S&P issue a ‘negative’ bias to the triple-A rating of this debt mountain. Why now?

‘Given the fact the US government is 28 days away from bumping up against the $14.3 trillion debt ceiling,’ says debt-guru Addison Wiggin in today’s edition of The Five Minute Forecast (click here), ‘we suspect the question of Uncle Sam’s ability, let alone political will, to pay is too obvious to ignore.’

Debt mountain

It is indeed hardly a secret that the US government has been accumilating debt over the past year while every other country in the world, bar Japan, has been struggling to push debt levels down.

But S&P still wants to face both ways, warning on the US debt while affirming its AAA-status. Here is how S&P explained itself:

‘Our ratings on the US rest on its high-income, highly diversified, and flexible economy, backed by a strong track record of prudent and credible monetary policy. The ratings also reflect our view of the unique advantages stemming from the dollar’s preeminent place among world currencies.’

We could handle the first and last parts of this statement, but ‘prudent and credible monetary policy’ is exactly what the US has not pursued for at least the past decade. It is debasing the US dollar by money printing and the presses have gone into a higher gear since the global financial crisis. That is the ‘A’ that ought to go from the triple-A.

What happens as the US loses its credit rating? Well, yesterday stocks plunged and so did the dollar. Gold and silver rose against this downpull (click here). Bonds will fall as yields rise.

So much for the eurozone debt crisis. It looks as though the US is also coming up against the limits of its credit. Remember the recession that followed the credit freeze of autumn 2008?

Debt unsustainable

The Whitehouse this week proposed budget cuts that would still mean lifting the federal debt ceiling to $20.8 trillion by 2016. But what is called into question now is the ability of the nation to finance this debt.

Of course the US can afford to finance its debt. But that will mean higher interest rates and bringing debt levels down rather than continuously pushing them up. If the US government does not do this then markets will do it for them.

S&P has been far too supportive of its friends in Washington and Wall Street, whether on subprime or government debt, and its warning now is too late to prevent an asset price implosion in the face of unsustainable debt levels. How bad this proves to be remains to be seen.