A Laughable Credit Report

Standard & Poor’s has doubts about America’s creditworthiness. That’s a naïve position, because if the United States falls, the rest of the world falls with it. The credit rating agency just managed to worsen its already tarnished reputation.

Good try, Standard & Poor’s. The most important rating agency has cast doubt on the creditworthiness of the world’s only superpower since it first gave the United States its top-notch AAA rating back in 1941. You might think that was courageous, proper and just in view of the fact that little countries like Portugal, Greece and Ireland had suffered the same indignity by the powerful rating agency.

But we should find a glance at financial market reactions to the announcement instructive: While the euro crisis got worse with each credit rating downgrade, the exact opposite happened on Monday. The U.S. dollar strengthened against almost all major currencies, and the price of U.S. Treasuries ended the trading week higher. Topsy-turvy world? Not at all. The rating agency decision is simply laughable because it ignores capitalist logic. Where are investors supposed to put their money if the global reserve currency is now unsafe? The most Standard & Poor’s managed to do with their action was to increase the perception that risks were becoming greater, thus driving money toward a safe haven. And that safe haven is currently the U.S. dollar in the form of U.S. Treasury bonds.

The currency and debt level of the nation that represents one-fourth of global output enjoy a tremendous privilege: They are unbeatable as long as there are no alternatives. The entire world needs dollars, and the United States is the only country that can print them. And because Americans are indebted to themselves, they can theoretically meet any level of public debt, regardless of how high it gets. All they have to do is crank up the printing presses.

It’s true that the West’s financial situation is very fragile following the worst economic crisis in 80 years. And it’s also true that the United States is deeply indebted abroad and that they’ve done little to try to correct this situation. But two intellectual exercises suffice to expose S&P’s rating action as naïve.

First is the question of alternatives. Who or what is supposed to take over the role of safe haven? Gold? About 2,600 tons of gold is mined each year. That means about €80 billion [$117 billion] could be annually invested in this new currency. That’s about what one would have to pay for control of the Siemens Corporation. Even the German budget deficit of less than €40 billion [$57.5 billion] is far too meager to provide a home for more than just a fraction of the trillions of dollars available. There’s no other place to which investors may flee regardless of creditworthiness rating.

The Intolerable Power of the Ratings Agencies

Second, one need only imagine what would happen if the United States were actually unable to pay its bills. What other country has the strength to bail out all the banks and insurance companies that would have to write off all their dollar holdings? Which currency would have the reserves to finance all the stimulus programs that would be necessary? The answer is simple: If the United States falls, all other countries and their banks would follow suit.

That’s why capitalism, which is based on paper money, could find no safer investment than U.S. securities. That’s also why downgrading those securities with a lower rating is, at best, nothing more than a public relations stunt. And finally, it’s also why the rating agency’s determination of America’s debt capacity and interest rates will ultimately have no effect whatsoever. But that privilege belongs only to the United States and perhaps, to a lesser extent, Japan and Germany.

For all the countries lower on the ladder, the power of the rating agencies is that much more unbearable because the agencies’ determinations exacerbate their already precarious positions. That was the case during the Asian crisis in 1997, as well as during the euro crisis of 2010. The lousy performance of these agencies does not justify giving them more power than bank analysts, funds managers or journalists. They all express their opinions. But why are these private agencies so powerful? Because lawmakers give them that power and make their decisions based on their evaluations and the investment decisions of pension funds, life insurance companies, banks and corporations. All it would take to break that stranglehold would be a stroke of the pen in the law books.