Wednesday, February 3, 2010

U.S. Credit Rating at Risk

El Greco, The Annunciation
As I Was Saying ...

I just wrote a post warning that the U.S. debt is at risk of becoming unsustainable.  Immediately after, along came a news story warning that the crisis may be even closer than we imagined.  Zero Hedge reports "Moody's Sees US Rating Under Pressure After $3.8 Trillion Budget", and they quote the report:
The ratios of general government debt to GDP and to revenue are deteriorating sharply, and after the crisis they are likely to be higher than the ratios of other Aaa-rated countries.
If the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure. The trend and the outlook would be more important than any particular level of debt.
The italics are mine.  As Zero Hedge asks:  "IF it becomes irreversible?"

Dollar No Longer the Safe Refuge?

The article says that, if trends continue, the U.S. ratios of debt to GDP and debt to revenue will be HIGHER than the ratios of other Aaa-rated countries.   Many people have been counting on the U.S. being in no worse position than other advanced economies, and they have been allocating assets as if the dollar will remain strong relative to the Euro, Yen, Pound, etc.  Maybe that is not a good assumption.  Those are flawed currencies, but the dollar is flawed too.  Maybe Treasuries will tank as rates rise on the sovereign debt of all these indebted countries.

MSN Money added this tidbit:  "Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the Aaa government bond rating."  This means, that in the absence of an economic miracle, we can expect (a) deflationary pressures from higher taxes and lower expenditures, (b) higher deficits, or (c) a ratings downgrade of the U.S.  Or maybe all of these.

An Actor?  We Move on the Word of an Actor?

That's what Martin Sheen (as General Lee) said in Gettysburg, after receiving a scouting report on the Army of the Potomac.  We all know that the credit rating organizations are corrupt liars, and no one believes them anymore.  They proved that they will do anything, utter any lie to make a buck.  If one of those sycophants comes this close to impugning the credit rating of the U.S., there must be a real problem with our credit.  You would be justified to complain that this crisis has been obvious for so long that it isn't news anymore.

When and What to Do

Whenever a ratings agency issues a more directly worded warning, you can be sure that the Treasury market and the dollar will tank immediately.  When it gets so bad that a Treasury auction finally fails, it will be too late to act.

What to do about it?  Short Treasuries?  Buy gold and foreign currencies?  I lean more toward stockpiling guns, food, and ammo.

When to act?  It seems a little early to act against the dollar, given the problems of Europe, Japan, and the U.K., whose problems are likely to benefit the dollar.  With weak economies weighted down by heavy debt loads, it also seems early to short Treasuries.  When the day will come is hard to tell.