The mood ahead of the G20 summit in Korea is turning ugly. America's actions - especially its policy of deliberate dollar devaluation through quantitative easing - are looking increasingly irresponsible and even reckless to its creditors, some of whom are starting to snap.
The Federal Reserve’s policy of buying $75bn of Treasury bills per month between November and June 2011 may well be a short term palliative to the US economy and, who knows, it might even deliver the hoped-for upturn in US employment.
The fear among America's international creditors, however, is that the policy known as QE2 will cause them no end of pain, especially if it is followed by QE3, QE4, QE5 and maybe even QE6. Every time the Fed prints money, the dollar shrinks in value and their chances of being repaid seem to diminish.
The weaker dollar will also limit the emerging and emerged economies' chances of being able to export themselves to prosperity.
The Dagong Global Credit Rating Co, a Beijing-based credit ratings agency founded in 1994 and closely intertwined with the People’s Republic of China government and Bank of China, is particularly narked by Washington’s self-serving monetary and fiscal policies.
This is the agency that, in its first foray into international ratings in July downgraded several western nations declaring that its goal was to "correct the defects" of the existing system and offer a counter-weight to Western agencies such as Standard & Poor's, Moody's, and Fitch.
In a 10-page report headlined 'Surveillance Report for Sovereign Credit Rating The United States of America', Dagong said it had further downgraded US debt from “AA” to “A+” with a negative watch. The ratings agency said America's policy of deliberate dollar debasement through QE2 “severely harmed the interests of creditors" and meant the US could no longer be trusted not to renege on its debts. In a classic passage, the ratings agency said:
"Though it is likely for the current loose monetary policy to postpone the occurrence of difficulties, yet in the long run, it will be proven to be a practice resembling drinking poison to quench thirst."
Dagong said the US's economic and fiscal model was broken and that Ben Bernanke’s Fed had embarked on QE2 without taking the interests of its creditors into account and, indeed, against their will. For good measure, Dagong added the US was dissolute, at risk of insolvency, and at risk of triggering a second global financial crisis.
Here are some choice excerpts from the ratings agency's report:
"Dagong has downgraded the local and foreign currency long term sovereign credit rating of the United States of America (hereinafter referred to as “United States” ) from “AA” to “A+“, which reflects its deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment."
"The serious defects in the United States economic development and management model will lead to the long-term recession of its national economy, fundamentally lowering the national solvency ... Analysis shows that the crisis confronting the U.S. cannot be ultimately resolved through currency depreciation. On the contrary, it is likely that an overall crisis might be triggered by the U.S. government’s policy to continuously depreciate the U.S. dollar against the will of creditors."
"...In essence the depreciation of the U.S. dollar adopted by the U.S. government indicates that its solvency is on the brink of collapse..."
"Outlook: Dagong believes that the occurrence and development process of the credit crisis in the U.S. resulted from the long-standing accumulation of the contradictions in its economic system; the U.S. debt burden can be relieved only to a certain extent through large-scale printing and issuance of the U.S. dollar; however the consequent decline of the U.S. dollar status and national credit will block the debt revenue channel which is vital to the existence of the United States to a greater extent. The potential overall crisis in the world resulting from the U.S. dollar depreciation will increase the uncertainty of the U.S. economic recovery. ... Given the current situation, the United States may face unpredictable risks in solvency in the coming one to two years. Accordingly, Dagong assigns negative outlook on both local and foreign currency sovereign credit ratings of the United States."
Further reading on QE2 and its likely fallout:
- Viewpoint: Neil Williams: Steering Between Deflation and Inflation—A Troubled Road for Developed Economies
- QE2 - The last resort, blog post by Bill Sharon
- "This is the monetary equivalent of a nuclear war", by Ian Fraser [blog post]
- QE2 and Gridlock in Washington - are we having fun yet?, blog post by Anthony Harrington
Tags: China , Dagong , Federal Reserve , G20 , global imbalances , international differences , QE2 , sovereign debt , US