In July, I wrote about For Whom Da-Gong Tolls. Basically this was a warning of the consequences if the dominance of US rating agencies were diminished. Well, it has only taken 2 months for the impact to be felt.
Here is the latest from Da-Gong Global Rating Agency:
AAA - Norway, Denmark, Luxembourg, Switzerland, Singapore, Australia and New Zealand.
AA+ - Canada, Netherlands, China and Germany
AA - United States, Saudi Arabia
US rating agencies insist that US government debt be rated AAA. Da-Gong disagrees, "Americans may not like to hear the truth, but there is no gainsaying the massive budget deficits, the mounting national debt, the current economic weakness, the expansion of entitlements and the coming wave of retiring baby boomers".
China has been tempering its purchases of US Government debt forcing the US Federal Reserve to buy the treasuries that China won't.
My prediction-- one of two things is going to happen:
(1) Interest rates on US debt will start increasing dramatically as treasury buyers want better insurance for the risk they are taking thus adding more burden to the US debt (this is a deadly embrace).
(2) The US will cause or allow something bad to happen in the world which forces everyone to the only place of safety they know-- The US dollar. Thus counteracting Da-Gong's downgrade of US debt.
My bet is on option #2 because it has already had a successful trial run--> The overblown implications of a default of Greek Sovereign debt caused a "flight to safety", people ran to US Treasuries and US interest rates fell.
What do you think?
Fundamental change aside, I believe that the USA is still an extraordinarily safe place for capital, in all of its forms.
ReplyDeleteEventually, bad stuff always happens. Having the biggest guns is helpful at those times.
Interest rates always fluctuate. Markets correct and the country tacks politically back to center right. For now.