Credit rating: another US downgrade

A wheelbarrow of money to buy a loaf of bread. This is what Obama, with his fiscal cliff plan, threatens us with.
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A credit rating agency that no one notices, downgraded US treasury securities again. They had already downgraded American bonds to AA. The new rating is AA-, the lowest rating that the American public debt has ever carried.

Credit rating downgrade

The credit rating agency that acted yesterday is Egan-Jones. On their home page they boast that no bond issuer pays them. So they can afford to give objective, “risk-averse” ratings. And that is why anyone buys bonds: to avoid risk. (Averse is a fancy Latin word meaning “turning away from something,” hence avoiding it.) Egan-Jones, furthermore, accuses their fellow credit ratings agencies of inflating their ratings. And they have the studies to back up that charge. Why do the other credit ratings firms inflate their ratings? Because bond issuers pay them. Egan-Jones’ clients are bond investors, not bond issuers.

Egan-Jones makes their full reports available only to paying clients. But CNBC and USA Today both had copies. According to them, Egan-Jones acted when the Federal Reserve announced their “quantitative easing” program. Egan-Jones objects to quantitative easing, mainly because this will not help the American economy produce, and will merely devalue the dollar. And with a weak dollar, consumers must spend more on motor fuel, and on everything that moves (because it takes motor fuel to move them). So they have less to spend on other things.

Egan-Jones fights the Big Boys

In the credit rating debate, Egan-Jones stands alone against the Big Boys: Moody’s, Standard and Poor, and Fitch. Of those three, Standard and Poor downgraded US debt to AA+ from AAA. Moody’s and Fitch both give US debt their highest rating. (But USA Today suggested that Moody’s might change their minds if Congress and the putative President cannot agree on a new budget.)

A wheelbarrow of money to buy a loaf of bread. Yet another credit rating downgrade! This is the endgame.

A Weimar-era householder wheels a barrow full of worthless Reichsbanknotes to the corner baker to buy a loaf of bread. Will the US economy reduce people to this, when it runs out of other people’s money?

Egan-Jones has been ahead of the other credit rating firms in saying that the United States government is acting like a deadbeat. In July of 2011 they downgraded US debt from AAA to AA+. In April of this year, they downgraded US debt again, to AA. And now they have acted again.

Metaphors for Egan-Jones, as against the Big Boys, are ridiculously easy to find. Consider:

  • Cassandra, the Trojan prophetess that lay under a curse that no one would believe her until it was too late.
  • The little boy in the Hans Christian Andersen story about an emperor who parades naked through his capital.
  • The Prophet Jeremiah.

And Egan-Jones is right. The US government is acting like a deadbeat. It creates money by simply saying, Fiat argentum! “Let there be money!” (Latin fiat, jussive subjunctive of sum, esse, fui I am, to be, I was.) Then they use this Monopoly money (apologies to Parker Brothers) to buy mortgage-backed bonds. Those are the same mortgages that are more than the market values of the homes that “secure” them! And when you create more of a thing, you make the other copies worth less. By doing that, you steal from those prudent enough to save, if they had the bad sense to save their money in US cash.

The US government decided on quantitative easing, probably to “inflate the debt away.” It doesn’t work that way. Eventually, US government debt will become, formally, junk. And Egan-Jones will be first to say that. They won’t say it out loud today. They don’t do “forward-looking reports.” But they, not the Big Boys, are the boys to watch.