by Washington's Blog
July 24, 2010
America's biggest creditor - China -
has called our bluff.
Financial Times notes, the head of China's
biggest credit rating agency has said America is insolvent and that U.S.
credit ratings are a joke:
The head of China’s largest credit rating
agency has slammed his western counterparts for causing the global
financial crisis and said that as the world’s largest creditor nation
China should have a bigger say in how governments and their debt are
“The western rating agencies are
politicized and highly ideological and they do not adhere to
objective standards,” Guan Jianzhong, chairman of Dagong Global
Credit Rating, told the Financial Times in an interview.
He specifically criticized the practice of
“rating shopping” by companies who offer their business to the agency
that provides the most favorable rating.
In the aftermath of the financial crisis “rating shopping” has been one
of the key complaints from western regulators , who have heavily
criticized the big three agencies for handing top ratings to
mortgage-linked securities that turned toxic when the US housing market
collapsed in 2007.
“The financial crisis was caused because
rating agencies didn’t properly disclose risk and this brought the
entire US financial system to the verge of collapse, causing huge
damage to the US and its strategic interests,” Mr Guan said.
Recently, the rating agencies have been
criticized for being too slow to downgrade some of the heavily indebted
peripheral EuroZone economies, most notably Spain, which still holds
triple A ratings from Moody’s.
There is also a view among many investors that the agencies would shy
away from withdrawing triple A ratings to countries such as the US and
UK because of the political pressure that would bear down on them in the
event of such actions.
Last week, privately-owned Dagong published its own sovereign credit
ranking in what it said was a first for a non-western credit rating
The results were very different from those published by Moody’s,
Standard & Poor’s and Fitch, with China ranking higher than the United
States, Britain, Japan, France and most other major economies,
reflecting Dagong’s belief that China is more politically and
economically stable than all of these countries.
Mr Guan said his company’s methodology has been developed over the last
five years and reflects a more objective assessment of a government’s
fiscal position, ability to govern, economic power, foreign reserves,
debt burden and ability to create future wealth.
“The US is insolvent and faces
bankruptcy as a pure debtor nation but the rating agencies still
give it high rankings ,” Mr Guan said.
A wildly enthusiastic editorial published by
Xinhua , China’s official state newswire, lauded Dagong’s report as a
significant step toward breaking the monopoly of western rating agencies
of which it said China has long been a “victim”.
“Compared with the US’ conquest of the
world by means of force, Moody’s has controlled the world through
its dominance in credit ratings,” the editorial said...
China is right. U.S. credit ratings have been
less than worthless. And - in the real world - America should have been
downgraded to junk. (See
China is not shy about reminding the U.S. who's got the biggest pockets.
As the Financial Times quotes Mr. Guan:
“China is the biggest creditor nation in the
world and with the rise and national rejuvenation of China we should
have our say in how the credit risks of states are judged.”
Right Economic Collapse
Indeed, Guan is even dissing (short for disrespect or
disparage) America's military prowess:
“Actually, the huge military expenditure of
the US is not created by themselves but comes from borrowed money, which
is not sustainable.”
repeatedly shown, borrowing money to fund
our huge military expenditures are - paradoxically - weakening our national
As I've previously
pointed out, America's
military-industrial complex is ruining our economy.
And U.S. military and intelligence leaders
say that the economic crisis is the biggest national security threat to
the United States. See
[I]t is ironic that America's huge military
spending is what made us an empire ... but our huge military is what is
bankrupting us ... thus destroying our status as an empire...
Indeed, as I
pointed out in 2008:
So why hasn't America's credit rating been
downgraded? Well, a report by Moody's in September states:
"In superficially similar circumstances,
the ratings of Japan and some Scandinavian countries were downgraded
in the 1990s.
For reasons that take their roots into
the large size and wealth of the economy and, ultimately, the US
military power, the US government faces very little liquidity risk -
its debt remains a safe heaven. There is a large market for even a
significant increase in debt issuance."
So Japan and Scandinavia have wimpy
militaries, so they got downgraded, but the U.S. has lots of bombs, so
In any event, American cannot remain a
hyperpower if it is broke.
The fact that America spends more than the rest
of the world combined on our military means that we can keep an artificially
high credit rating.
But ironically, all the money we're spending on
our military means that we become less and less credit-worthy... and that
we'll no longer be able to fund our military.
The Scary Part
I chatted with the head of a small investment brokerage about the China
credit rating story. Because he gives his clients very bullish, status quo
advice, I assumed that he would say that China was wrong.
To my surprise, he simply responded:
They're right. What's scary is that China
In other words, everyone who pays any
attention knows that we're broke.
What's scary is that our biggest creditor knows
Tricks Up Their
China has been
threatening for many months to replace the
dollar as the world's reserve currency (see
this). And China, Russia and other
countries have made a lot of noises about replacing the dollar with the SDR.
Gordon T. Long
argues that the much talked about
gold swaps are part and parcel of the plan
to replace the dollar with the SDR. Time will tell if he's right.
China, of course, is not without its own problems. (see
In related news, Germany's biggest companies are starting to
shun Wall Street as too risky.