Mutual Consent in Fitch’s Lowering of the US Debt Rating?

Fitch Ratings, one of the three main international global rating agencies, recently issued a statement announcing that it will lower its forecast of the U.S. sovereign debt rating to negative. Fitch declared that if the U.S.is unable to reach an agreement to effectively lower its debt, they will lower the U.S.'s AAA sovereign credit rating.

At present, Standard & Poor’s sovereign credit rating for the U.S. is AA+ with a negative forecast. Moody’s sovereign credit rating for the U.S. is AAA and also with a negative forecast. Everyone is worried about the same thing: Will the U.S. government ever be able to solve its debt problem?

It’s common knowledge that the initial shock from the breakout of the financial crisis was mostly felt by market participants like companies and financial institutions. However, with the deepening of the crisis and the constant launching of measures designed to combat the crisis, in the end, the problem always shifts back to the government. The European debt crisis was like this, and the U.S. debt problem is even more like this. How then to view Fitch’s lowering of the forecast for America’s debt rating?

The U.S. government has always used new debts to pay off old ones, a means that has become more prominent after the breakout of the financial crisis. During that time, the subprime mortgage crisis was set to go off at any minute, leading, when it did, to the collapse of several financial organizations. The outlook for economic growth was quite dismal. In order to prevent the crisis from developing any further, even the U.S., which has always advocated the market-adjusting mechanism of the “invisible hand,” was forced to use the “visible hand” of the government to save those institutions most in danger and to stimulate the economy through the active use of financial measures. Aiding and spurring the economy cannot be done without spending large amounts of money, therefore a surpassing of the debt ceiling by the U.S. government is to be expected.

From this perspective, the warning delivered by the rating agencies was inevitable, but since this bad news has been anticipated by the market, it will not necessarily have many negative impacts on the U.S. Rather, the author believes that, in this, there is a certain degree of willingness on both sides; one is willing to beat the other while the other is willing to be beaten. In short, Fitch’s lowering of the U.S. credit outlook is not necessarily a bad thing for the U.S, but in some sense might actually be a good thing.

In reality, the U.S. debt problem has never been solely an American problem. It is a problem for the other countries of the world. The reason lies in the U.S. dollar. If the U.S. cannot repay its debts, it prints money to repay them. However, there is another disguised means of money printing that is simpler and more covert: to let the American dollar depreciate. From the perspective of having a beneficial effect on increased exports, a weak U.S. dollar is more in tune with U.S. interests.

Recently, the trend of the U.S. dollar has been very strong. Looking at the foreign exchange markets, it is easy to see that ever since the eurozone economy slipped into a debt crisis and left the economic outlook dim, the exchange rate of the euro has continuously weakened against the dollar. Not only that, but the U.S. Dollar Index has continued to rise gradually, reaching a high of 80. As a result, Fitch’s “light tap” on the U.S. debt problem will stimulate a fall of the dollar, which, from one perspective, might thrust the it into a position more favorable to U.S. interests.

Therefore, the continual expansion of debt risks for the main countries of the world will cause panic among investors, but bad news is not necessarily something that everyone dislikes. Behind every piece of bad news, there is always someone who gains. From the fund groups involved in short selling the U.S. dollar to the U.S. government hoping to rely on the depreciation of the dollar to reduce the debt, there are many parties positioned to make gains from this bad news.

So what does this news mean for China? Regardless of whether the U.S. government’s debt crisis continues to worsen or whether the U.S. dollar weakens over the long term, this news is something that China, as a holder of so much American debt, does not want to hear. If the dollar weakens and the Yuan appreciates, this will benefit American exports but will harm Chinese exports. Additionally, 16 of the 21 American debt primary dealers polled by Bloomberg believed that the U.S. Federal Reserve has already prepared to launch a new round of quantitative easing measures that will buy mortgage securities as a means of pouring more capital into economic development. The quantitative easings are already at the point of no return. Is this good news or bad news?