S&P Justified in Downgrading US Debt

This is the third day since Standard & Poors Ratings Services downgraded US Federal Government debt, following stock market close on Friday, August 5, 2011.  Since then there has been a cacophony of screams of anguish and vilification of S & P, mostly unjustified.
I have no particular fondness for the S & P Ratings Services.  I think this organization should have been closed down due to their fraud (in my view) in rating mortgage backed securities during the housing bubble.  I also think executive officers should have been put on trial for fraud.  The same goes for the ratings agencies of Moody's and Fitch.  These three form a legal cartel of Credit Ratings Agencies (CRAs), sanctioned by Wall Street and Congress.

But they were not punished for their deception during the housing bubble, so that is irrelevent to the current debt downgrade issue.

The current Whitehouse administration and their various minions, hirelings and town criers were particularly vocal today.  Lawrence O'Donnell (MSNBC) is airing a highly inaccurate and deceptive  segment on the debt downgrade as I type.

The Chinese rating agency Dagong had downgraded US debt in November, 2010, and again last Wednesday, two days before the S & P downgrade.  The first downgrade was due to their view that US Federal Government debt was spiralling out of control.  The second downgrade was due to their view that the recent agreement on debt control was inadequate, and debt would not be contained.  Dagong's actions are widely viewed as politically motivated, but that doesn't mean their downgrades are totally unjustified.

More importantly, on July 18 the independent US rating agency Egan-Jones downgraded US debt.  This is important because Egan-Jones provides ratings information for investors who pay for this service; there is an incentive to provide realistic analyses.  Egan-Jones are considered unbiased, because their revenue source is their investor clients who want accurate and timely information.  The big three CRA cartel mentioned above are widely considered to be lackeys of Wall Street banks.

So now everyone is bashing S & P because the stock market is crashing.  Talk about shooting the messenger.  The interesting fact is that US debt is in wide demand today, despite the minor downgrade, as people rush out of stocks and into bonds.  Stocks are crashing worldwide as the credit bubble attempts to contract, while central banks pump in more money to prevent that event (possible deflationary collapse, aka "The Greater Depression").  The stock crash has very little to do with the S & P debt rating; stocks were headed down two weeks ago as Congress and the Whitehouse neared the end of their fake solution to the debt issue (see chart immediately below, click image for larger view).  Way more money has been lent out than will ever be repaid, and banks and governments worldwide are playing musical chairs trying to shift the bad debt to someone else.  Check your pension fund; that's where it's headed.

Also not mentioned in most media reports are the numerous previous warnings S & P had issued.  They have had US debt on negative watch for some time.  During the lengthy negotiations on raising the US debt ceiling S & P made it clear that there would have to be a credible plan to cut least 4 trillion dollars over the next ten years to avoid a debt downgrade.  The deal passed by Congress and accepted by President O'Bomber appears to me to be all smoke and mirrors, and putting decisions off into the future.  It comes nowhere close to a 4 trillion dollar cut, and promises of future cuts probably wouldn't be honoured anyway.

S & P sees it the same way.  US debt is spiralling out of control compared to other AAA rated countries, and there is no indication this trend will not continue.  (France's debt should also be downgraded soon according to my readings.) Therefore the downgrade is justified.  I would expect another downgrade around the second quarter of 2012 because there is a low probability of a dysfunctional Congress doing anything responsible between now and the 2012 election.

To put this into Tea Party vocabulary, think of it this way.  Suppose you're at the local sports bar with some buds sucking back on some Buds and watching Monday Night Football.  There's this annoying clown at the next table wearing an USA tee shirt and loudly whistling a Barry Manilow tune. You (wearing your S & P ball cap) lean over and mention politely that that kind of behaviour is not appreciated.

But the whistling continues.  So you lean over to whistler guy and tell him if he doesn't stop the runaway non-sanctioned whistling you will have to do something.

But whistler guy continues on, oblivious to the type of bar, the game and the fair warnings.  So you get more explicit, and issue a threat of physical violence if the whistling doesn't stop within the next minute.

Manilow guy continues so you get up and clock him.  Not a big hit, just a little open-hand slap upside the ear, just to show that you're serious.  And you stand with clenched fist letting him know what's next if he doesn't remedy his ways.  Next thing you know USA-tee-Manilow-whistler guy is running all around the bar claiming horrendous unjustified assault.  And all his sissy friends start blaming you, and want you thrown in jail.  Go figure.  After all the warnings he thinks the little slap was unjustified.

Wow!  The sell-off continues in the Asian markets.  S & P 500 futures down about 30 points after hours to 1180; gold up to $1760.  Bernanke and the FOMC ("Bennie and the InkJets") have a regular statement tomorrow; should be interesting.

In conclusion, the point of this post is that it is unfair to vilify the S & P for past indiscretions, when no-one attempted to punish them in the past.   Read the debt downgrade report S & P issued, and form your own conclusions as to whether the downgrade is justified.  I think it is.  And please, please do not form your conclusions based solely on media reports, almost all of which tend to be incomplete and biased.  I find it best to read the source information rather than rely on media spin.

And for those numerous S & P bashing hypocrites in the media today (including Prez O'Bomber), who did nothing about S & P before, during, and after the housing crash, I have a suggestion for an evening beverage:

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