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The only
thing more ridiculous than S&P's too little too late semi-downgrade of
U.S. sovereign debt was the market's severe reaction to the
announcement. Has S&P really added anything to the debate that
wasn't already widely known? In any event, S&P's statement amounts
to a wake up call to anyone who has somehow managed
to sleepwalk through the unprecedented debt explosion of the last few years.
Given S&P's concerns that Congress will fail to address its
long-term fiscal problems, on what basis can it conclude that the U.S.
deserves its AAA credit rating? The highest possible rating should be
reserved for fiscally responsible nations where the fiscal outlook is crystal
clear. If S&P has genuine concerns that the U.S. will not deal with
its out of control deficits, the AAA rating should be reduced right now.
By its own
admission, S&P is unsure whether Congress will take the necessary steps
to get America's fiscal house in order. Given that uncertainty, it
should immediately reduce its rating on U.S. sovereign debt several notches
below AAA. Then if the U.S. does get its fiscal house in order, the AAA
rating could be restored. If on the other hand, the situation
deteriorates, additional downgrades would be in order.
AAA is the
highest rating S&P can give. It is the Wall Street equivalent to a
"strong buy." If a stock analyst has serious concerns that a
company may go bankrupt, would he maintain a "strong buy" on the
assumption that there was still a possibility that bankruptcy could be
averted? If the company declared bankruptcy, would the analyst reduce his
rating from "strong buy" to "accumulate"?
In truth, if
bankruptcy is even possible, the rating should be reduced to
"hold," at best. Only if the outlook improves to the point
where bankruptcy is out of the picture should a stock be upgraded to
"buy." A "hold" rating would at least send the message to
potential buyers that problems loom. Then if the company does declare
bankruptcy, at least it does not do so sporting a "buy" rating.
Of course, by
shifting to a negative outlook, S&P will try to have its cake and eat it
too. In the unlikely event that Congress does act responsibly to restore
fiscal prudence, its AAA would be validated. If on the other hand, out
of control deficits lead to outright default or hyperinflation, it will hang
its hat on the timely warning of its negative outlook. This is like a
stock analyst putting a strong buy on a stock, but qualifying the rating as
being speculative.
The bottom
line is that the AAA rating on U.S. sovereign debt is pure
politics. S&P simply does not have the integrity to honestly rate
U.S. debt. It has too cozy a relationship with the U.S. government and
Wall Street to threaten the status quo. In fact, given the culpability of the
rating agencies in the financial crisis, it may well be a quid pro quo that
as long as the U.S.' AAA rating is maintained, the rating agencies will
continue to enjoy their government sanctioned monopolies, and that no criminal
or civil charges will be filed related to inappropriately rated
mortgage-backed securities.
Remember
S&P had investment grade, AAA, ratings on countless mortgage-backed
securities right up until the moment the paper became
worthless. Amazingly, the rating agencies somehow maintained their
status, and their ability to move markets, after the dust settled.
Currently,
they are making the same mistake with U.S. Treasuries. Once it becomes
obvious to everyone that the U.S. will either default on its debt or inflate
its obligations away, S&P might downgrade treasuries to AA+. Such a move
will be of little comfort to those investors left holding the bag.
In its
analysis of U.S. solvency, S&P typically factors in the government's
ability to print its way out of any fiscal jam. As a result, it applies a
very different set of criteria in its analysis of investment risk than it
would for a private company, or even a government whose currency has no
reserve status. But the agency completely fails to consider how reckless
printing will impact the value of the dollar itself. It can assure investors
that they will be repaid, but the agency doesn't spare a thought about what
if anything our creditors may be able to buy with their dollars.
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Peter
Schiff
is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling
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