In early 2005, back when Eliot Spitzer was taking his first pot-shots at American International Group, Inc., I wrote this blog post explaining how even mighty AIG could suffer a fate similar to that of Enron Corporation.
Inasmuch as AIG had a net worth of about $80 billion at the time coming off a previous year of $11 billion in net income on almost $100 billion in revenues, no one (including me) thought there was much of a chance that what I was suggesting could happen to AIG would actually happen to the firm.
Less than four years later, AIG would have suffered the same fate as Enron but for a massive federal government bailout.
The lesson here is that if creditors trust the federal government, then the government’s credit standing will remain high regardless of what the New York analysts say. In reality, the market rates the government’s credit continuously each moment of every day. Just look at fluctuations in interest rates on government debt.
So remember, regardless of what the Washington pols suggest, this is not rocket science.
Quite simply, it’s mostly about trust.
Well I certainly do not trust the S&P’s analysts at this point.
While some people choose to blame S&P, I think doing so is misguided. The mortgage rating unit certainly didn’t do much to help the reputation of the firm as a whole during the past half decade, but there exists little (if any) evidence that the sovereign ratings team has not done its job well. Complaining about the analyst team that cut the U.S. ratings based on the poor performance of another team is akin to denigrating the U.S. Marine Corps because the TSA does shoddy work.
The truth is that the ratings of the U.S. government should have been cut long ago. When debt is at 100% of GDP, taxes would need to be raised by 65% to effect a balanced budget and no one in a policy making position cares about living within our means, the credit of the country is not AAA.
“If the US Gov’t were a family, they would be making $58,000/yr, spending $75,000/yr, with $327,000 in credit card debt. They are planning BIG spending cuts to reduce their spending to $72,000/yr. These are actual proportions of the federal budget & debt, reduced to a level that we can understand.‚Äù
– Dave Ramsey