Weiss Ratings has just downgraded the debt of the United States government to a C-minus — approximately equivalent to a BBB- rating by S&P, or one notch above speculative grade (junk).
This is critical for you.
As I’ll explain today, regardless of the outcome of the debt debate now raging in Washington, few will escape the far-reaching consequences of America’s unfolding debt disaster.
No matter what assets you own, and no matter what country you live in, the impact on your finances could be huge.
You ask: How can this actually be happening in America? Isn’t the United States still the world’s largest economy, the dominant superpower, and the issuer of its primary reserve currency?
Yes, it is.
But it’s precisely because of America’s unique strengths that Washington and Wall Street have been able to spend, borrow, and assume financial risks that are actually greater than those taken by any other major nation on Earth.
I’ll name those risks for you in a moment. But first …
Here’s Why We Downgraded the U.S.
“By reaffirming the government’s triple-A rating,” we wrote, “the three leading rating agencies help entice savers and investors to pour trillions more into a potential debt trap or, at best, to be severely underpaid for the actual risks they are taking.
“The rating agencies give policymakers a green light to perpetuate their fiscal follies, further degrading our government’s ability to meet future obligations. And they help create a false sense of security overall.
“Recognizing and confronting our nation’s financial troubles with honesty is the necessary first step toward solving them.”
But in the months that ensued, despite continued rapid deterioration in the nation’s finances, S&P, Moody’s, and Fitch failed to budge.
We waited patiently. But after waiting nearly a year, we could wait no longer: On April 28, we launched our own Sovereign Debt Ratings, assigning the U.S. a C (fair) — a grade that we feel is the first to speak the truth about America’s financial mess. (See
press release.)
The reaction from the media was swift and sharp. The Wall Street Journal and Barron’sreported that the Weiss Rating on Uncle Sam is a mere two notches above “junk” status.Fortune expressed shock that we ranked America below some smaller countries. Virtually everyone in the mainstream press — and in government — seemed to think that the Weiss Ratings was rash, radical, or both.
But now, as the debt debate rages on, some are finally beginning to wake up to the true magnitude of America’s financial disaster — the massive size of the federal deficit, the uncontrollable nature of entitlements, and the extreme political resistance to meaningful change.
S&P and Moody’s have finally put the U.S. on credit watch. The Fed Chairman has warned of financial Armageddon. And some in the media are now shouting from the rooftops the same warnings we were issuing over a year ago.
On the surface, the primary source of their fears is the immediate chaos that would be triggered if the U.S. defaults on August 2, just 15 days from now.
But behind the scenes, many have also begun to recognize that …
Even if the immediate debt ceiling crisis is resolved to everyone’s apparent satisfaction, it could be just a dress rehearsal for the true tragedy of a nation unable to end its own financial decline any more effectively than a Greece, Ireland, or Portugal. (For our paper outlining this view, see
Introducing the Weiss Sovereign Debt Ratings.)
How is this possible? How can the mighty United States be on the same wayward path as countries that are so much smaller and less powerful?
Here are the hard facts:
Among the 49 sovereign nations Weiss Ratings covers, the U.S. has one of the heaviest debt burdens, the weakest international reserves, and the least stable economies.
It’s more dependent on foreigners for deficit financing than any other major country in the world.
Its consumers are among the most reliant on mortgages, credit cards, and other forms of debt to support its economy.
And perhaps most dangerous of all, America’s largest banks have the greatest exposure to high-risk derivatives — nearly 40% more today than during the debt crisis of 2008.
More Canaries in the Coal Mine
If there were no recent precedent for what happens to wayward nations in today’s high-stakes, fast-moving global markets, Washington and Wall Street apologists for the status quo might argue that the consequences of this entire mess are either unknown or unimportant.
But today there are so many canaries in the coal mine, the din is deafening.
Consider Greece, already caught in a death spiral — revenues sinking like the Titanic, insufficient funds to pay monstrous debts, and unavoidable austerity measures that sink revenues even deeper into the abyss.
Result: Just in the past few months, we’ve seen riots, the firebombing of banks, and blood in the streets.
Home values are plunging. Unemployment is soaring. The poverty rate is skyrocketing. One in four citizens, including an estimated 450,000 children, live in poverty. Crime is exploding.
And Greece is not alone.
Just a few years ago, Ireland was booming. Banks loaned people money hand over fist to finance homes and cars — all the joys of modern life.
Then, the bubble burst. Real estate values crashed. Mortgage defaults and bank foreclosures soared. Suddenly, Irish banks, drowning in red ink, were both insolvent and illiquid.
Thus, just as we saw in the United States, the Irish government stepped in and bailed them out … and soon, it was the government itself — not just the banks — that was in danger of going under.
In May 2010, with Dublin on the verge of defaulting on its debts, the European Union and International Monetary Fund rode to Ireland’s rescue with a 110 billion euro bailout. It still wasn’t enough. So again, in July 2011, Dublin agreed to accept another bailout worth tens of billions.
Now, the Irish people are living under crushing austerity measures. Countless jobs have been wiped out; the official unemployment rate is 15%.
Salaries have been cut to the bone. Pensions and health benefits have been slashed. The Irish tourism industry — once among the richest — is a shambles.
Similar stories are being told in Madrid, Barcelona, and 53 other cities across Spain, where tens of thousands of workers have taken to the streets to protest a problem they thought they’d never see in their lifetime — not just 9.2% official unemployment as in the U.S., but 21% official unemployment.
In picturesque plazas, beggars outnumber tourists and protesters outnumber beggars. In front of Parliament, riot police stand watch to protect lawmakers from angry mobs.
But of all euro-zone economies now threatened with this kind of chaos, Italy is, by far, the largest.
The combined GDP of all three countries that have gone bankrupt and needed a bailout so far — Greece, Ireland, and Portugal — is $739 billion. The GDP of Italy alone is over $2 trillion, or nearly three times more!
In other words, as the debt contagion strikes Italy, it will have TRIPLE the impact on global markets as the failure of a Greece, Ireland, and Portugal happening all at the same time.
Already, Italy’s government bonds are plunging, its borrowing costs surging, and the cost of insuring its debts against default exploding to all-time highs.
The obvious trigger: The demise of Italy’s UniCredit, one of the largest banks in Europe.
In the June 24th issue of his free e-letter (
The S&A Digest), Porter Stansberry explains it this way:
“In March 2010, I wrote an entire issue of my newsletter,
Stansberry’s Investment Advisory, about why I believed UniCredit would eventually collapse. I explained why the failure of this particular bank would be such a big problem for the global monetary system. UniCredit is the largest bank in Italy, and it owns other large banks in Germany, Austria, and Poland. The Italian government cannot afford to bail out UniCredit’s depositors, many of whom reside in other countries. The pan-European nature of the bank will politicize its failure, making it harder to manage.
“These same factors, ironically, led to the failure of big bank Credit-Anstalt in May 1931. The bank’s failure knocked Europe off the gold standard and directly led to the Great Depression. Credit-Anstalt is the predecessor of UniCredit.
“The past is prologue in this case. UniCredit’s failure will lead directly to the collapse of the euro currency as it finally dawns on the Europeans that their savings are not safe in the current system.”
These comments have turned out to be both prescient and accurate. But how are they relevant to U.S. investors? In three ways:
First, as I’ve explained here repeatedly, America’s largest banks — JPMorgan Chase, Bank of America, Citibank, and Goldman Sachs Bank — are grossly overexposed to the credit risk associated with their huge holdings in derivatives. Plus, many of these are linked to large European banks like UniCredit.
Second, like Italy, the United States is now confronting the Faustian choice of either letting its credit go to hell in a hand basket or forcing austerity down the throat of a weakened economy. And this is the same choice Washington also faces, whether Congress raises the debt ceiling in time or not.
Third, like the euro zone, the U.S. has been sacrificing its currency on the altar of expediency. Washington is debasing the dollar’s value to postpone its reckoning day. It’s forcing the public to pay for its financial sins in the form of higher prices for essentials like food and fuel. And it’s careening toward the same kind of disasters we now see in Europe.
As the U.S. follows Europe, you could see cutbacks in Social Security, Medicare, veterans’ benefits, support for states, homeland security, and more.
You could see stiffer limits on government guarantees for failing banks, commercial checking accounts, and consumer deposits.
In the event of new bank failures and turmoil in the nation’s credit markets, you won’t be able to count on Uncle Sam to be the lender, investor, and guarantor of last resort.
Nor can you expect reason to prevail at the Federal Reserve. As Fed Chairman Bernanke declared last week, he’s perfectly willing to devalue your money by running the money printing presses with still another round of quantitative easing.
Here’s what to do …
First and foremost, don’t trust research or ratings that are bought and paid for by the very same companies that are the subjects of the research and ratings.
Case in point: S&P, Moody’s, and Fitch. Despite abundant evidence that their conflicted ratings played a major role in causing the housing bust and debt crisis of 2007-2009, there has been no change in their conflated business model; they continue to collect large yearly fees for the ratings they assign to the thousands of debt issuers they cover.
Moreover, many of the banks and companies that pay them the biggest fees owe their very survival to government bailouts, government guarantees, and government contracts.
So connect the dots: If the credit rating agencies downgrade the U.S. government itself, they will come under intense pressure to also downgrade their biggest paying customers. That alone could trigger an investor exodus and a chain reaction of failures that threatens the credit rating agencies’ own revenues.
This is among the most egregious — and least understood — conflicts of interest in the history of financial analysis.
This conflict of interest helps explain why S&P, Moody’s, and Fitch have stubbornly refused to alter their AAA/Aaa ratings for Uncle Sam despite history-breaking declines in his finances.
It helps explains why, in defiance of all logic, the three credit rating agencies assign far inferior grades to countries with far superior finances.
It explains why the European Central Bank recently concluded that, by maintaining its AAA rating for U.S. government debt, S&P blatantly defies its own published guidelines for rating sovereign countries.
And it also explains why Moody’s and S&P have waited until the U.S. government was a mere three weeks away from a default deadline before even putting it on credit watch.
Second, continue to avoid the bonds issued by the U.S. Treasury and U.S. government agencies.
Although we are not predicting an outright default by the U.S. government, the debt crisis in Washington adds urgency to our earlier recommendations to avoid all medium- or long-term government securities. You can still hold some short-term T-bills for liquidity. But be sure to hedge against the growing dollar risks with gold or equivalent.
Third, don’t automatically expect the government to protect you if your bank, credit union, or insurance company sinks or fails. Make sure your financial institution has the resources to survive on its own even in the worst of times. If you haven’t done so already.
Good luck and God bless!
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