Chinese Credit Rater Downgrades US

[cpwill]

The United States has lost its double-A credit rating with Dagong Global Credit Rating Co., Ltd., the first domestic rating agency in China, due to its new round of quantitative easing policy.

Dagong Global on Tuesday downgraded the local and foreign currency long-term sovereign credit rating of the U.S. by one level to A+ from previous AA with “negative” outlook.

The Chinese rating agency said the downgrade reflected the U.S.’s deteriorating debt repayment capability and drastic decline of the U.S. government’s intention of debt repayment.

“The serious defects in the U.S. economy will lead to long-term recession and fundamentally lower the national solvency,” Dagong said in a report...

The Federal Reserve last week decided to buy 600 billion U.S. dollars of U.S. Treasury securities and other assets held by banks in a bid to inject fresh funds into the economy and bring down long-term interest rates.

“The credit crisis is far from over in the United States and the U.S. economy will be in a long-term recession,” Dagong Global warned in the report, adding a weakening greenback will cripple U.S. capability to attract dollar capital reflow..




the WSJ goes on to pooh-pooh the chinese, but then notes that western credit raters haven't exactly been up to snuff lately and then changes the subject.

 

[Diogenes]

It would seem the Chinese are making an effort to raise the interest rate we must pay to borrow money from them.

 

[Coronado]

It would seem the Chinese are making an effort to raise the interest rate we must pay to borrow money from them.

Poor credit = higher interest rate. No surprise there.

 

[Lord Tammerlain]

Poor credit = higher interest rate. No surprise there.

of course with the federal reserve and qualitative easing the US will never have to borrorow from the Chinese again

 

[Ahlevah]

Poor credit = higher interest rate. No surprise there.

When was the last time the U.S. defaulted on its debt? Alas, it is said, inflation is just around the corner, ready to rob the unwary, so you better get your Krugerrands and Silver Eagles now while you can still afford them. :roll:

Interest rates on longer-term Treasuries may head higher for a bit, but when people realize that QE2 is a flop (like QE1 was), rates will head down again. It's like this: About 2/3rds of the money banks would lend would flow to the mortgage market. However, people don't want to buy houses now. They won't want to buy houses next year, either. Where's the urgency to spend lots of money on an asset that's losing value every month? The only reason any houses are selling now at all is because the Feds insure the mortgages. There is plenty of retail and industrial real estate for sale. We don't need more of it, not with a Starbucks on every street corner and manufacturing enterprises fleeing the country for greener pastures they can pollute overseas. The people who want to borrow money don't pay their bills, and the people who the banks want to lend to don't want it. The same thing with corporations, many of which are paying off the debts they have (unless they're good credit risks who borrow domestically because they don't want to repatriate overseas earnings).

So the QE funds will largely sit in the form of reserves on deposit with the Fed, or they'll go into Treasuries, especially if rates keep rising as the Fed bangs its head on the wall in frustration. And since incomes are stagnant and likely to stay that way, good luck to businesses passing on higher commodity costs. The ones that can do it successfully will just ensure that households cut back somewhere else. People will leave their Buick Regals parked in their driveways and eat Lucky Charms for dinner if they have to.

 

[Kushinator]

The Chinese are lecturing us about currency valuation.

Ignoring the US dollar as the reserve currency, what would normally happen to the value of a currency when the country it represents has a prolonged negative current account balance in the hundred billions?

 

[washunut]

The Chinese are lecturing us about currency valuation.

Ignoring the US dollar as the reserve currency, what would normally happen to the value of a currency when the country it represents has a prolonged negative current account balance in the hundred billions?

Thus the downgrade. Let's face it the U.S. will not be able to pay off this debt without devaluing our dollar. Thus anyone buying US treasuries will in all likelihood take a bath in the next several years.

 

[Kushinator]

Thus the downgrade. Let's face it the U.S. will not be able to pay off this debt without devaluing our dollar. Thus anyone buying US treasuries will in all likelihood take a bath in the next several years.

You reply without answering my question. Why?

 

[Lord Tammerlain]

Depending on the nature of the currency ( a fiat or one back by an asset)

Fiat- It would normally be required to lose value in comparison to other currencies. Or see higher interest rates to attract those dollars back into the economy

An asset backed currency, would have a harder time adjusting its value, so the main option here is to increase interest rates to bring those dollars back into the economy.


The US dollar has been different in that asian economies (Japan, Korea, China and a few other countries) have decided to buy USD on the open market (or were required to ie China) in order to maintain a low value of their currency to the USD. And everyone but US manufacturers were happy. The US maintained an artificial standard of living, the asian economies grew their manufacturing bases and increased their wealth. Of course just because it has gone on for a relatively long time, does not mean it can continue for ever.

 

[ARealConservative]

When was the last time the U.S. defaulted on its debt?

the only time we have defaulted on our debt is 1971

 

[oldreliable67]

the only time we have defaulted on our debt is 1971

See "Was There Ever a Default on U.S. Treasury Debt?" by Alex Pollock for a discussion of the repudiation of U.S. debt in 1933. Here is a teaser:

Well, yes: The United States quite clearly and overtly defaulted on its debt as an expediency in 1933, the first year of Franklin Roosevelt's presidency. This was an intentional repudiation of its obligations, supported by a resolution of Congress and later upheld by the Supreme Court.

An interesting piece, IMO. YMMV.

 

[ARealConservative]

See "Was There Ever a Default on U.S. Treasury Debt?" by Alex Pollock for a discussion of the repudiation of U.S. debt in 1933. Here is a teaser:



An interesting piece, IMO. YMMV.

good point. As I understood it, we still honored foreign held debt, so we only repudiated debt held by US Citizens. Still made my earlier claims inaccurate.

1933 and 1971. 38 years difference.

1971 + 38 = 2009, which was right around the time that Harry Reid staved off the next great world wide depression.

 

[Ahlevah]

the only time we have defaulted on our debt is 1971

Funny, but when I read This Time is Different: A Panoramic View of Eight Centuries of Financial Crises by Reinhart and Rogoff, they didn't mention any defaults by the United States. In fact, in Table 7 of their research report they specifically wrote that the United States did not default since it became formally independent in 1783. So there must be some disagreement about what constitutes a "default." Supposedly, the U.S. has maintained a AAA credit rating on its debt since 1917. It seems a bit odd to grant that rating to a country that defaulted at least twice on its obligations in the last century.

 

[Kushinator]

Funny, but when I read This Time is Different: A Panoramic View of Eight Centuries of Financial Crises by Reinhart and Rogoff, they didn't mention any defaults by the United States. In fact, in Table 7 of their research report they specifically wrote that the United States did not default since it became formally independent in 1783. So there must be some disagreement about what constitutes a "default." Supposedly, the U.S. has maintained a AAA credit rating on its debt since 1917. It seems a bit odd to grant that rating to a country that defaulted at least twice on its obligations in the last century.

I could be wrong, but i believe they suspended their debt repayment via specie.

 

[ksu_aviator]

There is a way to pay off the debt without defaulting or devaluing, but it requires massive spending cuts...there is no political will to do this.

 

[Ahlevah]

There is a way to pay off the debt without defaulting or devaluing, but it requires massive spending cuts...there is no political will to do this.

We'll get a test nexr year when Obama presensts a budget for more stimulus money for cash-strapped states. Hopefully, the new Republican House will let it be DOA. I don't imagine citizens of states with better finances want to bail out states like California and New York.

 

[ksu_aviator]

We'll get a test nexr year when Obama presensts a budget for more stimulus money for cash-strapped states. Hopefully, the new Republican House will let it be DOA. I don't imagine citizens of states with better finances want to bail out states like California and New York.

I'm not convinced that Boehner gets it...but we'll see.

 

[SFLRN]

good point. As I understood it, we still honored foreign held debt, so we only repudiated debt held by US Citizens. Still made my earlier claims inaccurate.

1933 and 1971. 38 years difference.

1971 + 38 = 2009, which was right around the time that Harry Reid staved off the next great world wide depression.

Good point, a little unrelated, but if the U.S. hadn't made that distinction, and allowed a default on sovereign debt (namely debt the allies from WWI owed the U.S.) I think history would look very very different (a similar conclusion was reached by Keynes before the fact in The Economic Consequences of the Peace. To the point of this article, I would personally like to see how independent this specific rating agency is. Not to over-generalize, but it seems a Chinese rating agencies may have had some external factors that influenced this assessment (namely governmental pressure). It's not an unwarranted downgrade, but the part that struck me was this notion of the U.S. slipping into some kind of long-term recession because of its debt. To me, that seemed out of line with what analysts have been saying (namely that we will/have exited this recession, albeit at a slow pace).

 

[Lord Tammerlain]

Good point, a little unrelated, but if the U.S. hadn't made that distinction, and allowed a default on sovereign debt (namely debt the allies from WWI owed the U.S.) I think history would look very very different (a similar conclusion was reached by Keynes before the fact in The Economic Consequences of the Peace. To the point of this article, I would personally like to see how independent this specific rating agency is. Not to over-generalize, but it seems a Chinese rating agencies may have had some external factors that influenced this assessment (namely governmental pressure). It's not an unwarranted downgrade, but the part that struck me was this notion of the U.S. slipping into some kind of long-term recession because of its debt. To me, that seemed out of line with what analysts have been saying (namely that we will/have exited this recession, albeit at a slow pace).

Most analysts that are well known are biased due to the nature of the job they hold (investment banks, banks, governnment etc). The US Fed would not have done QE2 if they do not believe the dangers of the US economy falling back into a deeper recession are not significant. Secondly with the election of the Republicans, the likelyhood of fiscal cutbacks are increased, meaning a large decline in spending and economic activity.

 

[washunut]

We'll get a test nexr year when Obama presensts a budget for more stimulus money for cash-strapped states. Hopefully, the new Republican House will let it be DOA. I don't imagine citizens of states with better finances want to bail out states like California and New York.

I understand that the federal fovernment is already "loaning" several states money. California about $300 million/month.

 

[SFLRN]

Most analysts that are well known are biased due to the nature of the job they hold (investment banks, banks, governnment etc).

I wouldn't doubt that all analysts are somewhat biased, what I'm saying is that this specific rating agency is more likely to be biased (epsecially considering the fact that they stated there was a good chance of a long-term recession after the Fed had undertaken further quantitative easing).

The US Fed would not have done QE2 if they do not believe the dangers of the US economy falling back into a deeper recession are not significant.

Again, the rating was changed after quantitative easing had taken place, meaning the agency implied a risk of a long-term recession in spite of this easing. Furtermore, the rating agency (which was recently rejected as a certified rating agency in the U.S.) stated,

The credit crisis is far from over in the United States and the U.S. economy will be in a long-term recession,” Dagong Global warned in the report, adding a weakening greenback will cripple U.S. capability to attract dollar capital reflow.

I said this was biased, and out of line with what analysts have said, here's the proof,

Needless to say, the markets don’t find this credible. Bond yields haven’t done anything. As the Journal’s Joy Shaw reported, Dagong was little-known before it surprised the credit-rating world in July by publishing sovereign ratings for China that were higher than those for the U.S., the U.K., Japan and other major economies. The results differed from those issued by major credit-rating firms.

I'm not implying that those rating agencies are especially good, but they're more credible than this newer agency.

Secondly with the election of the Republicans, the likelyhood of fiscal cutbacks are increased, meaning a large decline in spending and economic activity.

I think its more accurate to state that there is a probability of some cutbacks. It doesn't seem very likely, given that the U.S. government is so divided (non-unified legislature) that Republicans will actually be able to enact large budget cuts (to do so would require cuts to rather popular programs). If you know of point in time where Republicans actually did significantly cut spending then there would be a greater probability of substantial cuts taking place (however, recent history does not offer many, if any examples). Your point on declines in spending leading to declining economic activity isn't incorrect, but I don't think there is enough evidence to maintain that spending cuts (which are likely to be incremental, at best) will substantially harm economic activity (much like most incremental tax cuts fail to create large surges in economic activity).

 

[Lord Tammerlain]

I wouldn't doubt that all analysts are somewhat biased, what I'm saying is that this specific rating agency is more likely to be biased (epsecially considering the fact that they stated there was a good chance of a long-term recession after the Fed had undertaken further quantitative easing).

Of course the Chinese rating agency is going to be biased and will most likely serve political interests of the Chinese govenment when needed. Doesnt make them wrong on certain issues though.

Again, the rating was changed after quantitative easing had taken place, meaning the agency implied a risk of a long-term recession in spite of this easing. Furtermore, the rating agency (which was recently rejected as a certified rating agency in the U.S.) stated, I said this was biased, and out of line with what analysts have said, here's the proof,

I am of the opinion that with or without the QE, the risk of a long term recession is extremely high. The bad debt that have been incurred in the US have not been worked out, and plenty of new bad debts are coming the banks way. If unemployement does not start to decline soon, and overall business activity increase, before the bad debts truely come due, then a deeper recession is very likely

I'm not implying that those rating agencies are especially good, but they're more credible than this newer agency.

I would suggest that the existing rating agencies are horrible and have zero credibility, from the fraud they assisted in regards to MBSs to the fact they only have degraded companies after the fact instead of being able to do so before hand shows they have either been incompetent, or just unwilling to actually rate companies poorly for fear of losing business

I think its more accurate to state that there is a probability of some cutbacks. It doesn't seem very likely, given that the U.S. government is so divided (non-unified legislature) that Republicans will actually be able to enact large budget cuts (to do so would require cuts to rather popular programs). If you know of point in time where Republicans actually did significantly cut spending then there would be a greater probability of substantial cuts taking place (however, recent history does not offer many, if any examples). Your point on declines in spending leading to declining economic activity isn't incorrect, but I don't think there is enough evidence to maintain that spending cuts (which are likely to be incremental, at best) will substantially harm economic activity (much like most incremental tax cuts fail to create large surges in economic activity).

The fact that the government is divided I believe will likely cause more spending cuts then otherwise. For example I doubt an extension on Unemployement benifits will get passed, putting a few million on welfare, many more social programs will not see any increases, or extensions, potential stimulus is I expect of the table. As just federal government deficit spending is currently equal to 9% of GDP, taking that down to 6% would see a 2-4% decline in economic activity in the US. I doubt that private enterprise or consumers will be able to make up that difference in the next two years