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No Triple A Rating for You! Come Back One Year!

January 14, 2011

My friend Xuan decided to take a break from her studies and put her creative forces to work by submitting this guest entry. In this post, she talks about how Moody’s and Standards & Poor’s may downgrade the U.S. government’s triple A rating to “Rated E for everyone” (okay, I made that part up) if it doesn’t address its continuously growing debt. Much thanks to Xuan for her contribution!

So the news came out this morning that Moody’s and Standard & Poor’s announced they may cut their triple A ratings on U.S. Treasury bonds. I laughed it off at first, but then the gravity of the situation hit me. This is no joke. There are Americans who take this news very seriously. Hence, I knew it was time to turn to the chatter to set the record straight.

First of all, Moody’s and S&P’s announcements within hours of each other seems a bit suspicious. Two things can be at play: 1) Moody’s and S&P’s are too scared to make the announcements on their own—come on, this is the U.S. federal government we’re talking about—so they had to do it together and/or 2) Moody’s and S&P’s have lost their minds and now think they are bigger than the U.S. government.

If the former, good. They should be scared. Try downgrading U.S. debt and see what will happen. The federal government still has not received an answer for why Moody’s and S&P’s gave those mortgage backed securities triple A ratings.

Congressional hearing? You betcha. SEC investigation? Of course. Can you imagine what that will do to the shareholders of Moody’s and S&P’s?

If the latter scenario took place, however, WE SHOULD BE SCARED.  What has happened to our political system when corporations think they are more powerful than the feds? While it is true that no entity is above the law, corporations should still be reminded that they are not above the federal government either. It was not until the early 1800s that corporations were allowed to exist indefinitely. State and federal governments granted charters to corporations who serve a “useful purpose” to the state or the union prior to 1819. Charters only lasted 20 years, and renewal required the corporation to show its usefulness to the state or the union.

What kind of world do we live in now where corporations think they can arbitrarily carry out a financial assault to rob the U.S. government? No folks, the U.S. government is not going to go bankrupt. Moody’s and S&P’s joint announcement is just an attempt to get the U.S. government to pony up more money to the banks. How does this work you ask? Well, if Moody’s and S&P’s push their agenda far enough, the U.S. government would have to show investors (i.e.bankers–doesn’t it sound odd that a sovereign government has to appease investors?) it can pay back its debt (U.S. Treasury bonds). This means the banks will get the U.S. government to respond the following ways:

1. Reduce its deficit (no more school or hospital funding; keep the bank bailouts please)

2. Cut corporate tax cuts to attract more investments (guess who this will benefit?)

3. Buy insurance for the U.S. Treasury bonds. How is this possible? Typically, investors buy U.S. Treasury bonds as insurance for their investments.  What will the U.S. government buy as its insurance? Well, how about some sort of paper concocted by Goldman Sachs? And why not use federal land or just about anything owned by the U.S. government to back up those insurance papers?

If you think my comments are absurd, you’re right. They’re meant to be that way. Think of this situation this way. Everyone in the world spends and saves in U.S. dollars. The U.S. dollar hegemony setup is not going away anytime soon for the rest of the world. Within the U.S, we’re stuck with the U.S. dollar forever. If you want to pay your taxes, the IRS does not take Euros or gold coins. You have to convert those Euros and gold coins for U.S. dollars. But wait a minute, guess who prints U.S. dollars? Nope, it’s not Goldman Sachs or Moody’s or S&P’s. That’s right, it’s the U.S. government. So as long as Goldman Sachs, Moody’s, and S&P’s are headquartered on Wall Street and have to have corporate taxes, they will need U.S. dollars.

U.S. Treasury bonds are backed up by the U.S. government’s power to tax. The U.S. government can always cash out your bonds for you. Just give them the bonds and they’ll print dollars and give them to you. Heck, they don’t even need to print money nowadays. The Treasury just calls up the Federal Reserve, and the Federal Reserve credits the amount to your commercial bank, who in turn credits the amount to your bank account. So yes, the U.S. Treasury bond is just a mechanism created by the federal government to allow you to earn interest on your dollars. Instead of stuffing your mattress with dollars, exchange them with the fed for a piece of paper. When you are ready to use your dollars, you can get them back with interest. It’s a sweet deal!

The same thing works for Moody’s and S&P’s. If they trade in their US bonds, they get dollars as well. A reason why the bankers are antsy right now about holding U.S. bonds is because they do not pay that much interest and the dollar is depreciating in value. Yet, Moody’s and S&P’s have no other option besides holding U.S. dollars and bonds. Name another government with the economic power of the U.S. None. Not the EU. Not China. So Goldman Sachs, Moody’s, S&P’s, and other Wall Street banks are stuck with the U.S. dollar but they are not happy with the yield. And what do bankers do when they are unhappy? Yes. They throw a fit. That’s exactly what’s going on right now.

So we have two choices. Either we ignore the whining bankers and let them continue pushing their agenda. And who knows? They may successfully convince the rest of us at some point that U.S. bonds are not worth the triple A rating. They downgrade the bonds and then make a killing on selling insurance policies to the U.S. government. Or we can tell the bankers to stop playing games with us. It’s time to ask Moody’s and S&P’s about their ratings practices.

Let’s see how “fair and transparent” the credit rating process really is. You never know, maybe Congress will come to its senses and realize Moody’s and S&P’s are beholden by Wall Street bankers. And when that day comes, Congress will replace Moody’s and S&P’s with a regulatory body that is not beholden by Wall Street. Why not a credit rating agency run by the U.S. government? Are you afraid of Big Government or are you more afraid of Big Business? The choice is yours.

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One Comment leave one →
  1. Ollie permalink
    January 16, 2011 7:04 am

    WOW.
    I usually dislike macro economics for three reasons.
    1- I prefer to maintain a higher level of interest in phenomenon that is closer to home and effects people directly, ie. food prices, labor, employment, individual tax policy,etc.
    2 – I in the neoclassical style still revert to the idea that the macro is just an accumulation of the micro, and the micro is closer to an individuals tangibility.
    3- Macro economics, to me, is almost entirely based on decisions within the realm of political science, and hence the policies that encompass it are almost always made in a political process, not an economic one.

    After reading this blog, which I can say is quite good, I can confirm once again that the institutions determining most macroeconomic phenomenon are highly susceptible to corruption, and this is allowed by the current political system.

    You say ” Why not a credit rating agency run by the U.S. government? Are you afraid of Big Government or are you more afraid of Big Business? The choice is yours.”

    My response is: The vast majority of politicians are directly beholden to their funding sources for stability in their posts, therefore we see that, we operate in a two-step-soft corruption political model, where business rules. Business can rule from the outside or the inside, it doesn’t really matter. Ask yourself this, are slave workers better off with or without the rare visit from a corrupt, theoretically neutral, auditor?

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