Standard & Poor's is catching hell for cutting the credit rating of the U.S. government and threatening to cut the credit rating of other governments. People are blaming the agency for the stock market declines that have followed all over the world. With Italy's penchant for comic opera, prosecutors in Milan have even raided S&P's office there in pursuit of evidence for a "charge" of unfairly criticizing the country's financial system.Yes, S&P long awarded spotless credit ratings to what were essentially frauds, so the agency's credibility is less "standard" than "poor." But the company's mistakes are no rationale for continuing them.
And yes, having the ability to pay its bills in currency it prints by itself, the U.S. government is unlike ordinary businesses and need never default on its debts, at least in a technical sense. But in a practical sense, the government long has been defaulting on its debts, as the value of the dollar, the currency in which those bonds are repaid, has fallen 30 percent in the last 20 years, and about 14 percent in the last year alone, as measured against other major currencies. Going back to the creation of the Federal Reserve in 1913, the dollar's value has diminished by more than 90 percent. The other day the Fed promised to keep interest rates at virtually zero for another two years, which is to say that interest rates will remain negative, below the inflation rate, the rate of the dollar's debasement. So practical default on the U.S. government's debt seems likely to continue.
Further, these days there is no genuine market for U.S. government bonds, as most are being purchased by the Fed and by foreign central banks as a matter of trying to hold the world financial system together. Without such purchases, particularly by China and Japan, there's no telling what U.S. government bonds would be worth, if anything. And since there really is no repayment of U.S. government bonds anyway, old bonds being retired only through issuance of new bonds with the government's net debt always increasing, the solvency of the government became irrelevant to its debt long ago.
What's relevant here is only the value of the dollar. No one in authority -- not the president, the treasury secretary, or the chairman of the Fed -- will speak candidly on the point, but the record is plain enough. Devaluation of the dollar is and always has been government policy; indeed, the capacity for strategic devaluation, what is called a "flexible currency," has always been the very point of central banking.
Some people think this is good, as it provides a "lender of last resort" to stave off financial disasters. Some people think it is bad, since it hasn't always worked well and lately has hardly worked at all; since it has been perverted into a system of infinite patronage for the crooked financial elite; and since it has deprived the world of any stable measure of value, and thus has expropriated savers, sometimes overnight.
But the value of the currency and, more so, the location of the power to determine that value are what the argument should be about, not whether a ratings agency exceeded its competence.
