Standard and Poors, the US government "accredited" debt ratings agency, has done something that no ratings agency has done since the mid 1990s. It has issued a "negative" outlook on US government debt paper. S&P has "warned" that unless something "credible" is done to rein in the size of US government budget deficits, that same US government "might" be in danger of losing its "AAA" status - by 2013. What are the chances. Well, they are considerably higher than Mr Geithner's 0.00 percent. S&P puts them at one in three.
Hilarious, isn't it?. But just how hilarious is it?
Well, in the mid 1990s, the "big three" US credit ratings agencies (S&P, Moody's and Fitch) became the only "Nationally Recognized Statistical Rating Organizations". They were given this designation by the US government's Securities and Exchange Commission (SEC). As proud holders of this title, the "big three" ratings agencies became the only firms whose ratings the SEC permitted "other" financial firms to use for "certain regulatory purposes". Back in the mid 1970s, there were seven such outfits. By the mid 1990s the number had shrunk to six and by 2003 the big three emerged. Today, there are ten such agencies, but the "markets" and the SEC only take three of them seriously - S&P, Moodys' and Fitch.
Nobody can doubt the impact that these agencies have on US and world markets. The world bought the mortgage backed securities (MBS) given AAA status by all three of them in the lead up to the GFC. All those deemed not "too big to fail" (including Lehman) rue that to this day. But the agencies sailed serenely on. They were needed to focus the next inevitable debt crisis OUTSIDE the US. This inevitable debt crisis - the sovereign debt crisis - was duly set in motion when the big three started to downgrade Greek sovereign debt in December 2009. Ever since - the headline sovereign crisis has been very successfully kept across the Atlantic. The big three US agencies are still happily downgrading over there.
Any analysis with even a thread of fiscal credibility would rightly label the sovereign debt paper issued by the Greek government as "junk". But in the US, and elsewhere, the big institutional investors do not make such a judgement until the ratings agencies speak. One would have thought that the MBS debacle would have taught them the folly of this, but it has not. Nor has it prompted those same institutions to examine the state of US sovereign debt.
Why should it have? After all, the Central Banks - with the Fed at the head of the line - have taken all that AAA rated toxic sludge onto their own balance sheets, relieving those same institutional investors (and their too big to fail parent banks) of them. For institutions - and foreign central banks - US sovereign debt is sacrosanct. The institutions know that without it, the global credit money system would implode. The foreign central banks know this too, with the added knowledge that in such an instance, the first thing to implode would be the secondary market "value" of the Treasury paper in their basements.
As we said, the S&P has NOT said that they have any plans to strip the Treasury of its AAA rating. They have merely said that there is a chance that they might downgrade their "outlook" for US debt paper - starting in 2013. Please note that 2013 is the year AFTER the next US presidential elections.
In the meantime, the US Dollar inexorably falls against every major (and most minor) currencies in the world. Gold is certainly rising in US Dollar terms, but it is going sideways against most of the other major world currencies. To give you and idea, here's Gold 2011 performance against six major currencies as of April 21 - the day it closed at yet another all time high in US Dollar terms:
The Japanese Yen in this table is, of course, a special case. Just over a month ago, the G-7 nations jointly intervened in the currency markets for the first time in over a decade to push the US Dollar UP against the Japanese Yen. Now, that intervention is faltering as the $US falls even against the Yen.
Yet we trust you get the picture. Gold has been making world headlines for weeks now concerning its inexorable rise against the US Dollar. Yet the US Dollar is the only major currency (other than ones still linked to the US Dollar) against which Gold is rising. The Yen is a special case, partly because of the G-7 intervention, partly because the Japanese government is in even worse fiscal shape than is the one in Washington DC.
And in the midst of all this, S&P comes out and "threatens" to put the US government on its negative watch list two years from now. Unless, of course, the US government makes some "credible" progress on addressing the size of its deficits.
Why now? Well, there is a debate coming up about raising the Treasury's debt limit. There are some Republicans threatening to vote against the rise unless it is accompanied with REAL measures to start cutting down on government spending. There are some Democrats who are threatening to vote against it if it DOES come accompanied by such measures. The debt limit rise MUST be passed. A deal MUST be struck very soon. 2011 isn't an election year in the US but 2012 IS. Pass the increase in the debt limit now and argue about government spending later, after all, the S&P has now come out and stated that it won't take any action until the elections are safely out of the way in 2013. No prizes for guessing that the other two ratings agencies will go along.
This S&P "threat", peurile as it is for anyone who examines the REAL situation, is hoped to be enough to get the recalcitrant from both parties to rethink their position enough to get a debt limit rise passed with a minimum (preferably an absence) of "contingency" factors. Who knows, it might even work.
But as Gold's "performance" this year against the major non US Dollar currencies makes clear, the debate over the viability of government debt in general and Treasury debt in particular hasn't even gotten properly started yet. If it had, the Euro would not be rising faster against the US Dollar than Gold is. After all, is Europe not the home of the "sovereign debt crisis" - according to all three US ratings agencies?
Silver is an entirely different proposition. It IS rising - rapidly - against ALL paper currencies. It can be "allowed" to do so without putting the credit based global monetary system in grave danger. The same is NOT true of Gold. The battle is still being waged between the financial "powers that be" and Gold. The latest S&P "warning" is simply the latest attempt to give those same powers that be more breathing space. And, as a side effect, to try to preserve the rapidly evaporating "credibility" of the US ratings agencies.
Yes, sure it is amazing that they still have any. But is that any more amazing than the fact that the paper markets are still rising on perceptions that the global economic "recovery" is gathering steam?
(Chart appears here in original analysis)
The significance of the table above is that it shows the all time high for Gold denominated in what is probably the most representative major "commodity currency" in the world - the Australian Dollar. That high was set on February 20, 2009.
Gold in terms of the other three major currencies shown in the table has since gone on to set major new highs considerably above the levels reached in February 2009. Gold in Euro terms reached its all time high when it closed at Euro 1071.50 on December 28, 2010. But on this table, the only current all time high for Gold is the $US price, which is now accelerating upward as the $US falls away.
When Gold reached its all time high in Aussie Dollar terms, the Aussie Dollar was trading at $US 0.6377. This was at the height of the huge US Dollar rally which took place in the aftermath of the Lehman Brothers crisis of September/October 2008. The Aussie Dollar gained parity with the US Dollar (for the first time in nearly 30 years) on November 3, 2010, the day that the US Fed officially announced QE2. It has remained at or about that parity level since and has recently been climbing again, breaching the $US 1.07 level this week.
As already stated, Gold in terms of the other three currencies in the table is well above the level it reached in February 2009. In terms of the only "commodity currency" in the table - the Aussie Dollar - Gold still languishes. At current (April 22, 2011) exchange rates, it would take a Gold price of $US 1688.80 for the Aussie Gold price to equal the all time high ($A 1571.60) it set more than two years ago on February 20, 2009.