The Other School of Economics

AA+? Has Standard and Poor’s shot the US a bullet in the foot? (With a yummy French culinary piece inside)

The downgrade of the US debt rating from AAA to AA+ has been an inextinguishable source of jokes for the lovers of French cuisine. AAAAA (yes, 5A!) is the quality label given to the ‘andouillette’, a traditional cooked pork sausage from the Champagne region, made of thin stripes of large intestines and stomachs seasoned with onions, herbs, salt and black pepper and cooked for 5 hours.

The tradition says that the andouillette may have first been cooked in the 9th century for King Louis II’s banquet. The AAAAA rating started in the 1970s when the porkbutchers association “Association Amicale des Amateurs d’Andouillette Authentique” (Friendly Association of Authentic Andouillette Lovers) decided to promote and protect the traditional sausage. They grant the AAAAA rating to those dishes that respect the criteria of producing and cooking.

Whether served cold like the ‘Andouille de Guéméné’ in Brittany in the west, or warm like the ‘AAAAA Andouillette de Troyes’ in Champagne in the East: the not-for-the-faint-hearted culinary tradition remains defiant of Standard and Poor’s downgrade!

But to finance now… Finally, after years of warning and months of speculation, the iconic AAA rating of the US debt has been downgraded. Is this the end my friend?

Despite the House of Representatives final vote on the legislation to raise the U.S. debt limit in the nick of time, one day before a threatened default, rating agency Standard and Poor’s crossed the Rubicon:

“We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.”

It can be difficult to get a grip on the magnitude of those numbers: the U.S. debt limit has been raised by $US2.1 trillion (2,100,000,000,000,000,000) and federal spending cut by $US2.4 trillion. The total gross debt at the beginning of August 2011 was a whopping $US14.3 trillion, roughly 96% of GDP.

It comes after China’s rating agency Dagong Global also decided to downgrade from A+ to A the US currency credit rating and put them on their negative watch list on July 14, with a negative outlook. They did it on the principle that:

“it has not changed the general trend that the increase in national debt outpaces the increase in economy and revenue, making this incident a turning point for the US government’s solvency to decline even further.”

Surely we should not forget that rating agencies are into public/market relations. Dagon Global is clearly tightly controlled by the Chinese government, which is the first creditor to the US, and thus serves a strategic agenda: “do not mess with our money!” But Standard & Poor’s being an American organisation was certainly not expected to press the red button. Indeed, rival agencies Moody’s and Fitch did not dare go that far and put the US national interest first:

“Fitch and Moody’s described the legislation as a first step toward the deep deficit reduction needed to maintain the nation’s triple-A rating.”

The surprise on Wall-Street would have been magnified by the finance experts’ conviction that such a downgrade was totally unlikely while the Titanic was sinking. In retrospect, share the embarrassment with this analyst from Forbes who asserted on his blog that there was no way S&P would make such a move. Yet, S&P’s decision came after several negative warnings: such as here on Reuters, here on the WSJ, or even here on the FT.

To enlighten us further on what the major rating agencies have accomplished during past financial crises, this short commercial review from independent firm Weiss makes an interesting read: available here.

But let’s forget about finance and turn to history and literature!

“From whence shall we expect the approach of danger? Shall some trans-Atlantic military giant step the earth and crush us at a blow? Never. All the armies of Europe and Asia…could not by force take a drink from the Ohio River or make a track on the Blue Ridge in the trial of a thousand years. No, if destruction be our lot we must ourselves be its author and finisher. As a nation of free men we will live forever or die by suicide.”

Whilst we need to bear in mind that times have changed since Abraham Lincoln delivered this speech in 1838 when he was a 28-year-old state legislator, we could also be tempted to draw uncanny parallels with the present times. Where are the armies coming from? Is Abraham Lincoln to be worshiped as a prophet? Will the American Empire live forever? Has Standard and Poor’s shot the US a bullet in the foot? Discuss … And what a better piece of music than ‘Titus Andronicus – A More Perfect Union’ to do so…

{ NKN, Paris – 7 August 2011 }