8 Facts That Prove Our Govt. Is Not Going Broke
Continued from previous page
4. But isn’t it ominous that the rating agencies took away our AAA rating?
Ludicrous, not ominous.
Rating agencies were first established to help investors judge the ability of corporations to repay their debts (corporate bonds). At first the rating agencies were paid by investors who wanted the information. But, a new business model emerged --- agencies were paid by the corporations and banks who were selling bonds in question. No one seemed to care much about the obvious conflict of interest until the recent Wall Street crash. Then we painfully discovered that these “independent” rating agencies made tens of millions of dollars doling out AAA ratings on every piece of toxic trash that investment banks paid them to rate. Then when the crash hit, the rating agencies had to reclassify thousands of mortgage-back bonds from AAA to junk. In short, the rating agencies are best viewed as pet poodles for the too-big-to-fail Wall Street banks and investment houses.
Rating agencies also evaluate debt offerings by governments and government agencies so that investors can decide how much risk to take on. The lower the rating, the higher the risk, and therefore, the higher the interest rate for the government offering. Fair enough.
But when it comes to rating major economic powerhouses like the U.S., Japan or Germany, what the rating agencies say is meaningless. When the U.S. “lost” its AAA rating, it was supposed to signal a rise in risk and therefore a rise in the interest rates the U.S. would be forced to pay investors to hold its debt. Instead, U.S. government bond rates went down as investors poured more money, not less, into buying our debt.
So why did the rating agencies bother to offer what obviously was a meaningless downgrade? Because again, they were acting as Wall Street poodles, hoping to tip government policy toward debt reduction and away from making Wall Street pay for the unconscionable mess it created. It’s amazing to watch highly educated politicians genuflect before these bogus ratings. It’s theology, not economics.
In short, the cut in our AAA rating should be viewed for what it really is: a political act to help Wall Street support the Republicans, submarine new financial regulations, and redirect the debate away from increased taxes on Wall Street and the super-rich.
5. Isn’t China buying up most of our debt and doesn’t that put us at its mercy?
The U.S. imports more from China than it exports to China. This produces a trade deficit (not government debt). In the first six months of 2012 we imported $235 billion worth of goods from China but exported only $61 billion to China for a net trade deficit of $174 billion. (There are many reasons for this imbalance, but a big one is that China keeps its currency artificially undervalued, which in turn, keeps its products cheap and ours more expensive. That makes it very hard to compete.)
Since China wants to do something with all those extra dollars, it buys U.S. government bonds. How much of our debt does China now own? About 8 cents of every dollar of outstanding U.S. debt. Other U.S. agencies like the Social Security Trust Fund and the Federal Reserve own about 30 cents of every dollar of our debt, and individual investors, corporations and other countries own the rest – about 62 cents of every dollar of debt. (See U.S Treasury Department and Businessinsider.com.)
Yes, China is the biggest foreign player, but it's not about to make trouble. It couldn’t even if it wanted to. China needs us to buy its goods or its economy will collapse. (Think for a minute about the trade. We get real goods and China gets paper…or rather little electronic signals in a currency account. It’s not clear who’s getting the better of that deal.)