China Ratings Agency Downgrades US Debt From Moody's, S&P's, and Fitch's AAA Rating

Currency wars. Well at least a Phony War for now. See, nothing has happened. All is well. Move along. Nothing to see here. Status quo intact.

The US sovereign debt gets a stiff downgrade, cut down from number one in the world, to a distant thirteenth place by China's Dagong Credit Rating Agency.

Governments like China do not take actions like this randomly, and their quasi-state organizations do not march to the beat of their own drummer. It will be interesting to watch this develop, and calculate the strategy, to figure out the next steps.

From a thematic perspective, coming up, competitive devaluations, and a shift in the reserve currency regime that will resemble a seismic shift, most likely pivoting around the SDR composition discussions later this year.

The US battered the euro and has been sitting on gold and silver ahead of the SDR discussions. And now China has slipped a shiv between the ribs of the almighty Dollar. This is just the overture, the prelude to the dance.

And further down the road, trade wars, well, at least trade wars more overt than the ones which have been ongoing since 1980, in which the US based multinationals thought they were pulling the strings, breaking the back of American labor.

And guess who the arms dealers are in this paper chase, selling to all sides? Who are the untouchables, the TBTF, a strategic asset in the financial arsenal of democracy? When these boys roll into town it's time to hide the women, children, livestock and provender.

The US media will downplay this, dismiss it, say it does not matter because China will not/ dare not/ can not/ do anything to change the status quo. And expect the spin to be laced with plenty of condescension. Oh those sly Chinese, just talking up their book, just like us. But who can take those little rapscallions seriously.

They are wrong, and they know it.

Well maybe not the news readers and the spokesmodels, who only know what they are told. But the strategists, the thought leaders, and the smart money most certainly know it. They just do not wish to share that information with you yet, because real knowledge is power. And show enjoy the show.

Watch how people react to this, and how they spin it to you. This will be an indication of either what they know, or the kind of character they have. Then you will know something about them and the kind of player they are. Remember it.

They think that you do not have a need to know anything about this yet, because you are intended to be cannon fodder, grist for the mill. Along with Europe, which is busy scourging its citizens into submission to more willingly serve the Anglo-American banking cartel.

And of course there is the new dictum, 'Extend and pretend. If it bleeds, bury it...'

And so the fog of war rolls in.

Associated Press
Chinese credit firm says US worse risk than China
By Joe Mcdonald
July 11, 2010

BEIJING (AP) --
A Chinese firm that aims to compete with Western rating agencies declared Washington a worse credit risk than Beijing in its first report on government debt Sunday amid efforts by China to boost its influence in global markets.

Dagong International Credit Rating Co.'s verdict was a break with Moody's, Standard & Poors and Fitch, which say U.S. government debt is the world's safest. Dagong said it rated Washington below China and 11 other countries such as Switzerland and Australia due to high debt and slow growth. It warned the U.S. is among countries that might face rising borrowing costs and risks of default.

The report comes amid complaints by Beijing that Western rating agencies fail to give China full credit for its economic strength, boosting borrowing costs -- a criticism echoed by some foreign analysts. At June's G-20 summit in Toronto, President Hu Jintao called for the creation of a more accurate system.

Dagong, founded in 1994 to rate Chinese corporate debt, says it is privately owned and pledges to make its judgments impartially. But in a sign of official support, its announcement Sunday took place at the headquarters of the Xinhua News Agency, the ruling Communist Party's main propaganda outlet.

Dagong's chairman, Guan Jianzhong, said the current Western-led rating system is to blame for the global crisis and Europe's debt woes. He said it "provides the wrong credit-rating information" and fails to reflect changing conditions.

"Dagong wants to make realistic and fair ratings," he said.

Beijing has more than $900 billion invested in U.S. Treasury debt and has appealed to Washington to avoid hurting the value of the dollar or China's holdings as it spends heavily on its stimulus.

Dagong's report covered 50 governments and gave emerging economies such as Indonesia and Brazil better marks than those given by Western agencies, citing high growth. Along with the United States, some other developed nations such as Britain and France also received lower ratings than those of other agencies.

Dagong rated U.S. government debt AA with a negative outlook, below the firm's top AAA rating. It warned that Washington, along with Britain, France and some other countries, might have trouble raising more money if they allow fiscal risks to get out of control.

"The interest rate on debt instruments will run up rapidly and the default risk of these countries will grow even larger," its report said.

Dagong said it hopes to "break the monopoly" of Moody's Investors Service, Standard & Poors and Fitch Ratings. Their reputation suffered after they gave high ratings to mortgage-linked investments that soured when the U.S. housing market collapsed in 2007.

Manoj Kulkarni, head of credit research for SJS Markets in Hong Kong, said that despite the possibility China's government might try to influence Dagong's decisions, there is room in the market for a Chinese agency because Western firms' credibility is badly tarnished.

"As long as there is another opinion and it is backed up, I don't really think a China-based company will have an incentive to rate, say, Indonesia any better than a U.S.-based rating agency," Kulkarni said.

"If it comes to Chinese government-related companies, maybe there might be a conflict of interest, and investors would have to be aware of that fact," he said.

Chinese leaders have appealed repeatedly to Washington to safeguard their country's U.S. holdings and avoid taking steps in response to the global crisis that might weaken the dollar or the value of American assets.

Dagong rated China AA-plus with a stable outlook -- higher than Moody's A1 and S&P's A-plus -- due to rapid growth and relatively low debt.

Ahead of it were seven countries including Switzerland, Australia and Singapore that received the top rating of AAA, the same as those from Western agencies. Canada and the Netherlands also ranked above China...

Bloomberg
China Wins Higher Rating Than U.S. in First Ranking
July 12, 2010

July 12 (Bloomberg) -- A Chinese company gave its own government a higher debt rating than the U.S., U.K. and Japan in the nation’s first sovereign ranking because of widening deficits in the developed world.

Dagong Global Credit Rating Co. rated U.S. government debt AA with a negative outlook, and China AA+ with a stable outlook, the company said in a report covering 50 nations published on its website. The yuan-denominated rating is higher than Japan’s AA- and the same as Germany’s, Beijing-based Dagong said...

Dagong’s rating report gave “markedly” different valuations to 27 countries compared with those of Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, the statement said. The euro has slumped 12 percent this year on concern that Europe’s fiscal crisis may expand beyond Greece and Spain to Germany and France.

“This marks a new beginning for reforming the irrational international rating system,” Chairman Guan Jianzhong said in a statement. “The essential reason for the global financial crisis and the Greek crisis is that the current international rating system cannot truly reflect repayment ability.”...

China Ratings Agency Press Release

Typical snide reaction from the Financial Times I Heart China Says China Rating Agency

Three Interesting Audio Interviews About Precious Metals and the Economy

King World News is a great alternative source to the mainstream media.

Here are three interviews that all appeared on July 10, and are well worth hearing.

1. Ben Davies of Hinde Capital

2. James Turk of Goldmoney

3. Ted Butler On Gold and Silver

Austrian Economics: True Money Supply, Deflation and Inflation

Here is the Austrian theory of money supply and its measures in a nutshell.

"The True Money Supply (TMS) was formulated by Murray Rothbard and represents the amount of money in the economy that is available for immediate use in exchange. It has been referred to in the past as the Austrian Money Supply, the Rothbard Money Supply and the True Money Supply.

The benefits of TMS over conventional measures calculated by the Federal Reserve are that it counts only immediately available money for exchange and does not double count. MMMF shares are excluded from TMS precisely because they represent equity shares in a portfolio of highly liquid, short-term investments which must be sold in exchange for money before such shares can be redeemed.

For a detailed description and explanation of the TMS aggregate, see Salerno (1987) and Shostak (2000).

The TMS consists of the following: Currency Component of M1, Total Checkable Deposits, Savings Deposits, U.S. Government Demand Deposits and Note Balances, Demand Deposits Due to Foreign Commercial Banks, and Demand Deposits Due to Foreign Official Institutions."

True Money Supply, Ludwig Von Mises Institute

Here is some additional reading on the subject. The Austrian Theory of Money by M. Murray Rothbard

The weakness in TMS is the same as in all of the narrower money supply aggregate measures, in that it is very volatile in the short term because of seasonal demand. Ideally one would perform long term trending to get a better idea of the expansion or contraction of the money supply.



As one can see, the trend in money supply growth has been quite strong, almost parabolic.



Why do I present this? Because I thought it would be a good idea for those who aspire to be Austrian economists to know what the Austrian School thinks about money supply and how to measure it.

So when some point to M3, for example, and see an argument for deflation rampant, they should at least understand that they are not being 'true to their school.'

I should disclose here that although I have sympathy for many of the things that the 'Austrian School' says, I am not an 'Austrian' or a member of any economic school of thought for that matter. I think the Austrian school has been influenced to the point of being hijacked by the neo-liberal economists, due in large part to its marginalization in the study of economics and its lack of vigor.

Returning to what the Austrians think, a fairly recent discussion of this deflation issue was penned by Richard M. Ebeling in The Hubris of Central Bankers and the Ghosts of Deflation Past.

"One fact should be pointed out in terms of the current economic crisis. There has been no monetary deflation -- that is, an absolute decrease in the quantity of money and credit in the economy. Just the opposite. Since 2008, the Federal Reserve has increased the total amount of reserves in the banking system by around $1.5 trillion, mostly by buying up many of those "toxic" mortgages that were guaranteed by Fannie Mae and Freddie Mac.

This huge expansion in the potential quantity of money and credit that could flood through the financial markets and generate significant price inflation has been held off the market due to the fact that the Federal Reserve has been paying banks interest to hold those sums as unlent reserves. With key market interest rates being kept artificially low at near zero or one percent through activist Fed policy, banks have found it more profitable earn that positive rate of interest at the Federal Reserve.

But unless the Fed finds some way to drain those "excess reserves" out of the banking system, significant inflationary -- not deflationary -- forces may be at work looking to the next few years ahead."

This could help some people understand why the expected effects of monetary deflation have not been appearing as they planned.

There is certainly an undeniable slump in aggregate demand that it putting pressure on prices, and some sectors, like housing, are experiencing the collapse of asset bubble.

Some point to credit contraction as deflation, but as the Austrian school would point out, credit is not money, only a means of money creation. The Fed owns a printing press, and as most recently seen, can expand its Balance Sheet and True Money Supply almost at will.

Some things I have seen recently from 'Austrians' leads me to think that a portion of that camp has been hijacked by the neo-liberal economists. That would indeed be a shame if it is true, and ti becomes a trend. Stranger things have happened. But I see it clearly in the calls for austerity, and liquidationism, and 'free markets' from some who wear those school colors.

Markets are always and everywhere never naturally free. They require diligent effort and serious work to be maintained free of fraud, corruption, and inefficiencies. But some find it easy to believe in or at least promulgate economic theories based on the natural goodness of man, and assorted fairly tales and urban myths, if it suits their ideology or duplicitous agenda. One can usually spot them by the quantity of invective and rhetoric against the quality and detail of their thought.

As for Ben's printing press, baby, you ain't seen nothing yet.

Jesse's Paradox: Gold Can Perform Well In Both Monetary Inflation and Deflation

The average punter understands the first graph to the right. Gold tends to increase in price in times of monetary inflation, because as an alternative store of wealth it provides a safe haven from central bank debasement of the currency.

By monetary inflation, we do not mean the simple, nominal growth in money supply, and of course the same can be said of a simple decrease and deflation. This is obvious when one considers that money must have a natural relationship to the demand for it relative to population growth, but most importantly to the growth of real GDP.

But notice the second chart, and this is the one which so many speculators and economists miss. Gold tends to perform well when the inflation adjusted returns on the longer end of the curve are low. In other words, when the real returns on bonds are inadequate to the risk. But the risk of what?

Inflation, pure and simple. Deflation is a prelude to inflation, and sometimes a brief hyperinflation, in a fiat currency regime.  And even while the nominal money supply may remain flat or even negative, the decay in the underlying assets that support it may be declining, and sometimes dramatically so. 

The smarter money is not chasing the latest wiggles in the Elliot waves, or the price manipulation shenanigans of the central bankers and their minions at the bullion banks. They have been buying ahead of the increasing likelihood of a monetary event.

The underlying value of the dollars are deteriorating. So even though there might be fewer dollars nominally, in fact there should be much fewer dollars because of the contraction in GDP.

And the quality of the assets underlying those fewer dollars are much lower quality than only a few years ago.

Gold seems to perform less well, underperforming other asset classes, in a healthy economy where the growth of money is related to the organic growth of real production and not to financial engineering. Gold seems to be a hold in 'normal' times.

I would suggest that the extraordinary price in gold now is because for many years the central banks artificially suppressed the price and the means of production for gold by selling their holdings in a conscious attempt to mask their monetization and the unreasonable growth of the financial sector. They wanted things to look 'normal' while they were becoming increasingly out of balance, especially with regard to debt and international trade balances, and so they opted for appearance versus reality.

As Fernando of the Fed would day, "It is better for the economy to look good than to be good, and dahling while we were printing money and selling the public's gold it looked marvelous!"

And what if the Fed starts allowing the 10 year Treasury yield to start rising naturally. Will that be the time to start selling gold? Probably not because the money supply would most likely be artificially increasing again, and that yield increase would be a remedial reaction.  Keep an eye to negative real interest rates if you can find an indicator of inflation that has not been corrupted.

Cargo Cult Economics

People who really do not understand what is happening in a complex system sometimes react in funny ways, and suggest things that would be laughable if there were not in a relative position of power. Anyone who has worked in a large corporation will understand what funny things bosses can be when struggling to deal with complexity that they do not understand. Our duty of course is to help them, for the good of all, but sometimes that is beyond our reach, especially in dealing with Type A bosses who cannot conceive that there might be something beyond their comprehension. Since 'killing the messenger' is their reflexive reaction, their learning curves tend to be quite long, generally resolved in the insolvency of the division or even the entire company.

What I find incredibly amusing are the high priests of the economic cargo cult, dressed up in the ritualistic accoutrement's of academic credentials, sporting the codpieces of monetary policy, carrying the totems of efficient market theory, arrogant and presumptuous even in their frustration and failure. They are just so incredibly and unsuspectingly funny. I am sure history will have a good laugh over it, and for us, well at times we have to grin and bear it.

Much of what Larry Summers is doing now makes me think of Dilbert's boss. If gold is the signal of a problem in the economy, well then, let's just manipulate the price of gold. If slumping stock prices are a sign of economic deterioration, well then, lets just buy the futures and prop them up whenever they slide. See how short term and easy things can be?

This is not always humorous of course. Powerful people who are frustrated and amoral can tend to do increasingly destructive things. And then the response of the people is to try to ignore them. If necessary one must basically tell them to 'stuff it,' and give them the boot. And if they persist and start acting out, well, tyrants eventually get replaced one way or the other, but it is far too early to discuss things like that now.

When Will the Gold Bull Market End

So, the frustrated investor says, when will gold finally start topping?

Gold have topped when the smart money is convinced that the real economy is becoming naturally sustainable, robustly organic in its credit creation and allocation, and healthy in the growth of the median wage to support consumption, without subsidy or interference or new unpayable debt from the Federal Reserve, or the draconian 'taxes' from an outsized financial sector that stifles real growth.

When people are no longer obsessed with what Goldman Sachs and their ilk are doing, or what Bernanke and his merry pranksters have to say that day, then will be the time to be out of gold. I do not see even a move in that direction anywhere on the horizon.  Because of the credibility trap, the impulse to reform is stifled in the corridors of power.

This is no top, and sentiment is unusually bearish. As I have said, I believe this is the base for a new leg up that is going to surprise all but a few. No one knows the future and I could be wrong.

But I do not think that I am, unless there is a new market panic and a general liquidation of all assets. The hedge funds, BIS, and the Fed can play their games, but they cannot hold back the tide of history without being overwhelmed.