I think we will see that change the coming decade. During the credit crisis and the recession, investors bought securities because they were relatively safe compared to stock, real estate and bank loans (at the time). Eventhough we see more euro and yen reserves after the crisis, these currencies are also unstable and not without debt, the dollar still is the worlds reserve currency and as long as americans buy chinese products and american securities, and the chinese keep buying american securities for their dollars in return, we will see the distortion you describe.
I disagree fully. The US dollar is in decline and with in a decade or two it will be replaced by another reserve currency. It happened to sterling when a bigger player came on the market and the UK was weak. It will happen to the US. It might be the Chinese Yuan or the Euro or Yen, but it will be replaced sooner than later. And that is when the present debt load and deficit will come home to roost.
And you also hit the nail on the head in a way.. you claim that "as long as American's buy Chinese products".. but with what money? Real income is falling and has been falling for over a decade and the fact that American's are so heavily indebted means they can as they did during the last decade.. rely on re-mortgage of their homes to live off.
That is the problem, everyone in the US and UK financial markets expect the US to come back to its massive spending spree it has enjoyed for so long and frankly that is one hell of an assumption considering the scope of pain the average American has seen the last 3 years. And considering that many jobs are being moved overseas in the US, then where exactly in the short term will the income come from, so that American's can go on a spending spree?
We had this shock in Europe in the late 1970s and our "consumption" levels never really took off in the same way as the American's did, and hence we are in no way as dependent on "consumer spending" as the American's are for their economic growth. In many European countries (maybe not the UK), any bad news what so ever will get Europeans to stop spending and save. We are paranoid like that now.
I can’t think of a logical reason for it, doesn’t Norway have a positive balance, do they even have debt?
They have oil, and have had surplus for a very long time. They have the second biggest sovereign fund on the planet, who has been buying up now cheap stuff across the world (along with the Gulf countries). They have secured their peoples pension and lives for a minimum of 100 years so far. And then on the flip side, you have Japan with 200%+ debt vs GDP.. with a 10 year yield under 1%... But since most of that debt is domestic debt (as in owed to the tax payer) then it is not a problem. Not even stagflation over a decade dented the yield rate..
My point was that London is the financial heart of Europe, a position they took over from the dutch centuries ago.
I agree, and that is most likely one of the main reasons to be brutally honest and why successive British governments have defended the City tooth and nail. Without the City, the UK has no major industry to speak off (relatively speaking).
I don’t have an explanation for these ratings though, they don’t always make sense to me either. We spoke about Greece, Italy, Portugal and Spain earlier this year, I’m sure we still disagree on whether they got fair ratings or not.
Greece was fair, Spain and Portugal not. Ireland is not even fair now, way too low considering the deficit it has. Like it or not Spain even with 20% unemployment is going along about just as well as the UK .. but has almost double the yield... which ironically goes up and up when nearing a Spanish bund auction, and the plummets to around 4% and under after.. speculators anyone? I am not saying that the Spanish yield should be the same as the UK's or even semi close, but not at the double and even near triple lvl it was at once point. Spain is till in the top 10 world economies (nr. 9 last I looked).
In general I agree but I also realise that economy doesn’t deal in absolute truths. What would you suggest to improve the accuracy of these ratings?
Economy and finances is about absolute truths unless we are talking about forecasting. But ratings are not real forecasting instruments per say since they have failed at every major attempt so far.. sub-prime, Lehman and so on. hell they did not even pick up the Greece mess, and one of their biggest clients was involved in that.
As for improving the accuracy... nationalize all the ratings agencies, and make them fully independent of Wall Street and the financial industry. The main problem with them at them moment is they are first dominated by the Anglo-American sphere of thought, plus rely on income from the very financial institutions that use their ratings in their financial transactions.
For example, I find it highly troubling that Goldman Sachs pays all 3 ratings agencies millions a year and these rating's agencies downgrade say Greece (legit though) where Goldman Sachs helped a previous government hide the true debt, all in the while playing the other side of the fence also. In the end those few millions a year earned them billions. Who is not say that the ratings agencies gave the Greece rating an extra nudge or two for one of its clients? And if not Greece, pick any country or company that recently has been downgraded... companies like Goldman Sachs made millions if not billions on said downgrades.