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China Calls Our Bluff: "The US is Insolvent and Faces Bankruptcy as a Pure Debtor Nation but [U.S.] Rating Agencies Still Give it High Rankings"

→ Washington’s
Blog America's biggest creditor - China - has called our bluff. As
the 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 rated. “The western rating agencies are
politicised 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 criticised the practice of “rating shopping” by companies
who offer their business to the agency that provides the most favourable
rating. In the aftermath of the financial crisis “rating
shopping” has been one of the key complaints from western regulators ,
who have heavily criticised 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 criticised 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 agency. 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 this ,
this ,
this ,
this ,
this ,
this ,
this ,
this
and this . 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.” Might Makes Right
Economic Collapse Indeed, Guan is even dissing 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.” As I've
repeatedly shown ,
borrowing money to fund our huge military expenditures are -
paradoxically - weakening our national security: 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 this ,
this
and this . [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 we don't? 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 knows it. In other words,
everyone who pays any attention knows that we're broke. What's scary is
that our biggest creditor knows it. Tricks
Up Their Sleeves? China has been threatening
for many months to replace the dollar as the world's reserve currency
(and see this ).
And China, Russia and other countries have made a lot of noises about
replacing the dollar with the SDR. See this
and this . 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 this and this . In related news, Germany's biggest companies are starting to shun Wall Street as too risky.

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