As outlined in an earlier article, Standard & Poor’s statement on July 14th required verifiable spending cuts of $4 trillion in order to maintain our nation’s triple A credit rating. Although all debt ceiling plans currently in play do not address this requirement, Standard & Poor’s representative testified in Congress yesterday and then recanted their previous position.
It seems that Washington made Standard & Poor’s a deal that they could not refuse:
Is our government so corrupt that this is how they deal with “issues”? We saw the Bush administration use this same blackmail on Wells Fargo to sign TARP and we did nothing. Are attacks on patriots by both parties and the media proven means to destroy opposing viewpoints? What is the next step if we back down now? The answer is given by Ayn Rand and history: the nation will collapse under massive debt and corruption.
We are now at the tipping point that everyone has feared. Do we stand up for honor and draw the line in the sand for our future or do we wait for our deal that we cannot refuse? The consequences of that final capitulation are contrary to everything we believe and will lead to a war between good vs. evil.
It appears that the perception Standard & Poor’s seemed to harbour, that the U.S. needed to find a $4 trn sized package in order to keep its triple A rating, is unfounded.
On July 14, S&P placed the AAA long-term and A-1+ short-term sovereign credit ratings of the U.S. on CreditWatch negative, indicating action will likely take place within three months.
Its report stated that the negotiations on the state of the U.S. fiscal position and debt ceiling had become entangled and said:
“We expect the debt trajectory to continue increasing in the medium term if a medium-term fiscal consolidation plan of $4 trillion is not agreed upon.”
It then follows with what appears to be an admirably unambiguous statement:
“If Congress and the Administration reach an agreement of about $4 trillion, and if we conclude that such an agreement would be enacted and maintained throughout the decade, we could, other things unchanged, affirm the ‘AAA’ long-term rating and A-1+ short-term ratings on the U.S.”
But Sharma now appears to be saying that S&P was merely commenting that the $4trn figure, postulated by congressmen and the administration, would bring the AAA rating into a sustainable range.
Gary Jenkins of Evolution Securities apologised to his followers for having “misread” the S&P statement.
Not everyone will be as generous as Jenkins. It is hard, if not impossible, to read S&P’s July 14 report and come to any other conclusion as to what it really believed.
If S&P wants to change its stance, it should come out and say so. It would have plenty of reasons to keep the rating at AAA, while keeping the negative watch.
In the words of Alex Johnson, head of portfolio management at Fischer Francis Trees & Watts:
“The US dollar is a fiat currency. At heart, it represents a claim on the productive capacity of the U.S. economy. What does a rating even mean in the context of the United States?”
Quite. But because so many investment decisions are rules based and embedded into the financial system, markets have suffered considerable volatility and weakness because of the perception that a ratings cut was all but inevitable.
There is no liquid alternative to U.S. Treasuries, so their status in finance will continue – as will the benefits that brings to funding a massive budget deficit.