Friday, July 23, 2010
China Calls Our Bluff: "The US is Insolvent and Faces Bankruptcy as a Pure Debtor Nation but [U.S.] Rating Agencies Still Give it High Rankings"
America's biggest creditor - China - has called our bluff.
As the Financial Times notes, the head of China's biggest credit rating agency has said America is insolvent and that U.S. credit ratings are a joke:
The head of China’s largest credit rating agency has slammed his western counterparts for causing the global financial crisis and said that as the world’s largest creditor nation China should have a bigger say in how governments and their debt are rated.
“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards,” Guan Jianzhong, chairman of Dagong Global Credit Rating, told the Financial Times in an interview.
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He specifically criticised the practice of “rating shopping” by companies who offer their business to the agency that provides the most favourable rating.
In the aftermath of the financial crisis “rating shopping” has been one of the key complaints from western regulators , who have heavily criticised the big three agencies for handing top ratings to mortgage-linked securities that turned toxic when the US housing market collapsed in 2007.
“The financial crisis was caused because rating agencies didn’t properly disclose risk and this brought the entire US financial system to the verge of collapse, causing huge damage to the US and its strategic interests,” Mr Guan said.
Recently, the rating agencies have been criticised for being too slow to downgrade some of the heavily indebted peripheral eurozone economies, most notably Spain, which still holds triple A ratings from Moody’s.
There is also a view among many investors that the agencies would shy away from withdrawing triple A ratings to countries such as the US and UK because of the political pressure that would bear down on them in the event of such actions.
Last week, privately-owned Dagong published its own sovereign credit ranking in what it said was a first for a non-western credit rating agency.
The results were very different from those published by Moody’s, Standard & Poor’s and Fitch, with China ranking higher than the United States, Britain, Japan, France and most other major economies, reflecting Dagong’s belief that China is more politically and economically stable than all of these countries.
Mr Guan said his company’s methodology has been developed over the last five years and reflects a more objective assessment of a government’s fiscal position, ability to govern, economic power, foreign reserves, debt burden and ability to create future wealth.
“The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings ,” Mr Guan said.
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A wildly enthusiastic editorial published by Xinhua , China’s official state newswire, lauded Dagong’s report as a significant step toward breaking the monopoly of western rating agencies of which it said China has long been a “victim”.
“Compared with the US’ conquest of the world by means of force, Moody’s has controlled the world through its dominance in credit ratings,” the editorial said...
China is right. U.S. credit ratings have been less than worthless. And - in the real world - America should have been downgraded to junk. See this, this, this, this, this, this, this, this and this.
China is not shy about reminding the U.S. who's got the biggest pockets. As the Financial Times quotes Mr. Guan:
“China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged.”Might Makes
Indeed, Guan is even dissing America's military prowess:
“Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable.”As I've repeatedly shown, borrowing money to fund our huge military expenditures are - paradoxically - weakening our national security:
Indeed, as I pointed out in 2008:As I've previously pointed out, America's military-industrial complex is ruining our economy.
And U.S. military and intelligence leaders say that the economic crisis is the biggest national security threat to the United States. See this, this and this.
[I]t is ironic that America's huge military spending is what made us an empire ... but our huge military is what is bankrupting us ... thus destroying our status as an empire ...
The fact that America spends more than the rest of the world combined on our military means that we can keep an artificially high credit rating. But ironically, all the money we're spending on our military means that we become less and less credit-worthy ... and that we'll no longer be able to fund our military.So why hasn't America's credit rating been downgraded?
Well, a report by Moody's in September states:"In superficially similar circumstances, the ratings of Japan and some Scandinavian countries were downgraded in the 1990s.
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For reasons that take their roots into the large size and wealth of the economy and, ultimately, the US military power, the US government faces very little liquidity risk — its debt remains a safe heaven. There is a large market for even a significant increase in debt issuance."
So Japan and Scandinavia have wimpy militaries, so they got downgraded, but the U.S. has lots of bombs, so we don't? In any event, American cannot remain a hyperpower if it is broke.
The Scary Part
I chatted with the head of a small investment brokerage about the China credit rating story.
Because he gives his clients very bullish, status quo advice, I assumed that he would say that China was wrong.
To my surprise, he simply responded:
They're right. What's scary is that China knows it.In other words, everyone who pays any attention knows that we're broke. What's scary is that our biggest creditor knows it.
Tricks Up Their Sleeves?
China has been threatening for many months to replace the dollar as the world's reserve currency (and see this). And China, Russia and other countries have made a lot of noises about replacing the dollar with the SDR. See this and this.
Gordon T. Long argues that the much talked about gold swaps are part and parcel of the plan to replace the dollar with the SDR. Time will tell if he's right.
China, of course, is not without its own problems. See this and this.
In related news, Germany's biggest companies are starting to shun Wall Street as too risky.
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I am wondering what is the right way to assess US debt risk.
ReplyDeleteIn terms of net external debt - which is debt owed to foreigners less foreign assets held by Americans, the numbers are not that bad.
I do not have a set of those numbers, but it is worth looking at them vs. just the gross debt numbers.
Another number that is worth looking at is the ability of the US to generate incremental / growth in exports.
Many American companies, like Microsoft and Google, never repatriate more than a tiny fraction of their earnings to the US, where it is heavily taxed --- preferring to funnel the profits to tax havens elsewhere.
These intangibles represent sizable amounts of US exports that are not easily counted.
What is the value of the Google / Microsoft franchisees that is valuable in nearly every part of the world?
Likewise, what is the value of capabilities like Cisco, etc. that are strong exporters?
Taken together, the case made by Chinese rating agencies may be exaggerated.
One self evident argument for their bias: Any rating of Chinese debt would have to account for the repudiation of debt pre-1949 by the People's Republic of China.
The US, on the other hand, have met its debt obligations since its founding in 1776, including before and after the civil war.
China can hardly claim a similar track record.
Rating agency observation; A+. The US is broke.
ReplyDeleteRating of China solvency: almost but not quite as broke as we are, following the same wasteful path.
As for dollar remarks; D-. How can the Chinese be considered 'wealthy' when Chinese wealth is in the form of US dollar reserves?
How would any currency supplant it? Saudi Arabia accepts dollars; that country keeps the US superior to China and the rest, and China knows this. Without the dollars, China cannot buy oil.
Since the IMF (which emits SDR's) is a US Treasury step- child what would compel the IMF to issue - and KSA to accept - dollar proxies when they already accept the real thing?
The problem in the currency/economic output ambit is not debt but dollar hardness and energy constraints which devalue debt's 'money- like' qualities. Output is constrained by resource shortages which makes money - dollars - more valuable than output. Social tensions do the same thing as savings increases currency value. China's savings rate would bankrupt the country if not for currency flows from overseas. High savings rates are only tolerable in mercantile schemes that allow for the inflows to be retained. China is absolutely dependent upon 'Broke' USA currency flows and the USA knows it!
What is China's wealth? Outside of its dollar assets which are ironically balanced by dollar denominated- liabilities (a condition that exists as an outcome of its mercantile policy which gained the dollars in the first place) China's 'wealth' is its noxious and poisonous industrial base making useless, cheap garbage.
China is the USA's basement. It is as insolvent as the US, just in different ways.
Issuing a credit rating, which is meant to assess the risk of default, on a sovereign with debt denominated in its own currency (like the U.S.) is a pointless exercise.
ReplyDeleteIt is technically impossible for a country like the U.S. to default on its debt because it can print an unlimited supply of money to buy back its own debt.
In the U.S. there could be inflation. However, China has a higher inflation risk than the U.S. at present.
i think that US must start making money for herself rather then borrow it from other countries such as Chine so that Chine can stop being so proud if that. we can always hear from me at my blog at
ReplyDeletewww.knowingwhat.com
feel free to check it (you will lose nothing)
You've made my day (Debi caught the ZH re-post). I have only two quibbles:
ReplyDelete1) this is going to unfold much slower than you think. The analogous situation to now is 1875 with China-now == US President Grant & US-now == UK PM Disraeli. America's going to keep looking dominant for the next quarter century as the process of internal rot comes to fruition.
2) Everyone knows that Wall Street's fiat debt raters are a joke, but few realize yet that the actuaries have all left the building, leaving insurance and pensions a smoking hole.
If our credit rating depends upon our military force, and our military force depends upon our credit rating, we've got problems.
ReplyDelete@ W.
ReplyDeleteYour argument that China repudiated it's pre1949 debt while the US never has in its history is flawed.
Pre 1949 debt wasn't made to the PRC, but rather to the ROC, a different government that was in active conflict with the PRC.
For a similar US version of the story, following the Civil War, Confederate debt went unpaid as well. It's ridiculous to assume a government will pay off another's debt. Do you think Revolutionary America paid off Britain's war debt? Any debt pre 1949 that China incurred went with the Kuomingtang to Taiwan.
Regarding the US's credit, I agree that credit agencies perform badly. A large portion of the fault for mortgage securities was because the credit agencies gave them a high rating when in actuality they did not deserve one.
Still, I think people are forgetting that a credit rating on Treasury bonds should merely look at the US's ability to pay it off when the bond is due. I don't see any difficulty in that issue for the next 15 years.
@ Steve. You're misinformed about China's holdings. It's been steadily diversifying it's holdings.
"China's 'wealth' is its noxious and poisonous industrial base making useless, cheap garbage."
It's obvious that your opinion isn't balanced or objective, so I'll not try to reply.
Pot calls kettle black. Both begin to roll in the snow, only succeed in making the snow black.
ReplyDeleteArtificial:
ReplyDeleteWhat a disingenuous argument to wiggle out of debt!
There is a longstanding precedents under international law for successor states to assume the responsibility of a former state.
This rule applies regardless of whether the state remains roughly the same geographically, or split or agglomerated with a larger entity.
Thus, on that basis, the People's Republic of China claimed (and ultimately received) all the posts formerly held by the Republic of China in all international organizations, including the UN seat with the permanent seat and a veto at the Security Council.
China (PRC) seem to have no difficulties asserting that they are legally entitled to assume these benefits.
Well, then PRC have to assume the costs (repudiating debts under the ROC era).
Furthermore, the debts are not only debts of the government, but also, private debts --- which China under the PRC also repudiated.
Under such circumstances, there is not a doubt that Chinese government is by any reasonable stretch of the imagination, an unstable government that have a history of less than 50 odd years.
This compare and contrast with Britain and USA, who have been continuously governed --- and honoring their obligations --- for centuries.
Insofar as the Confederate debt, well, that is an unlawful, non-recognized regime that existed for 4 brief years.
Quite a different story.
i don't care politics and government .. i care about wealthy civilian without government business
ReplyDeleteThe USA can print to pay off debt. But as the country depends on critical resources that are supplied beyond its borders, if the dollar loses value, printing won't help.
ReplyDeleteRight now the depressed world economy seems to have depressed the price of oil. If that changes significantly, the higher energy cost will be reflected in price increases of other products.
Becoming energy self-sufficient would increase national security.
the guy from http://www.forecastfortomorrow.com has been spot on and has been calling for another major catastrophe.
ReplyDeleteI am getting scared now...hmmm
Can we explain this away?
ReplyDeletehttp://blog.alexanderhiggins.com/2010/07/26/bp-gulf-oil-spill-fishing-waters-reopened-based-visual-observations-oil-surface-3/
More affirmation of Matt Simmons…
hmmm
ReplyDeleteChina is not shy about reminding the U.S. who's got the biggest pockets. As the Financial Times quotes Mr. Guan:
ReplyDelete“China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged.”
I think it is very interesting to note that when Reagan took office in 1981 the U.S. was the world's largest creditor nation, and by the time he left office we had become the world's largest debtor nation. Yet people still believe that the Republicans are the party of "fiscal responsibility".
The way to deal with the problem of our massive debt is to enact a Green WPA to create millions of jobs building a clean energy infrastructure. Unemployed workers don't buy very much, or pay much in taxes. Spending hundreds of billions a year to purchase oil from foreigners who want to kill us is bad for the economy, as is spending Trillions in tax dollars to finance endless wars to "secure" said oil.
I think the way the topic is phrased is what is totally flawed to begin with. It is not relevant what the credit rating is that should determine solvency or impact future growth of the economy. The problem is the stimulus money and attempts to prop up the asset value of assets that have lost their real value.
ReplyDeleteHousing has lost it's value by 35%, yet we bail out banks and Fannie and Freddie, when we should just let them fail and those that purchased the assets lose their investment to match the real value loss of the asset.
At present we have the government propping up the wealthy class with bailouts at the expense of everyone, since 90% of all asset classes reside in the hands of the few 1% wealthy class.
How can you have housing drop 35% of it's value, yet still owe 98% on the original loan? With all of the foreclosures and bailouts combined there has yet to be an adjustment to the amounts owed on assets in this country, thus there will be no correction or recovery until at some point the new value matches the debt via forgiveness or write down of all assets and debt.
With every step we have taken to date all it means is that we will repeat what Japan did in the 80's and end up stuck with this declining economy for the next 20 years.
The way to get people back to working, and investment back in business and production is to let the banks fail that need to fail rather than bail them out, and the business that should fail need to fail or you will never reach a stable economy for growth.
ReplyDeleteWe are doing just as Japan tried in the 1980's to do and failed for 20+ years to do, propping up, stimulus, anything but allow for failure. Thus housing has lost 35% of it's real value, but the debt owed remains at 98%. Rather than let GM fail we buy them for 57 billion dollars and give cash for clunkers. When is the time for fiscal responsibility where a person that owes $100,000 on a house valued at $65,000 need to be forgiven the $35,000 difference or asked to leave the keys in the door?
If we maintain $100,000 debts for $65,000 businesses, homes, cars, boats, we will never create another job in this country and will be printing more money forever to get nowhere.
It is time for failure, so we can move forward and grow job and the economy again. It has nothing to do with credit ratings, you can be rated AAA+ but if your holding $100,000 debt on a $65,000 asset, your bankrupt.
The USA "can" print more to settle debts. But seeing the dependence on vital resources that are supplied from other countries, it would remain at a stalemate so this step won't be feasible.
ReplyDeleteWhat we need is the creation of jobs promoting clean energy infrastructure. Without employment, the buying power of the people is diminished and makes for a very heavy burden to the economy, since the payment of taxes won't be easily met, and could also lead to bankruptcy. Los Angeles has lawyers which specializes in these situations. Best bet would be to consult with them about your finances. Even a criminal attorney in Los Angeles would notice the predicament our country is in. It's so obvious that the government should have come to a conclusion by now.