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Nearly a year ago, I publicly challenged S&P, Moody’s and Fitch to downgrade the long-term debt of the United States government — to help protect investors and prod Washington to fix its finances. (Go to this page for the challenge, and here for the press release.)
In a moment, I’ll show you why their failure to respond is ripping off investors, how it’s exposing millions to a financial atom bomb, and what you can do for immediate fallout protection.
But first, this question: Did S&P finally respond to my challenge last week when it “downgraded” U.S. debt to “negative”?
To the casual observer, that might appear to be the case. But in reality, their action — much like recent steps by Washington to “fix” the deficit — was little more than smoke and mirrors.
Here are the facts:
S&P did NOT change, even by one tiny notch, its “AAA” rating for U.S. government debt. It merely changed its future “outlook” for the rating.
S&P did NOT have the courage to do what’s right for investors and for the country today. It merely said it might do something a couple of years from now.
Worst of all, S&P has done nothing to change its practices that have caused so much pain for investors in recent years. As before, it’s typically quick to upgrade its best-paying clients, but often delays meaningful downgrades until it’s far too late.
It’s the Greatest Financial Scandal of Our
Time, and the U.S. Government’s Triple-A
Rating Is the Most Scandalous of All.
In proportion to the size of its economy, the U.S. government has bigger deficits, more debt, plus bigger future liabilities to Medicare and Social Security than many countries receiving far lower ratings from S&P, Moody’s and Fitch.
Compared to lower rated countries, the U.S. also has a greater reliance on foreign financing, a weaker currency, and far smaller international reserves.
The U.S. government is exposed to trillions of dollars in contingent liabilities from its intervention on behalf of financial institutions during the 2008-2009 debt crisis.
The U.S. Federal Reserve, as part of its response to the financial crisis, may be exposed to significant credit risk.
The U.S. economy is heavily indebted at all levels, despite recent deleveraging.
U.S. states and municipalities are experiencing severe economic distress and may require intervention from the federal government.
The U.S government’s finances could be adversely impacted by a rise in interest rates.
The U.S. dollar may not continue to enjoy reserve currency status and may continue to decline.
Improper payments by the federal government continue to increase despite the Improper Payments Information Act of 2002.
The U.S. government had failed its official audit by the Government Accountability Office (GAO) for 14 years in a row, with 31 material weaknesses found in 24 government departments and agencies.
This is no secret. Nor am I citing original facts.
They are the same facts that have been written about extensively by Jim Grant, editor of the Interest Rate Observer, brought to light by the U.S. Government Accountability Office and widely publicized by its former chief, David Walker.
They are similar to the points made in recent warnings by the International Monetary Fund, the Congressional Budget Office, the European Central Bank, the president’s deficit commission, and even the Big Three Rating agencies themselves.
And yet, the U.S. government STILL gets a AAA rating from all three?
And all the while, other countries, which do NOT have these problems, get far lower grades?
This Doesn’t Even Pass a Simple Smell Test.
It Reeks of Egregious Conflicts of Interest.
We know that the Big Three rating agencies failed to warn investors about giant insurers that went bankrupt in the early 1990s.
We also know how they bungled their ratings of Enron in 2001 and gave stellar grades to big Wall Street firms that failed in 2008.
So it’s fair to suspect that similar problems afflict their sovereign debt ratings. Indeed …
If the Big Three rating agencies downgraded the debt of the United States government, they would come under tremendous pressure to ALSO downgrade big borrowers that count on the U.S. government for sponsorship, financing or bailouts.
But those big borrowers PAY the rating agencies huge yearly fees for their ratings and would be less willing — or even less able — to continue those payments if their debts are downgraded.
Why You’re Getting Ripped Off (and Worse!)
If you think this fundamental dishonesty doesn’t impact you directly, think again.
Even if there are no further consequences, you’ve already paid a high price for it:
The rating agencies are understating the risk of your investments, and consequently, those investments are paying your LESS yield than you deserve to compensate you for the real risk you’re taking.
This is true not only for U.S. Treasury securities, but also for virtually every bond ever issued.
If the U.S. Treasury itself were graded at its appropriate level, thousands of other securities, traditionally assumed to be of lower quality than Treasuries, would need to be seriously reviewed for parallel downgrades. But until that review takes place, many get away with paying you less interest than you deserve.
You’re also not getting a fair interest rate on bank CDs or insurance policies.
Nor is this impact limited to fixed instruments. If bonds are downgraded and must pay higher yields, nearly every other investment in the world would be pressured to do the same.
That’s why this is a financial atom bomb. And that’s why it’s shameless. If the rating agencies had rated U.S. debt honestly years ago, we might not be in this predicament.
What’s worse is that …
- Treasury note and bond investors are exposed to far greater risks than they’re being told about. Even assuming the U.S. government never defaults, you can lose a lot of money from declining market values of notes and bonds, from the declining purchasing power of your dollars, or both …
- Citizens and residents of the U.S. are exposed to far greater risk of rising taxes and slashed benefits payments than is implied in the triple-A ratings, and, alas …
- Our entire country and way of life is in far greater danger than Washington or Wall Street would have you believe.
The outlook: With each day that passes, investors in the U.S. and overseas will gain greater clarity of vision, smell the dangers, and begin to recognize that the emperor has no clothes.
They will respond by taking action, driving U.S. bond prices and the U.S. dollar sharply lower.
You need to take protective steps AHEAD of time.
And above all, stay SAFE!
Good luck and God bless!
Martin
Dr. Weiss founded Weiss Research in 1971 and has dedicated his entire career to helping millions of average investors find truly safe havens and investments. He is Chairman of the Weiss Group, which includes Weiss Research and Weiss Ratings, the nation’s leading independent rating agency accepting no fees from rated companies. His last three books have all been New York Times Bestsellers and his most recent title is The Ultimate Money Guide for Bubbles, Busts, Recession and Depression.
{ 23 comments }
It appears the best thing for investors is to ignore the ratings and try to do some investigation of the financials for yourself. As far as US ratings, it almost goes without saying that they are a bad credit risk. Everybody knows that the US is unable to pay their debts and keeps borrowing more. I know some people like that but you’d think the people in charge of the finances of a country would be smarter than that.
I might be off base on this, but wasn’t it S&P ( or was it Moody’s) that gave good ratings to banks where a few weeks later some failed? If that be the case, why would S&P put up a phony shield to give the illusion things were working out OK.
The old saying is; “Follow the money”. Who would be coughing up the money to get S&P to be so deceptive…. Humm !
Astute column, Martin. I can’t understand why more people don’t pay attention to this massive problem. Heads in the sand? The politicians likely know it ( at least some of them) but it would painful to do anything to help fix it (that is, to their reelection chances which ALL they care about).
You should change the name of this newsletter to chicken little the sky is falling. TBT is a traders vehicle and should only be owned for short periods. GLD and foreign currencies are a good hedge. The U.S. stock market however continues to rise and there are plenty of good companies turning in record profits. S&P said a U.S. debt downgrade if it occurs is 2 years away. The markets don’t look that far ahead and a lot can happen in 2 years.
Much of the middle class lost their rating already. Inflation is squeezing social benefits not only here but in UK as well where Malaria is gaining momentum. The smart ones “very few” who are preparing for the Economic Atom Bomb “EAB” ;expectede to be dropped early 2013, will be better off in my view. What is expected will go far beyond anyone’s imagination – so bad that what is happening now in MENA will be dwarfed.
Thanks Martin.
Rating U.S. debt is essentially equivalent to rating systemic risk. Rating systemic risk is not what the S&P raitng system is designed to accomplish. It is therefore not meaningful to rate U.S. debt. S&P should not rate U.S. debt but should limit its review of U.S. debt to discussion of systemic threats.
It is not reasonable to compare the United States and its Government to firms like AIG and Lehman in 2008 and countries like Greece, Portugal, Ireland and Spain. We may well suffer another collapse in the stock market similar to 2008 but if one considers Japan’s debt to GDP the US still has far less debt proportionally than Japan and the Yen has not become worthless. The interdependence of all the large economies of the world and the fact that the United States is acting as the world’s policeman suggests a solution to excessive currency fluctuations will be arrived at and it will not result in destruction of the US economy. Currency is a means to an end: the facilitation of trade. The value of the US dollar is based primarily on the output of goods and services of the United States. High numbers of unemployed in the US represents the opportunity to increase production of the things people in the world want. Fear mongering by your service to hype your revenues is not making a useful contribution to the solution of the problems. Long term bond rates continue to be at record low levels and your recommended TBT trade continues to be a loser. You to seem to be saying the markets made by the very wealthy and powerful through hedge funds, EFT’s sovereign wealth funds, etc are totally wrong about reasonable levels for interest rates of the long term debt of the United States. How much gold do we have in Fort Knox? How many Atom bombs? Inflation is the result of high levels of employment coupled with low output of goods and services. Do we have have high levels of employment? Are our retired seniors excessive consumers?
There is NO gold at Fort Knox. It was all sold back to London last century
The raging commodities markets, especially that of silver, is proof that large numbers of people are finding an outlet for their political frustrations by simply turning to emptying their bank accounts (that don’t pay any interest anyway) and buying whatever precious metal they can. Silver happens to be an easier target because they can buy a few pieces and walk away with a little weight in their pockets, instead of a single gold object.
Who can love a currency that serves only the function of wealth expropriation? Yes, interest rates are probably going to go up, but there will be no “correction” in the precious metal markets until government shuts down ALL entitlement programs (including SS in its entirety) and restores a high degree of credibility to an intrinsically worthless paper currency. Short of confiscation of precious metals from people who bought them with paper/electronic trails attached, how will government ever be able to accomplish such a task in a democracy where the “entitled” class (including SS recipients and government employees federal, state, and local) constitutes at least 50% of the population?
My guess is that all government currencies, globally, are history. Confiscation or hoards and nationalization of precious metal mines and the re-establishment of a precious metal government currency is one possibility, but things might be so chaotic at that point that such an event might not be possible for the entire country–in which event a “national” currency for the entire country would be a myth. People may be entirely fed up with confiscatory governments and government currencies that function through a token system and are seen as serving only as future tools of confiscation.
What about the “treasury only” money market funds? I have a lot of money sitting in them. What do you recommend?
I will appreciate any advice you can give.
Best wishes.
Since my mortgage balance currently is 3x more than all my investment savings, and since my #1 goal is to pay off the mortgage, it does not matter to my own condition that Washington has been trashing its own currency. My mortgage is fixed and US$ denominated. Small comfort, maybe, but (relative) poverty does have its consolations. Yeah I know Washington’s legal criminal enterprise will continue to the end of all things as it has lo these many years, doesn’t matter who is in charge. But trying to outsmart them with more speculating and counter-speculating is like trying to beat the house in Vegas. Recommendation: don’t go to the federal-WallStreet-ETF casinos in whatever disguise they take, get out of personal debt including your mortgage, and live humbly as best you can on whatever money you can earn at your day job.
Eugene — good points, especially — ” My mortgage is fixed and US$ denominated. Small comfort, maybe, but (relative) poverty does have its consolations.” But, then, why be too concerned about other dollar-denominated debt? If our government is determined to destroy the value of the currency, won’t the real costs to debt decline over time? Edeter
I’m new to this pub. You are certainly not alone. The number of people who are spreading this type of
information is growing daily. The political oligarchy that has come into existence since the end of WWII has slowly produced a majority of people who look to the state for their very existence. At the high end of the scale you find the politicians. At the lower end, the welfare group.
The productive class grows smaller and smaller.
Most people today do not have the vaguest idea about financial matters. They rely on advertisers and the talking heads of television for any and all information. World finances are far from their mind. The few politicians who realize the true situation are shouted down and derided by the media.
Retired people like me must be extremely cautious with their investments today. Yours is solid advice.
I think govt is going to pay for all it’s dishonesty.Eventually no one believes what they say and even when they say or do something honest,who is going to believe it?A govt with a totally fiat currency needs credibility and they are losing it fast.
If the three major rating firms are liars in sych., why isn’t there a new competitor in this field to elevate itself to national standard and recognition by all, with full-proof and honest ratings of all governments and business??? There seems to be a much needed service and a void to be filled (perhaps by Weiss research), and a necessity that could eliminate those liars over time!!!
You are right to criticize the credit rating agencies, in the sense that they are too complacent. However, the credit issue that is front and center is “willingness to pay” more so than “ability to pay”. And, that is not an easy thing for the credit ratings people to tackle, although they should make a stronger effort. It is not clear to us how the credit rating agencies should respond, other than to say what brass tacks any given credit situation comes down to – when governments ranging from the U.S. Federal Gov’t to states to smaller municipalities inflate themselves into credit / borrowing blimps, refuse to cut spending, decline to raise taxes, and as has happened over the last three to five years – merrily purchase garbage securities and pseudo-securities such as derivatives with what financial capacity they do have —- then they cry to “the people” in the “larger group” for a rescue. In our opinion, the credit rating agencies are on the right track starting to take account of what we will call for lack of a better term “political risk” (not far from the mark because the underlying scenario lays a foundation for socialism) —- but they need to be a little more vigorous, in the sense of speaking up louder and more clearly. It is difficult to address these issues clearly when the White House, the Federal Reserve, the Treasury Department, and J.P. Morgan Chase, are merrily in the process of selling America’s stock exchange to Germany. Both the debt and equity sides of America’s financial apparatus are under attack by the left, and by blob-like governmental entities including the Federal Reserve who only seek to take more power and wealth from the people to squander.
Matt Lechner
Chairman – WSSIG, the Wall Street Special Interest Group
“supporting and growing America’s interests in the global capital markets”
4714026@optonline.net
So, what would you rate the US at?? CCC- with outlook as horrible???
Whilst I can see the Emperor has a red coat on (or is it orange?), you nevertheless, should offer an alternative rating if you want to be considered as credible alongside the big boys……
Thanks Martin, a well thought out and insightful article. I appreciate your research and your obvious care and concern for folks. I have learned so much from you, Mike Larson, Larry Edelson, Sean Brodrick, and your other editors. I have been reading Money and Markets and Uncommon wisdom for about 2+ years now. When the basic fundamentals are known and factored in concerning inflation and its increase, as we are seeing in the cost of food, crude oil, gasoline, and other consumables, we can easily see where this is all headed. I have been tracking the increasing price of gold, silver, and other commodities, the dropping value of the dollar, the ever increasing deficit and debt of the U.S., the lack of honesty concerning the deficit and debt on the part of Congress and our President, as you have noted, and other fundamentals, not to mention the insane money printing and massive bailouts, for some time now. I have also read about what other countries’ governments did that went into hyper-inflation. It’s shocking to see that our Federal government and Federal Reserve have been making the same bad choices. Additionally, when the basic definition of monetary inflation is understood to be the inflation of the money supply, one can see that we are in for a rough ride ahead. Again, thank you, Martin, and the rest of Weiss Research, to help us prepare. Warm wishes and blessings to you all, Carl
I WONDER? WHAT IS HAPPENING TO THE FORT KNOX GOLD STORE? NO ONE EVER TALKS OF THAT. IS IT PUT UP AS SECURITY? DOES IT BACK ANYTHING? IS IT STILL THERE? VAN
From the time Mike Larson recommended TBT last week after the S&P issued a negative outlook on US debt, I lost a few percentage points. Is your call for a buy recommendation on TBT too early?
Great article Martin! The future USA economic outlook seems destined to bankruptcy. Precious metals and other commodities with value will continue to show the true value of the fiat dollar. A corrupt democratic republic will prove to be just as worthless as any other government.
Martin: I just want to know one thing. I have kept the bulk of my (what you call “keep safe” ) money in a 3 month treasury ETF which produces no dividends. Most of your retoric is gloom and doom. As the value of the dollar keeps going lower and lower what can I expect from this type of investment? Can I expect more of the same? Will my principle still be safe as you have mentioned many times in the past? Please don’t beat around the bush.
If anyone goes to Kitco.com and reads the contributed commentary by Jim Willie, they will get a good picture of what is coming on the economic front. It is not pleasant.