"The Odds on the Dollar, Treasury Bonds and the U.S. Government’s AAA Grade All Heading for the Dumpster are Shortening" → Washingtons Blog
"The Odds on the Dollar, Treasury Bonds and the U.S. Government’s AAA Grade All Heading for the Dumpster are Shortening" - Washingtons Blog

Thursday, May 21, 2009

"The Odds on the Dollar, Treasury Bonds and the U.S. Government’s AAA Grade All Heading for the Dumpster are Shortening"


I've written numerous essays on the facts that the dollar is losing its status as world reserve currency, the bubble in treasury bonds may be ending, and the U.S. may very well lose its AAA sovereign credit status.

Bloomberg writer Mark Gilbert addresses all three facts today:

The odds on the dollar, Treasury bonds and the U.S. government’s AAA grade all heading for the dumpster are shortening.

While currency forecasting is a mug’s game and bond yields can’t quite decide whether to dive toward deflation or surge in anticipation of inflation, every time I think about that credit rating, I hear what Agent Smith in the “Matrix” movies called “the sound of inevitability.”

Several policy missteps suggest that investors should stop trusting -- and lending to -- the U.S. government. These include the state’s pressure on Bank of America Corp. to buy Merrill Lynch & Co.; the priority given to Chrysler LLC’s unions over the automaker’s secured creditors; and the freedom that some banks will regain to supersize executive bonuses by giving back part of the government money bolstering their balance sheets...

“All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem,” Lee Quaintance and Paul Brodsky of QB Asset Management said in a research note earlier this month. “In reality, however, paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money.”...

Why pick on the dollar, though? Well, not necessarily because the U.S. economy is in worse shape than those of the euro area, the U.K. or Japan. The biggest problem is that external investors -- particularly China -- have more skin in the dollar game than in euros, yen or pounds, which makes the U.S. currency the most likely candidate to meet the cleaver in a crisis of confidence about post-crunch government finances...

“When the government parks its tanks on capitalism’s lawns, that spells trouble for those who invest, add value and create jobs,” says Tim Price, director of investments at PFP Wealth Management in London. “Trillion-dollar bailouts do not only leave massive public-sector deficits in their wake, they also leave the presence of the heavy hand of government all over industry and markets, so the outlook for government bonds is less promising than the economic textbooks on deflation would have us believe.”...

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

David Walker, a former U.S. comptroller general, wrote in the Financial Times on May 12 that the U.S.’s top credit rating looks incompatible with “an accumulated negative net worth” of more than $11 trillion and “additional off-balance-sheet obligations” of $45 trillion. “One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate,” he wrote...

Dropping the U.S. from the top rating grade, though, wouldn’t mean the nation is about to default on its debt obligations; there’s a subtle distinction between ability to pay and propensity to fail to pay. There’s also a compelling argument that no government should be enjoying the benefits of a top credit grade in the current financial climate.

Using the definitions outlined by Standard & Poor’s, a one- step cut into the AA rated category would nudge the U.S.’s creditworthiness into a “very strong” capacity to fulfill its commitments, just weaker than the “extremely strong” capabilities demanded of AAA rated borrowers. That seems an appropriately nuanced sanction -- albeit one that the rating companies might turn out to be too cowardly to impose.

The statement that "paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money" sounds a lot like what the gold bugs - like Darrell Schoon and Antal Fekete - have said for years.

2 comments:

  1. Thye US Dollar will be vapor only when tuition at MIT can't be paid for in dollars. The reality on gold is that the public is a seller at high perceived prices, and the buyers are playing momentum on the gold and dollar going down. So the question then is, to whom will the gold buyers sell to to lock in their profits?

    ReplyDelete
  2. "Several policy missteps...".

    There have not been any missteps.
    There have not been any mistakes.
    There have not been any miscalculations.
    This is by design.

    ReplyDelete

→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.