Is America still AAA?

[phk]

Is America still AAA?

Não

May 21st 2009 | SÃO PAULO
From The Economist print edition

Brazil rates America

WHEN Brazil’s sovereign bonds were raised to investment grade last year there was much rejoicing, such is the heft of the big credit-rating agencies in emerging markets. Yet somehow the process does not work in reverse, even though there are several independent rating agencies based in the bigger emerging markets that are capable of judging sovereign creditworthiness. This may be about to change. SR Rating, a Brazilian firm, will soon issue a judgment on American government bonds. Its verdict is not pretty: the company says it will issue a AA rating.

Paulo Rabello de Castro, who chairs the ratings committee at SR, describes the decision to rate Uncle Sam as “an outright provocation”. Yet he also thinks that firms in emerging markets like Brazil, which are accustomed to instability, might have some advantages when scanning the horizon for danger signs, compared with agencies that operate in the relative calm of Europe or America. “You can be living happily in the belly of a whale and operating with that as your world,” says Mr de Castro, “until one day the whale’s belly contracts and you discover there is a whole universe of risks out there.” Brazilians, he suggests, are specialists in such belly contractions.


Questioning America’s long-held AAA rating is not as treasonable now as it once seemed. Moody’s has recently raised the alarm about the combined strain that bailing out banks, stimulating the economy, and paying for health care and social security will put on the Treasury. Mr de Castro argues that perfect scores should henceforth be saved for places like Norway that sit on lots of oil, put revenues from its sale into a piggy bank and are unlikely to be invaded by their neighbours. As for the structured products that were mistakenly given AAA ratings over the past few years, he argues that no asset that has been around for less than ten years should be considered worthy of the accolade.

America’s bondholders will not be too put out by the verdict of one Brazilian rating agency. Concerns about long-term credit worthiness aired recently by the People’s Bank of China are much more likely to trouble them. SR Rating is, however, hoping to build a network of independent agencies in emerging markets that, taken together, would have more clout. They might even help to prevent future contractions.

[Swing low, sweet chariot. Comin' for to carry me home.]

unless the U.S. runs out of ink and paper, I have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA.

[CARLHAYDEN]

unless the U.S. runs out of ink and paper, I have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA.

Yes I understand you favor of inflating the money supply to pay off debts.

Now, foreigners (say China and the Saudis) might not like having their investments in real money being paid off with monopoly money, and may well decide not to loan us anymore.

Indeed, intelligent Americans may decide to put their investments in assets less likely to disappear.

I realize that you "have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA," but others do understand that idea, and lack you blind faith!

[Swing low, sweet chariot. Comin' for to carry me home.]

unless the U.S. runs out of ink and paper, I have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA.

Yes I understand you favor of inflating the money supply to pay off debts.

Now, foreigners (say China and the Saudis) might not like having their investments in real money being paid off with monopoly money, and may well decide not to loan us anymore.

Indeed, intelligent Americans may decide to put their investments in assets less likely to disappear.

I realize that you "have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA," but others do understand that idea, and lack you blind faith!

oh, i am not saying that printing money is desirable.  But, to my understanding, "credit ratings" rate the risk involved with getting the money you loaned returned to you.  There may be a real non-zero risk of the U.S. economy absolutely collapsing against the wishes of the government, but there is absolutely ZERO chance of the U.S. not paying back its debt it owes in U.S. currency unless the governament makes a deliberate choice not to do so.

If my understanding is wrong, and if the credit ratings are meant to provide guidance to the quality of  the store of value in relation to commodiites, then EVERY national currency should be rated as junk.

[Gustaf]

unless the U.S. runs out of ink and paper, I have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA.

Yes I understand you favor of inflating the money supply to pay off debts.

Now, foreigners (say China and the Saudis) might not like having their investments in real money being paid off with monopoly money, and may well decide not to loan us anymore.

Indeed, intelligent Americans may decide to put their investments in assets less likely to disappear.

I realize that you "have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA," but others do understand that idea, and lack you blind faith!

oh, i am not saying that printing money is desirable.  But, to my understanding, "credit ratings" rate the risk involved with getting the money you loaned returned to you.  There may be a real non-zero risk of the U.S. economy absolutely collapsing against the wishes of the government, but there is absolutely ZERO chance of the U.S. not paying back its debt it owes in U.S. currency unless the governament makes a deliberate choice not to do so.

If my understanding is wrong, and if the credit ratings are meant to provide guidance to the quality of  the store of value in relation to commodiites, then EVERY national currency should be rated as junk.

Of course the credit rating is linked to the actual real value of the money. Anything else would be completely absurd...

[Swing low, sweet chariot. Comin' for to carry me home.]

oh, i am not saying that printing money is desirable.  But, to my understanding, "credit ratings" rate the risk involved with getting the money you loaned returned to you.  There may be a real non-zero risk of the U.S. economy absolutely collapsing against the wishes of the government, but there is absolutely ZERO chance of the U.S. not paying back its debt it owes in U.S. currency unless the governament makes a deliberate choice not to do so.

If my understanding is wrong, and if the credit ratings are meant to provide guidance to the quality of  the store of value in relation to commodiites, then EVERY national currency should be rated as junk.

Of course the credit rating is linked to the actual real value of the money. Anything else would be completely absurd...

I highly, highly doubt that.  In that case, every corporate bond rating would have to take into account the real value of the currency.  I think the rating is simply a function of the risk of defaulting.

[CARLHAYDEN]

unless the U.S. runs out of ink and paper, I have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA.

Yes I understand you favor of inflating the money supply to pay off debts.

Now, foreigners (say China and the Saudis) might not like having their investments in real money being paid off with monopoly money, and may well decide not to loan us anymore.

Indeed, intelligent Americans may decide to put their investments in assets less likely to disappear.

I realize that you "have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA," but others do understand that idea, and lack you blind faith!

oh, i am not saying that printing money is desirable.  But, to my understanding, "credit ratings" rate the risk involved with getting the money you loaned returned to you.  There may be a real non-zero risk of the U.S. economy absolutely collapsing against the wishes of the government, but there is absolutely ZERO chance of the U.S. not paying back its debt it owes in U.S. currency unless the governament makes a deliberate choice not to do so.

If my understanding is wrong, and if the credit ratings are meant to provide guidance to the quality of  the store of value in relation to commodiites, then EVERY national currency should be rated as junk.

Jaw drops.

I had no idea you were so massively ignorant in the field of economics.

Just about every major newspaper publishes currency exchange rates in the business section (at least of major currencies).  Try following them for a while.

Interestingly, the Canadian dollar (the loony) has been significantly appreciating relative to the American dollar in the last few months.

So, if I had exchanged American dollars at the existing exchange rate six months ago for Canadian dollars, and sought to reverse the transaction today at currently exchange rates, I would make a significant profit.

Therefor, not all currencies are equal, or remain equal (and most are not "junk").

I made some money twenty years ago betting against the Yen (and conventional wisdom).

Another (simpler) way to examine the value of a nation's currency is to look at how much of it is necessary to purchase an ounce of gold.

[Swing low, sweet chariot. Comin' for to carry me home.]

unless the U.S. runs out of ink and paper, I have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA.

Yes I understand you favor of inflating the money supply to pay off debts.

Now, foreigners (say China and the Saudis) might not like having their investments in real money being paid off with monopoly money, and may well decide not to loan us anymore.

Indeed, intelligent Americans may decide to put their investments in assets less likely to disappear.

I realize that you "have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA," but others do understand that idea, and lack you blind faith!

oh, i am not saying that printing money is desirable.  But, to my understanding, "credit ratings" rate the risk involved with getting the money you loaned returned to you.  There may be a real non-zero risk of the U.S. economy absolutely collapsing against the wishes of the government, but there is absolutely ZERO chance of the U.S. not paying back its debt it owes in U.S. currency unless the governament makes a deliberate choice not to do so.

If my understanding is wrong, and if the credit ratings are meant to provide guidance to the quality of  the store of value in relation to commodiites, then EVERY national currency should be rated as junk.

Jaw drops.

I had no idea you were so massively ignorant in the field of economics.

Just about every major newspaper publishes currency exchange rates in the business section (at least of major currencies).  Try following them for a while.

Interestingly, the Canadian dollar (the loony) has been significantly appreciating relative to the American dollar in the last few months.

So, if I had exchanged American dollars at the existing exchange rate six months ago for Canadian dollars, and sought to reverse the transaction today at currently exchange rates, I would make a significant profit.

Therefor, not all currencies are equal, or remain equal (and most are not "junk").

I made some money twenty years ago betting against the Yen (and conventional wisdom).

Another (simpler) way to examine the value of a nation's currency is to look at how much of it is necessary to purchase an ounce of gold.

dude, I am vastly familiar with foreign exchanges, for I value FX Hedges, swaps, and options, every single trading day.  I work in energy trading, and any trade involving a gas pipeline across the boarder in Canada is hedged with an FX swap if the trade is done in canadian dollars.  It is part of my job to make sure those deals are valued correctly so that the company can manage their trading risk to PnL.

The question I have here is related to the credit rating of U.S. bonds and whether or not that rating attempts to predict currency valuation risks.  I don't think it does.

[Lunar]

You know a Canadian quarter is now worth more than a U.S. one?  Crazy world we live in.

You think you're tossing away a piece of crap but you're actually tossing away 28.1 cents.

[Beet]

This is why the British insisted on returning the pound to gold at the pre-war exchange rate. Anything less than a $4.86 pre-war exchange rate would have amounted, in the eyes of the British authorities, to a default on foreign obligations, and the British were willing to further contract the monetary base in their already slack 1920s economy to return to this rate.

According to this view, the United States continually defaulted on its debt to floating exchange partners from 2002 to 2006. It continually defaulted on its debt to China from July 2005 to late 2008. Of course, many of these creditor nations' dollar holdings are not for the purpose of store of value, but rather for the sake of currency manipulation in the short- term, and protection against capital flight in the long term. Developing nations learned their lessons in the 1980s, 1990s and early 2000s about the dangers of too much credit-creation and speculative hot money. The United States is only learning it now. Some developing nations will now learn about the dangers of grotesque export reliance and how other peoples' irresponsibility will come back to bite them in the ass nonetheless.

[CARLHAYDEN]

Here's excerpts from an AP article:

Dollar Hits New Multimonth Low vs. Euro

Friday, May 22, 2009 4:57 PM

 NEW YORK -- The dollar kept falling Friday, notching fresh multimonth lows against the euro, pound and yen as a warning that Britain's debt level may result in its credit rating being cut ricocheted into worries about the massive U.S. deficit.

The 16-nation euro rose to $1.4015 in morning trading from $1.3889 in New York late Thursday — its first time above $1.40 since Jan. 2.

The British pound rose to $1.5916 from $1.5890, peaking at $1.5945 earlier in the session, its highest point since Nov. 6.

Meanwhile, the dollar edged up to 94.51 Japanese yen from 94.23 yen — after earlier falling to 93.82, its lowest point since Feb. 23.

On Thursday, Standard & Poor's said Britain may have its rating cut because of rising debt levels. Though the ratings agency reaffirmed the country's actual long-term credit rating at "AAA," it said the outlook had deteriorated because of massive borrowing to deal with the recession and the banking crisis.

Because Britain is pursuing similar policies to the U.S. — with both the Bank of England and the Federal Reserve injecting billions of dollars in their economies by buying assets from banks — the move also weighed on U.S. assets and the dollar. Treasurys sold off Thursday, and continued to do so Friday.

S&P's announcement "wound up creating more problems for the U.S. dollar than for the British pound," HSBC analysts said in a research note.

"The problem for the U.S. is particularly acute because of its reserve status," said UBS analyst Brian Kim in an e-mail to investors Friday. Major holders of U.S. debt, such as Middle Eastern sovereign funds and the Chinese government, have not been shy about calling the U.S. out for what it sees as policies that will trigger inflation, shrinking the value of their Treasury holdings.

The Fed in March said it planned to buy up billions in long-term Treasurys and $1.25 trillion in mortgage-backed securities, flooding the money supply.

"The dollar has weakened as dollar bears have now added concerns on U.S. credit ratings to their arsenal," Kim said.

Earlier this month, the Obama administration hiked its forecast for this year's federal deficit to $1.84 trillion. The deficit is approaching $1 trillion for the budget year that began Oct. 1.

Big deficits mean the government has to borrow more, which could put its credit rating at risk. They can also put upwards pressure on inflation, thus cutting the purchasing power of the dollar.

In other trading, the dollar fell to 1.1235 Canadian dollars from $1.1404 and slid to 1.0833 Swiss francs from 1.0936 francs late Thursday.
 

[Gustaf]

oh, i am not saying that printing money is desirable.  But, to my understanding, "credit ratings" rate the risk involved with getting the money you loaned returned to you.  There may be a real non-zero risk of the U.S. economy absolutely collapsing against the wishes of the government, but there is absolutely ZERO chance of the U.S. not paying back its debt it owes in U.S. currency unless the governament makes a deliberate choice not to do so.

If my understanding is wrong, and if the credit ratings are meant to provide guidance to the quality of  the store of value in relation to commodiites, then EVERY national currency should be rated as junk.

Of course the credit rating is linked to the actual real value of the money. Anything else would be completely absurd...

I highly, highly doubt that.  In that case, every corporate bond rating would have to take into account the real value of the currency.  I think the rating is simply a function of the risk of defaulting.

Well...it does. Think of this way.

Suppose I am thinking of lending (or "investing") money I don't need right now. I do need it in a year when I expect to buy a house or something. Let's furthermore assume that I'm American. Let's say I can choose between an American 1-year bond and a German 1-year bond.

For simplicity's sake, let's say 1 USD= 1 Euro right now. Let's say both have a yield of 10%. And, finally lt us assume that higher inflation in the US will mean  that 1 Euro = 1.1 USD in a year (10% appreciation of the euro). So, if I buy the American bond I will have $110 in a year. If I buy the German bond I will have 110 Euros = $121

I prefer 121 to 110 when it comes to buying whatever I may want. So I'll take the German bond. In fact, everyone will, if everyone has the same expectations of currency fluctuation. Thus, the US will have to offer a higher interest rate in order to get anyone to buy their bonds.

Finally, since currency fluctuation tends to be driven by differences in inflation rates, and inflation is in turn driven to a large extent by state borrowing default risk and inflation risk tend to be the same thing for states. A government can't, after all, default on its debt. It can always inflate it away.   

[I spent the winter writing songs about getting better]

unless the U.S. runs out of ink and paper, I have no idea how U.S. debt, owed in U.S. currency, can be anything other than AAA.

Ever heard of the Weimar Republic?

[opebo]

Weimar has nothing to do with it - Weimar's troubles were caused by lack of power.

Probably my favorite political quotation of all time is Mao's - "power grows out of the barrel of the gun".  Heck its probably everyone's favorite.  Anyway its the most true.

Those who control America are not only 'owing' a debt denominated in the nation's 'own currency' (in other words the hegemon has political power over the whole debt issue, and even a great deal of power over the supposed creditors). 

The only reasonable comparison for superpower devaluation was the collapse of the British Pound after WWII, certainly not the Weimar Republic.  And in either case the reason was - the loss of political power.  So the real question is, has America lost its gun.  I would argue that it has not yet lost it, though no doubt we're trending in that direction.

[Sam Spade]

AAA?  No.

But it is where the flight to safety will still occur when we get one (fairly soon).  Old habits die hard (and besides it is what most debt (i.e. money) is denominated in)

The question in my mind is, how quickly will that flight to safety to flee to shorter and shorter term Treasuries.

[2952-0-0]

In the 1998 Russian crisis, the Russian government defaulted on its rouble debt (which was worth almost nothing), but always kept its foreign currency payments.

The "there is zero chance at defaulting if the government has the printing press" argument doesn't always pan out.

[Swing low, sweet chariot. Comin' for to carry me home.]

The "there is zero chance at defaulting if the government has the printing press" argument doesn't always pan out.

that's because you're a hack and hacked off the rest of my argument:

there is absolutely ZERO chance of the U.S. not paying back its debt it owes in U.S. currency unless the governament makes a deliberate choice not to do so.