Late to The Party...Once Again
by Peter Schiff: Fed
The only thing
more ridiculous than S&P's too little too late semi-downgrade
of U.S. sovereign debt was the market's severe reaction to the announcement.
Has S&P really added anything to the debate that wasn't already
widely known? In any event, S&P's statement amounts to a wake
up call to anyone who has somehow managed to sleepwalk through the
unprecedented debt explosion of the last few years.
concerns that Congress will fail to address its long-term fiscal
problems, on what basis can it conclude that the U.S. deserves its
AAA credit rating? The highest possible rating should be reserved
for fiscally responsible nations where the fiscal outlook is crystal
clear. If S&P has genuine concerns that the U.S. will not deal
with its out of control deficits, the AAA rating should be reduced
By its own
admission, S&P is unsure whether Congress will take the necessary
steps to get America's fiscal house in order. Given that uncertainty,
it should immediately reduce its rating on U.S. sovereign debt several
notches below AAA. Then if the U.S. does get its fiscal house in
order, the AAA rating could be restored. If on the other hand, the
situation deteriorates, additional downgrades would be in order.
AAA is the
highest rating S&P can give. It is the Wall Street equivalent
to a "strong buy." If a stock analyst has serious concerns
that a company may go bankrupt, would he maintain a "strong
buy" on the assumption that there was still a possibility that
bankruptcy could be averted? If the company declared bankruptcy,
would the analyst reduce his rating from "strong buy"
In truth, if
bankruptcy is even possible, the rating should be reduced to "hold,"
at best. Only if the outlook improves to the point where bankruptcy
is out of the picture should a stock be upgraded to "buy."
A "hold" rating would at least send the message to potential
buyers that problems loom. Then if the company does declare bankruptcy,
at least it does not do so sporting a "buy" rating.
by shifting to a negative outlook, S&P will try to have its
cake and eat it too. In the unlikely event that Congress does act
responsibly to restore fiscal prudence, its AAA would be validated.
If on the other hand, out of control deficits lead to outright default
or hyperinflation, it will hang its hat on the timely warning of
its negative outlook. This is like a stock analyst putting a strong
buy on a stock, but qualifying the rating as being speculative.
line is that the AAA rating on U.S. sovereign debt is pure politics.
S&P simply does not have the integrity to honestly rate U.S.
debt. It has too cozy a relationship with the U.S. government and
Wall Street to threaten the status quo. In fact, given the culpability
of the rating agencies in the financial crisis, it may well be a
quid pro quo that as long as the U.S.' AAA rating is maintained,
the rating agencies will continue to enjoy their government sanctioned
monopolies, and that no criminal or civil charges will be filed
related to inappropriately rated mortgage-backed securities.
had investment grade, AAA, ratings on countless mortgage-backed
securities right up until the moment the paper became worthless.
Amazingly, the rating agencies somehow maintained their status,
and their ability to move markets, after the dust settled.
they are making the same mistake with U.S. Treasuries. Once it becomes
obvious to everyone that the U.S. will either default on its debt
or inflate its obligations away, S&P might downgrade treasuries
to AA+. Such a move will be of little comfort to those investors
left holding the bag.
In its analysis
of U.S. solvency, S&P typically factors in the government's
ability to print its way out of any fiscal jam. As a result, it
applies a very different set of criteria in its analysis of investment
risk than it would for a private company, or even a government whose
currency has no reserve status. But the agency completely fails
to consider how reckless printing will impact the value of the dollar
itself. It can assure investors that they will be repaid, but the
agency doesn't spare a thought about what if anything our creditors
may be able to buy with their dollars.
Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets and Crash
Proof: How to Profit from the Coming Economic Collapse. His
latest book is How
an Economy Grows and Why It Crashes.
© 2011 Euro Pacific Capital
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