This is not a theme you’ll see in the mainstream press, but it’s the truth. Unfortunately, you can’t prove what “might have been” if it doesn’t come to be, but read on and tell me where I’m wrong. The same ratings agencies that are fodder for everyone from Obama to European leaders for their utter incompetence and complicity in rating garbage subprime loans AAA while profiting handsomely from burying their heads in the sand will actually end up saving western society as we know it for future generations. Here is the premise at a high level:
- The United States, old Europe and Japan are completely drowning in debt – not just current debt, but future debt obligations. Deficits have been allowed to go unchecked for decades until very recently when ratings agencies finally took the unprecedented step of downgrading these nations that have largely set the tone for how humans want to live. You know, those things like freedom, democracy, capitalism, a high standard of living. If the alternative is an “Arab Spring”-like influence spreading throughout the world where we see Islamic law enacted or the anarchy and socialism much of the Occupy Wall Street movement is calling for, I’ll take what we have now.
- The fastest growing nations are not what most western inhabitants would aspire to. Unfortunately, China’s economy is set to eclipse that of the US in our lifetime and their ownership of US debt went from a mere 6% ten years ago to around 30% today and that ratio is accelerating. That is absolutely pathetic. As China’s ownership of our debt increases, so does their influence. Do you want China influencing our future? They are. China owns us. As they steal our intellectual property and dance around currency, military and political issues dangerously close to the precipice, the US stands idly by…acknowledging that in fact, we are increasingly at their mercy.
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- Nothing, and I mean nothing, will stop western societies from spending more than they can afford other than a crisis. And a crisis is what they got. Confronted with skyrocketing interest rates, most European nations have finally embarked on austerity measures to reign in their debt obligations. But it’s too little too late. See, the US and Europe have had years of false prosperity by basically artificially inflating GDP (and hence, standard of living) by borrowing money from future generations. So, when the binge ends and in fact, starts to reverse, the net effect is economic contraction. It’s like withdrawal for a common drug addict. Going cold turkey is painful. Well, we’re seeing that in Europe now and America is getting a pass for now since there’s no other “stable” economy to rely on as a reserve currency.
- So, we see multiple regimes overthrown in the Middle East with probably even more chaos and uncertainty in the regions than under the prior despots, we see Europe in decline and America stands at a cross-roads. Mend its mess or kick the can. Our current leaders are completely content with kicking the can down the road. After all, doing something bold, brave and painful with no immediate payoff to voters doesn’t get you reelected. So, barring any superhuman influence otherwise, western societies are doomed to collapse.
- But wait! There is an influence that can force change. Since politicians won’t change, and those who elect them focus on abortion, gun control and religion as key voting criteria instead of fiscal prudence, Americans and Europeans certainly aren’t voting in politicians with a laser focus on debt. They tend to vote for whoever promises them the most or takes a stand on something they find dear – social issues. In the face of collapse of humanity as we know it if western societies fall, social issues don’t matter. But we continue to vote with our hearts instead of our heads. What can save us? The credit ratings agencies.
- As absurd as it may sound, the agencies may well save the world. By downgrading debt on the US and as recently as this weekend, 9 European nations, it forces a wakeup call – and ACTION. (more on the pressure created by the downgrade in Europe). See, as these downgrades continue, it will force interest rates up even further and the only way to assuage the agencies into restoring AAA (which will take years, but look how long we all acted like B+ borrowers) will be to demonstrate the fiscal prudence commensurate with a top rating. We need to see deficits DECREASING, not considering a 3% deficit as “painful cuts” and “balancing the budget on the backs of working class Americans”. The time to cut the BS is now. No more sacred cows and special interests on either side. Everyone benefited from years of false prosperity and hence, everyone needs to sacrifice now to get us back on track.
- The argument that the ratings agencies have no legitimacy because they got the housing crisis wrong is absurd. If that were the case, then WHO will keep these economies in check? The agencies seek to be ahead of the bond market. They warn, they issue reports and when countries ignore them (as the US, Japan and Europe have), they get the downgrade they deserve. There is no other force for fiscal responsibility besides the ratings agencies and the bond markets. And by the time the bond markets have spoken, it’s too late, like it is in Italy, Greece and more.
- I applaud the debt downgrades in Europe, the US and Japan. I believe this will force the change needed to right the ship. Because democratic voters aren’t. And leaders aren’t. The ratings agencies are humanity’s last hope.
What Are Your Thoughts?
Should We Care About Debt, Ratings and Interest Rates?