When did a credit rating stop becoming a credit rating?
So the world and our politicians seem to be surprised with the announcement that Standard and Poor's have downgraded the U.S. credit rating from AAA to AA+.
I am sorry, but since when did credit ratings become open to negotiation?
I am more amazed by the debate that came before the downgrade, where politicians were trying to prevent it.
Credit ratings are pretty simple.
If you can afford to repay, you don't speculate too much with your money and you have more income than your outgoings, you are a good credit risk.
If you can't afford to repay, you speculate heavily with your money and you spend more than you bring in, you don't deserve a good credit rating.
So lets look at the government.
- They have given the power to create money to banks through debt; therefore, when consumers and companies cannot take on more debt, governments have to. If the government ever tried to repay our debt, we are in a dire depression. Do you think they can afford to repay?
- They speculate by offering guarantees on bank deposits far in excess of what they can afford. They speculate on workers being able to afford to pay for pensioners. They speculate on bankers' ability to run our country by giving them their license to create our money. They speculate full stop.
- They consistently spend more than they bring in -- a lot more. Nothing more to be said on point 3.
And we give them a AAA credit rating?
If we rated our borrowers in BankToTheFuture.com with the same methods used to rate our governments, we would go bankrupt overnight.
If I ran any of my business like the government and they gave me a AAA rating, they would be accused of fraud.
If I said I could buy my customers all the things that the government promises to us, I would be bankrupt tomorrow and face lawsuits of mis-selling.
And yet the market was still surprised that the government got downgraded.
The big surprise to me is why people still think that government debt is worth anything.
If there is one blessing in disguise from this turmoil, it's that at least banking reform will happen sooner.
When the government no longer has the credit rating to bail out the banks during the upcoming crash, like I have been saying all along, their only choice is banking reform.
Bring it on. The world will be a great place. I will tell you why in future blogs.
I'd love to hear your thoughts...