Thursday, February 05, 2009

Confused and Moody...

...or rather Moody's is confused.

The following excerpt from their remarks concerning U.S. debt illustrate the extent of misunderstanding even the largest investment services display when conceptualizing the real economic causes and effects of debt issued by the U.S. in its own currency.

1. The notion of "creditors" is misguided as it ignores the other half of the equation - the desire (indeed the massively lustful need) to save U.S. financial assets. "Creditor" nations do not "finance" our spending as much as we "finance" their saving.

2. Moody's gets the relative argument correct (other nations debt levels increasing as well), but fails to delineate if those nations are issuing in their own currency or if the debt is denominated in foreign currency. If foreign currency, then it is very much a problem as that nation must obtain the stated foreign reserves to pay the obligations. Export-heavy emerging market economies get caught in this all the time when they issue debt denominated in foreign currency. An obligation to pay back in dollars is based on "getting" dollars from exports. If net exports declines, there are less dollars forthcoming and vultures start circling. See Argentinian economic history in the 80s and 90s.

3. Government spending is not revenue constrained. I have repeated this many times recently. Again, the U.S. does not have to "get" dollars from anyone. U.S. interest payments will never bounce. The ability to pay in U.S. dollars is NOT a function of tax revenue. INFLATION is the issue, not SOLVENCY or "ability" to pay.

4. So the question to Moody's is "so what?" Where do they put their money?

(ADDENDUM) This may also be Moody's (no doubt other rating agencies will follow as well) attempt at remaining relevant and "tough".

(ADDENDUM II) I point readers to Japan's bond performance (compared and contrasted with contemporaneous Moody's rankings) given their Debt/GDP ratio of nearly 150%. Why use this measure if it does not describe or predict?

"The US government's financial position is projected to worsen considerably
over the coming two years as a result of measures taken to aid the financial
sector, the effects of the recession and the upcoming stimulus package, says
Moody's... At the end of fiscal year 2008, debt borrowed from creditors
outside the federal government, the most relevant measure of federal
government debt, amounted to $5.8 trillion, equivalent to 40.8% of US GDP.
"Compared with the central government debt of other Aaa-rated countries,
this is a moderate level. However, total debt held by the public is
projected to rise by more than half during the coming two years, reaching
$9.0 trillion, or 62% of GDP by the end of fiscal year 2010... In the
meantime, however, most other Aaa governments will see their debt metrics
deteriorate as well." Moody's also examines the ratio of this debt to the
federal government's own revenue, which is a measure of the resources
available at any moment to repay the debt."

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