April 18, 2011
Asuncion, Paraguay
When I woke up this morning and scanned through my usual digest– boots on the ground reports from overseas contacts, market summaries from Asian and European bankers, commentary from friends still in the intelligence community– a couple of things caught my eye that I want to tell you about.
Dagong Global Credit Rating Co is China’s leading credit rating agency. Credit rating agencies are the firms who are responsible, among other things, for scoring the credit risk of a particular asset or sovereign nation.
When they rate a security as “AAA”, premium safety, investors pile in. They’re an integral part of the financial system.
You undoubtedly remember that the world’s leading agencies– Fitch, Moody’s, and S&P, were all complicit in slapping AAA premium ratings on so many toxic mortgage-backed securities… and maintaining sound ratings for far too long on bankrupt nations like Greece and Portugal.
The entire industry lacks credibility at this point, and China’s Dagong agency aims to do something about that.
This morning I read Dagong president Guan Jianzhong’s remarks at a recent conference of Asian rating agency CEOs held in Kuala Lumpur, Malaysia (one of my favorite cities).
In his speech, Guan called for the establishment of a global rating agency that follows clearly outlined international standards, effectively putting an end to the cowardly analysis that dominates the industry now and replacing it with a healthy dose of reality.
Putting its money where its mouth is, Dagong has a long-standing, negative outlook on US debt that doesn’t pull any punches. From its November 2010 report:
“In essence the depreciation of the U.S. dollar adopted by the U.S. government indicates that its solvency is on the brink of collapse, therefore it wants to cut its debt through the act of devaluation with the national will; such a move has severely harmed the interests of creditors.”
Following suit, S&P stunned financial markets this morning by revising its US outlook to ‘negative’, citing politicians’ inability to address medium-term and long-term challenges.
In total contrast, US News and World Report published an article a few days ago entitled Why you should buy U.S. Treasuries,” which amounts to the worst advice I’ve seen in years.
"Trust me. I'm good for it."
The article is devoid of any clear analysis which could support loaning our hard-earned savings to the most indebted nation in the history of the world in a rapidly depreciating currency at rates which have little chance of keeping up with inflation; instead, the author relies solely on patriotism:
“It has always been a bad idea to bet against America and our ability to prosper even against overwhelming difficulties. America will cut back its spending, innovate, and pay off its debts. We will earn our way out. It’s just how we do it…”
A more accurate statement would have been, “that’s how we used to do it…” Fact is, America’s economic problems are deep-seeded and neither political party can put forth a viable strategy for righting the ship. Even S&P is starting to realize this.
Even worse, it’s not just the politicians that don’t get it. From top to bottom, the culture in government service is an entrenched “me first [at the expense of taxpayers...]” attitude which encourages shortsighted decision making, and in some cases, even fraud.
If you’re still betting on America to come out on top, you’re taking a big risk. America first emerged as a major economic power, not because of government policies or political leadership, but because of the strong incentive that individual Americans had to work hard, take risks, and create value for others.
The incentive isn’t about patriotism… it’s about the benefit of their families and loved ones.
Americans like this still exist, and their desire to see their families and loved ones flourish through enterprise and value creation is as strong as ever. As the economic situation worsens with each passing day, more and more of these value creators look to greener pastures outside of America.
Maybe you should consider the same.
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