Monday, August 8, 2011

The credit rating is a farse

Friday evening, we found out that one of the participants in a government-granted cartel of rating agencies has downgraded the safety of long-term US debt from AAA to AA+. This means nothing for a number of reasons:
  • The debt rankings are untrustworthy. Need proof? Mortgage backed securities - those things that collapsed in 2008 and ushered in a global financial meltdown - were ranked AAA by all three ratings agencies.
  • The U.S has been in perpetual default since 1971. I will do a post about this in the near future, but the gist of it is that under the Brenton-Woods agreement in 1953, foreign banks and creditors could redeem their federal reserve notes for gold at the rate of $35/oz. Richard Nixon closed this window in 1971, and the US has refused to fulfill this obligation. Instead it has paid its creditors through inflation. This is default by any reasonable definition of the term.
  • Finally, you would have to be a moron to put your money in US Debt. According to the treasury's own website, treasury yields are a NEGATIVE rate of interest for short term (less than 7 year) debt. This means that you PAY money for the privilege of holding US debt. Long term yields are not much better. The 30 year bonds are yielding 1.14% APY. This means that you can by a 30 year bond from the US Treasury, and if you believe the phony inflation statistics of ~2% per year, lose 1% of your "investment's" purchasing power per year. How can an investment that cannot, even under the rosiest of scenarios, even maintain purchasing power, be ranked AAA by any right-minded agency? At best, they should be ranked at best, CC. (info on bond credit ratings available here:

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