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Last December I warned that the ratings agencies were likely to downgrade the credit rating of the USA.  And this morning they went ahead and slapped a “negative” rating on US credit:

“On April 18, 2011, Standard & Poor’s Ratings Services affirmed its ‘AAA’  long-term and ‘A-1+’ short-term sovereign credit ratings on the United States of America and revised its outlook on the long-term rating to negative from stable.

…Our ratings on the U.S. rest on its high-income, highly diversified, and flexible economy, backed by a strong track record of prudent and credible monetary policy. The ratings also reflect our view of the unique advantages stemming from the dollar’s preeminent place among world currencies. Although we believe these strengths currently outweigh what we consider to be the U.S.’s meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the ‘AAA’ level.The U.S. is among the most flexible high-income nations, with both adaptable labor markets and a long track record of openness to capital flows. In addition, its public sector uses a smaller share of national income than those of most ‘AAA’ rated countries–including its closest peers, the U.K., France, Germany, and Canada (all AAA/Stable/A-1+)–which implies greater revenue flexibility.

Furthermore, the U.S. dollar is the world’s most used currency, which provides the U.S. with unique external flexibility; the vast majority of U.S. trade flows and external liabilities are denominated in its own dollars. Recent depreciation of the currency has not materially affected this position, and we do not expect this to change in the medium term.

Despite these exceptional strengths, we note the U.S.’s fiscal profile has deteriorated steadily during the past decade and, in our view, has worsened further as a result of the recent financial crisis and ensuing recession. Moreover, more than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.”

As I stated back in December, this is nothing short of absurd:

“Of course, the USA has no foreign denominated debt and can create currency at will.  The issue of solvency is a non-issue for a nation such as the USA which is the supplier of its currency in a floating exchange rate system.  In a very low inflation environment the USA needs to focus more on price stability and the ratings agencies would help everyone out if they didn’t contribute to the fear mongering that the USA is going bankrupt.  Nothing could be further from the truth.”

There is simply no such thing as the USA not being able to meet its financial commitments.  We could devolve into a hyperinflation, but that is a very different phenomenon than insolvency & S&P does not touch on this topic.  Unfortunately, S&P appears to make no real distinction so it’s clear that their analysis is entirely off base to begin with.  They are acting as though the US government is akin to a household.  That analogy simply does not apply to the USA.

The worst part, is that this is all likely to throw gasoline on the austerity fire.  S&P is seen as a credible outfit (despite discrediting themselves during the financial crisis, but hey, this is Wall Street and we’re always willing to welcome someone into our homes who only just recently robbed us) so the lawyers in Congress are likely to use this as a good excuse to dig their heels in over the debt ceiling and spending.  And not surprisingly, it is the credit rating agencies, via their own ignorance, who are likely contributing to what has the potential to be a disastrous economic outcome….

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