This time is [not] different, but where's that Wile E. Coyote Moment?

[alice wellintown]

> hmmm, Daily Kos article sez China's agencies are busy downgrading US credit
> rating, hope that doesn't mean anything bad!


Well, if you still believe in Credit Ratings...and in any of the
numbers that come out of China...I don't.

Credit Rating was once a fairly useful "number" (usually lettters,
like AAA, AA, B, C, D...), but is not all that useful for several
reaons, the first one is that the people rating the debts have been
discredited, the second one is that there is now so much more
information, data, balance sheets made public and easily digested,
that one doesn't need to open the old Moodys red book to justify an
investment decision. In other words, a portfolio manager doesn't
rationalize lending a billion dollars from an employee pension plan to
IBM because it has a higher rating with S&P and Moodys than Apple. Not
that most portfolio managers, good ones that is, ever treated the
rating agency grades as gospel...and anyway, most of the lenders or
buyers of debt hold on to the bonds to maturity and so they are only
concerned with getting their money back after a steady stream of
interest. In the case of UST debt, default is not an issue. The US is
not at risk of default. So AAA or AA or A, doesn't much matter from an
investor's point of view. What matters is getting paid. That a lower
credit rating should, because it implies more risk, pay more than a
higher credit, is not the only consideration, nor is it the primary
one, especially for foreign investors and especially for Chinese
investors in UST. The Chinese know that default is not a real concern.
So, the thord reaon why credit risk is an issue is that there are a
hundred other more important things that do matter. The first one is
liquidity and the UST debt market has it. The second one is the
greenback, the reserve currency, and the UST pays in dollars and the
Chinese need them. The third one is that the UST market has a big
buyer named Bernake and he has taken the Bond Vigilantes out of the
game. The fourth reaon is, in addition to the OMO the Fed is using
some extraordinary tools to support the bond markets. And, the Chinese
have read Bernanke on Japan, and so they know that the rating of the
debt, often tilted by political gridlock and the failure to follow the
prescribed measures is all working in the interest of the lenders.
That is, there is no inflation, the dollar is strong, rates are low
and moving lower, the recession has been avoided with a slow somewhat
jobless recovery, and the fiscal cliff doesn't matter a bit.