The thing about playing chicken is that fatally high stakes are a prerequisite of the game.
And someone — not excluding, say, an entire country — is going lose.
If you believe market pundits like Jim Rogers (an American trader of some fame who chooses to teach his daughter Mandarin and now lives in Singapore) the U.S. has already lost its triple-A credit rating in all but fact.
“Everyone already knows that the U.S. has lost its ‘AAA’ status,” Rogers said (while alternately lambasting the press for taking seriously what he called the ongoing Washington “charade”).
“Anyone who knows what is going on, already knows that the U.S. is now the
biggest debtor nation in the history of the world. It’s only S&P and Moody’s [the ratings agencies] that haven’t figured out what is going on. The investment world knows that the U.S. is not ‘AAA.’”
The truth is, the ratings agencies have figured out the U.S. is not triple-A. But those entrusted with grading the U.S. debt at the ratings agencies have been on the phone frequently with Washington, which means their allegiances are subject to crushing political pressure.
In this case, the ratings agencies are being pressured to do nothing. And so far they are complying. (Remember, these were the same ratings agencies that gave triple-A ratings to the toxic assets ginned up by Wall Street for years leading up to the financial crisis.) Bottom line: all things labeled “AAA” must be treated with extreme chariness.
(Speaking of As, a reader recently sent us this, a complete list of U.S. government departments and agencies. Note that departments and agencies under just the letter ‘A’ go on for a full page. Your great-grandchildren’s tax dollars, working for you.)
Meanwhile, the gridlock in Washington has become untenable, as calls from furious Americans have flooded Congress. Yesterday marked one week to go before the U.S. runs out of cash (or, really, one week to go before the congressional recess, during which the deep thinkers in Washington would rather be numbing their pain rather than bracing for default).
To put into perspective how many trillions of dollars the U.S. owes, here is a simple visualization, courtesy of one of our hedge fund friends who’s actually considering not raising his children in the U.S., for fear of saddling them with uniquely American obligations and debts he feels they shouldn’t have to pay.
In addition to realizing that the U.S. has already received a downgrade on its credit in the eyes of the world, Wall Street realizes something else, and has for quite some time. In the words of Alex D. Patelis, who studied at Princeton under our current Fed chief, Ben Bernanke, and now runs Patelis Macro:
“A legacy of high government debt – against very high domestic inequality, a large chunk of debt owned by foreigners and little leeway to increase taxes or cut spending – means that the U.S. has an incentive to weaken its currency and create inflation as its preferred strategy to reduce that debt longer-term.”
Meaning, your dollar is likely to buy less in the world for the foreseeable future.
More importantly, this battle raging in Washington over slashing entitlements vs. raising taxes isn’t actually offering a real solution. If one looks at the verdicts of the non-partisan Congressional Budget Office in response to the various plans being put forth by Congress, there is no solution on the menu.
For the time being, we have spent more than we can pay, and no amount of tiny cuts to the federal budget or taxes or gimmicks will lead to a quick fix.
