Tuesday, December 14, 2010

The Protocol of change...

After observable events prove a theory or a process to be wholly incorrect and imprudent, at what point does a rational thinker change his/her protocol for understanding a given issue?

On a theoretical level, Moody's insistance that "ability to pay" comes from "ability to raise funds via taxes" is wrong. A sovereign issuer of currency does not need to collect its own currency in order to pay in that currency. Furthermore, external "funding" from other currencies that grant creditworthiness is a misnomer. We live in a fiat floating currency world and Moody's continues to think constrained by the manacles of gold.

On an experimental level, one need only look to Japan to note the inadequacies of Moody's approach to sovereign creditworthiness.

NEW YORK (Reuters) – Moody's warned on Monday that it could move a step closer to cutting the U.S. Aaa rating if President Barack Obama's tax and unemployment benefit package becomes law.

The plan agreed to by President Barack Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduce the appeal of U.S. Treasuries, which currently rank as among the world's safest investments.

"From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth," Moody's analyst Steven Hess said in a report sent late on Sunday.

After Obama announced his plan, Treasury prices fell sharply in volatile trade last week and yields have hit a six-month high, in part due to concerns over the effect the package will have on government debt levels.

If the bill becomes law, it will "adversely affect the federal government budget deficit and debt level," Moody's said.

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