Strange world: The credit risk rating changed to outlook negative for America

It is a surprise that S&P has had the courage to put the US long term debt on outlook negative. The first time ever that such a thing has happened, totally unconceivable few years ago, now a reality that might change they way the world is structured. Not that America represents a good a risk currently, in fact, it does not. If we were to really go deep into all the macro accounts of the country we would perceive the real rating for America’s debt is way below AAA, more like BBB+, using the same metrics as they used so fast to reduce the ratings for the smaller countries in Europe. But, the question is: what is the outcome of such a move? What is the real importance of these credit rating agencies? In my view, these guys receive too much credit themselves and have acquired the power of the Caesar’s thumb… Outlook negative? Thumb down. Rating reduced? Thumb down. What happens next? If the US has its rating reduced to anything lower than AAA, to actually show the real risk, the world will go spiralling down because Central banks across the globe hold US treasuries just because they are AAA, as they are mandated in the investment of reserves by-laws. If the world dumps the US treasury bonds they hold, the dollar will go down the drain and there will be not many people left to finance the US debt. Total colapse of the system. So are these agencies really needed? Should they hold such a power? The main consideration when we look at risk is the willingness to repay, the US has it. The second one is the capacity to generate richess to be able to repay, the US is struggling but it also has the ability and capacity in the long run to repay its debt. So what is the big deal with these agencies, they are willing to be more royal than the King himself. We are going through strange times and it is no time at all to rock the boat. The US should raise its interest rates to actually equalize the rsik-return relationship. Low rates are not a good solution when they stay low for long periods. Raising interest rates will attract capital flows to the US and will give support to the dollar. One must not forget that psicologically a strong currency helps the overall economic ambience, making the people more enthusiastic about continuing to grow because of the purchasing power acquired.

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