While U.S. government and Federal Reserve officials continue to pretend as if all is well in the economy, apparently a rather important counter-party doesn’t share the same view.
A few weeks ago there was a story about how the Chinese government is considering reducing its allocation of U.S. treasuries. Now, one of the Chinese rating agencies (Dagong Global Credit Rating) has gone ahead and downgraded the U.S. credit rating.
Based on the financials, it’s hardly a surprise to see the U.S. get downgraded. Perhaps what’s more incredible is that rating agency Moody’s still has U.S. debt rated with its highest Aaa rating, while S&P has not taken further action since it’s downgrade in 2011.
Yet what is significant about this new downgrade is that it’s coming from a Chinese rating agency. And given the context of what’s happening in the world, it’s not exactly as if this is the view of some unimportant speculator whose opinion holds no relevance.
“Deficiencies in the current U.S. political ecology make it difficult for the efficient administration of the federal government, so the national economic development derails from the right track,” Dagong said adding that “Massive tax cuts directly reduce the federal government’s sources of debt repayment, therefore further weaken the base of government’s debt repayment.”
If there’s any real surprise here, perhaps it’s only that the move was not made earlier. Everything that Dagong cites is true, and of course what they mention in that quote is only the tip of the iceberg.
Yes, while giving less money to the government and allowing it to remain in the hands of the businesses and entrepreneurs who earned it is actually a good thing, it’s not the best news for the fiscal condition of the U.S. Treasury. The national debt has blown past $20 trillion, while budget meetings based on just agreeing on how much to increase spending are resulting in a government shutdown. Now the treasury is facing the possibility of reduced taxation revenue, while the concerns Dagong cites about the politics speak for themselves.
Yet even aside from the downgrade, or the fact that the U.S. was left on watch for further downgrade, is that it’s interesting to take note of what Dagong mentioned about the dangers of the current U.S. economic path.
“The virtual solvency of the federal government would be likely to become the detonator of the next financial crisis.
The market’s reversing recognition of the value of U.S. Treasury bonds and U.S. dollar will be a powerful force in destroying the fragile debt chain of the federal government,” Dagong said.
So while Washington continues to celebrate the stock market bubble as evidence of a growing economy, it seems like the Chinese are well aware of the true nature of what’s actually going on. Yet U.S. decision makers continue to pretend as if they’re not being crushed by the massive elephant in the room, and give every indication that they’ll leave their heads in the sand until the system simply crashes.
Certainly this is far from good news for the U.S. political and Wall Street establishment. But if you happen to be one of the people who’s been watching China’s massive precious metals buying spree and followed along on the same side of the trade, the downgrade serves as the latest confirmation that the fundamentals for gold and silver are still very much in place.