Downgrade Nonsense – Moody’s and Egan-Jones Demonstrate Ignorance

The following are two headlines from this last week:

Egan-Jones downgrades US Rating on QE3 move

Moody’s set to downgrade US without budget deal

Excerpt from AP article:

“Moody’s Investors Service on Tuesday said it would likely cut its “Aaa” rating on U.S. government debt, probably by one notch, if budget negotiations fail.”

Text of Wallace Witkowski’s Egan-Jones article:

Egan-Jones Ratings Co. said Friday it downgraded its U.S. sovereign rating to AA- from AA on concerns that the Fed’s new round of quantitative easing, or QE3, will hurt the U.S. economy. The ratings agency said the Fed’s plan of buying $40 billion in mortgage-backed securities a month and keeping interest rates near zero does little to raise GDP, reduces the value of the dollar, and raises the price of commodities. “From 2006 to present, the US’s debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%,” Egan-Jones said in a note. “In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%.”

Why the rating agencies have any credibility left after the financial crisis is beyond me, but the collective demonstrative ignorance of the (now) four rating agencies (S & P, Moodys, Fitch and Egan-Jones) has just hit a new high (along with the stock market).

A nation that is sovereign in their own currency and whose debts are denominated in that currency does not have a solvency issue.   Yet, this didn’t stop Egan-Jones from making a completely bonehead comparison of the United States with Spain.  Spain is a USER of the Euro currency, not the issuer and thus is constrained in terms of revenue and CAN become insolvent – the U.S. is a currency ISSUER and not revenue constrained.

The U.S. cannot run out of dollars anymore than a scorekeeper at a football game can run out of points.

These downgrades and threats of more downgrades are just ridiculous and demonstrate a complete lack of understanding of our monetary and currency system.  Is it any wonder that these same companies granted AAA status to securities that were junk from day 1?  Isn’t that the irony – securities that COULD NEVER repay principal and interest received the highest ratings while Treasury bonds issued by the United States whose principal and interest are guaranteed and can ALWAYS be paid…receive a lower grade.

Any shred of dignity the rating agencies had left….is now gone.  Its time to downgrade the rating agencies – they are junk.

Scott Dauenhauer CFP, MSFP, AIF


Leave a Reply