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CNN.com asks should USA still be AAA?
(emphasis mine) [my
comment]
Should
USA still be AAA?
Despite soaring budget deficits, investors are still buying U.S. Treasurys. Still,
some critics say the government debt isn't nearly as safe as widely assumed.
By
Chris Isidore, CNNMoney.com senior writer
Last Updated: March 23, 2009: 10:14 AM ET
NEW YORK (CNNMoney.com) -- When the Federal Reserve announced last week it
was buying $300 billion in long-term Treasury notes, the move was viewed as
one of the safer bets the central bank has made recently. [It
isn’t]
After all, the Fed has either bought or announced plans to spend trillions
of dollars on troubled mortgages and other types of questionable consumer
debt in the past year. At the same time, the Fed has been loaning money to
banks and companies that couldn't get funding elsewhere.
So the purchase of AAA-rated Treasurys, the highest credit rating that a bond
can have, is probably the least risky thing the Fed can do these days.
Investors agreed: The prices of long-term Treasuries rose after the Fed's
announcement, pushing their yields lower. (Bond prices and yields move in
opposite directions.) Rates didn't even budge much Friday after the
Congressional Budget Office raised its federal budget deficit forecast for
this fiscal year.
But is the purchase of Treasurys really as safe an investment as it seems?
[No] Some think the U.S. may not be able to hold on to its perfect
credit rating indefinitely considering how much money the Fed, Congress and
the Treasury Department have thrown at the economy in their attempt to lift
it from this recession.
"The only reason someone who bought a Treasury can get their money is
that the government is able to borrow more money to pay them off [These are
called ponzi schemes]," said Peter Schiff, president of brokerage firm
Euro Pacific Capital. "It's impossible for us to just keep going deeper
and deeper into debt." [proof that ponzi schemes don’t last
forever: Madoff]
Still, that seems to be exactly what the government will be doing. According
to credit rating agency Moody's, the amount of U.S. Treasurys held by the
public, including foreign governments, is expected to rise to $7.8 trillion
by the end of the government's fiscal year in September, up from $5.8
trillion a year earlier.
What's more, Moody's predicts that this figure could increase to $9
trillion by September 2010 [it will be more], since the government is likely
to take advantage of the current low rates to finance its various bailout
efforts. The yield on the 10-Year Treasury is about 2.62% [ridiculously low].
But strong demand for Treasurys does little to assure those who think
there will be big problems ahead. Critics of federal spending worry
that once concerns about the value of the dollar or the government's debt
load start to turn, it will turn quickly, sending Treasury prices plunging
and longer-term interest rates soaring. [Agreed]
"Anyone who buys a lot of [long-term Treasurys] now might be
crazy," [Agreed] said Brian Wesbury, chief economist at First Trust
Portfolios. "It's the biggest the bubble in the world." [Agreed]
Higher bond rates can have significant costs for the nation since it would
drive up the price that the government has to pay to borrow money. And any
increase in how much the government has to spend on interest payments could
lead to a reduction in the amount of money available for [rampant
money printing to fund] other government spending.
Even President Obama acknowledged that risk when asked during an interview on
"60 Minutes" on Sunday about the limits on how much the government
can spend on various efforts to jump start the economy.
"The limit is our ability to finance these expenditures through
borrowing," he said. "People are still buying Treasury bills. They
still think that's the safest investment out there. If we don't get a handle
on this and also start looking at our long-term deficit projections, at a
certain point people will stop buying those Treasury bills." [that
point is now. Someone would have to be insane to buy treasuries with what the
fed’s expansion of the monetary base.]
With the U.S. dependent on foreign investors to buy much of its debt,
maintaining overseas confidence in U.S. Treasurys is particularly crucial. [Too
late. Foreign governments would not be discussing replacing the dollar if
they still had confidence in the US.]
That's why when Chinese Premier Wen Jiabao said earlier this month that he
had "some worries" about the safety of the more than $700 billion
in U.S. Treasury debt his country holds, it got the attention of bond traders
and government officials. Some experts think the Fed's move to start buying
Treasurys was at least partly a response to Wen's remarks.
"Is that a coincidence? Hmm. I think not," said Kevin Giddis,
managing director of fixed income at Morgan Keegan. "I think it
certainly helped the Fed make its decision."
On Monday, however, Hu Xiaolian, a vice governor of the People's Bank of
China, gave U.S. Treasurys a vote of confidence, saying that the bank will
continue investing in that debt because it views the overall credit risk to
be low. [China is going to suffer colossal losses on its treasury
holdings.]
Will rating agencies downgrade the U.S.? [No, not until AFTER treasury
prices crash]
So far, major credit rating firms such as Moody's and Standard & Poor's
have yet to take any steps to lower the U.S. credit rating [it would be
political suicide for Moody's and Standard & Poor's to downgrade the
US’s rating] -- despite the increased spending and concerns about
rising budget deficits.
Still, some smaller rating agencies have already lowered their U.S.
rating. Egan-Jones Group actually removed the AAA rating from U.S. debt four
years ago, well before the current crisis in financial markets prompted
trillions in government bailouts.
"There is little doubt that the obligations of the U.S. government
have risen faster than their means to absorb those obligation," said
Sean Egan, the firm's managing director. "Hopefully this trend will be
reversed."
Egan doesn't think there is much threat of the government defaulting on
its debt [not when the fed can print money to buy treasuries]. But
he said that government policies will lead to a severe devaluation of the
dollar, which could leave investors almost as bad off as a default. [Exactly]
The dollar moved sharply lower against most other major currencies
following the Fed's Treasury announcement. The Fed also said last week
it would be buying $750 billion in mortgage-backed securities. So that
essentially means the Fed is printing more than $1 trillion to fund these
purchases. That could [will] spark inflation down the road.
Nonetheless, officials with Moody's and S&P defend their current AAA
ratings for U.S. debt [they had better. If Moody's and S&P don’t
defend the US’s rating like their existence depended upon it, the
government might start looking into their decision to give AAA ratings to
trillions in toxic securities]. They say that the U.S.' debt level as
a percentage of gross domestic product and interest payments as a percentage
of tax revenue [that ratio could change fast] are well within the range found
in the other 17 nations that still have AAA ratings. Most of them are in
Western Europe, which some argue has a worse banking and credit crisis than
the U.S.
"If you rate U.S. sovereign debt as less than AAA, then there's
probably nothing in the world that should be rated AAA," [Complete
BS. Germany’s and China’s government bonds are true AAA debt. The
AAA of US treasuries are a joke.] said David Wyss, chief economist for
S&P. "To some extent you have to grade on the curve here."
Still, officials with S&P and Moody's say they are concerned about
various U.S. debt ratios. They insist they wouldn't be afraid to lower
U.S. ratings [yeah right] if the ratio of debt to the size of the U.S.
economy or interest payments to government tax revenues become too great.
"We don't have a magic number," said Steven Hess, senior credit
officer for Moody's. "But if at any point we became convinced that the
debt and ratios would continue to grow, [a downgrade] is something we would
consider."
But Egan argues that S&P and Moody's would be extremely reluctant to
cut their ratings on U.S. debt [Correct]. So if anyone is going to
downgrade their opinion of the government's creditworthiness, it will be the
marketplace that reacts first, not the agencies. [Absolutely correct]
"People aren't stupid. They figure this out over time," [Agreed]
said Egan.
My reaction:
Treasuries are not safe.
1) Treasuries are essentially an enormous ponzi scheme which will grow until
it collapses. They are the biggest the bubble in the world.
"The only reason someone who bought a Treasury can get their money is
that the government is able to borrow more money to pay them off," said
Peter Schiff, president of brokerage firm Euro Pacific Capital. "It's
impossible for us to just keep going deeper and deeper into debt."
Once concerns about the value of the dollar or the government's debt load
start to turn, it will turn quickly, sending Treasury prices plunging and
longer-term interest rates soaring.
"Anyone who buys a lot of [long-term Treasurys] now might be
crazy," said Brian Wesbury, chief economist at First Trust Portfolios.
"It's the biggest the bubble in the world."
2) Treasuries held by the public is expected to rise to $7.8 trillion by
September, up from $5.8 trillion a year earlier, with Moody's predicting this
figure could rise to $9 trillion by September 2010.
3) The yield on the 10-Year Treasury is at a ridiculously low 2.62%.
4) The point people stop buying Treasury bills is fast approaching.
5) Higher bond rates can have significant costs for the nation since it would
drive up the price that the government has to pay to borrow money.
6) Smaller rating agencies have already lowered their U.S. rating
"There is little doubt that the obligations of the U.S. government have
risen faster than their means to absorb those obligation"
7) major credit rating firms (Moody's and S&P) have yet to take any steps
to lower the U.S. credit rating, and they won’t until treasury prices
have crashed.
S&P and Moody's would be extremely reluctant to cut their ratings on U.S.
debt. So if anyone is going to downgrade their opinion of the government's
creditworthiness, it will be the marketplace that reacts first, not the
agencies.
8) Government policies will lead to a severe devaluation of the dollar, which
could leave investors almost as bad off as a default.
Conclusion: With the fed planning 15-fold increase in us
monetary base, investors in treasuries are likely to
see their wealth wiped out.
Eric
de Carbonnel
Market Skeptics
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