Maybe, but BRK and the US Treasury are meaningfully AAA. There is clearly a class of AAA risk that means something, and a (far larger) lower tier of AAA risk that merely rides the coattails.
Right. I think that overall that's correct - for all intents and purposes it's effectively impossible for the US Treasury to run out of dollars. But the way the incentives for agencies are set up makes me think we're begging to be lied to.
Mind you, despite all this you can have a serious news piece of "someone from Moody's" claiming that they might be forced to lower the US' rating http://www.bbc.co.uk/news/business-14142621 - which frankly just sounds all kinds of ridiculous.
Why ridiculous? The treasury cannot, by law, issue more than a certain amount of debt. The politicians may change the law - but that's a vote that's yet to have been taken. Once upon a time, it would have been unthinkable for Japan to have had a lower credit rating than AAA.
Also, the US owes money in currencies other than $, which the Treasury doesn't have the power to print.
Really? I'm not real enthusiastic about dragging politics into this, but i think the US Treasury is one elected religious fanatic away from declaring intrest usurious and declining to pay. "Fiscal Responsibility" seems to last until about 5 minutes after any given election.
I'm not saying the probability is big, but is 1% an unbelievable number? Just for reference, back in 2000 what odds would you have put on the US electing a black president before 2050? Back then, I thought that number was very close to zero.
I'm (obviously) not an analyst. I'm baffled at how they can predict return with much confidence 10 years out.
Credit ratings are only supposed to predict risk of default; if a loan denominated in dollars is repaid in dollars, the loan is satisfied. They don't have to also predict what the real value of that repayment will be in other currencies.
What we're talking about is: What is the risk of default of the tbills issued by the US treasury. It's conventionally considered that AAA means "1 in 10,000" chance of default.
Considering that tbills are issued with "the full faith and credit" of the United States and that it's against the US Constitution to default on them, the agencies have historically rated the debt as AAA.
And yes, technically, the US could not default and still pay back worthless bonds by deliberately hyper-inflating the currency.
Doing so would also make worthless all of the private debts demoninated in US Dollars and effectively destroy the US Economy.
While it's certainly possible that could happen, it's quite remote. Quite.
The ratings agencies DO factor inflation risk into their ratings, and are on record multiple times publicly citing inflation risk as a reason. The ratings agencies know that default risk is not the only type of bond investment risk and they rate accordingly -- their track record might be questionable but they're not stupid. You are absolutely right with this comment.
For those who don't understand what's the problem with inflation so long as the bond is repaid, imagine you buy a 10-year, $1,000,000 dollar bond paying 10% interest from the Weimar Republic in 1918. You get $100,000 per year. By 1923 the Mark is worth a trillion times less than it was when you bought your bond, so the resale value is now the 1918 equivalent of $.000001 and the annual interest income is $.0000001. You complain about this to your friend, and he points out that Weimar is still rated AAA because they obviously can print an infinite amount of money to meet their obligations. Do you feel consoled? What kind of interest rate would you require to consider buying another bond?
The United States most likely won't see this kind of inflation because it doesn't have the problems Germany had, but it could certainly see enough to drop the rating to a low A if things really got out of hand.
This argument is fallacious (not that its not kicked around a lot).
The point is that the US treasury will pay its debt. The value of the dollar simply a different question.
By your argument (and apparently, some of the rating agencies'), a supposedly necessary downgrading of treasure bonds would require the downgrade of every existing dollar denominated bond in the world - ie, nearly every AAA bond. Oddly enough, Moody's isn't threatening to do this.
At the end of the day, politicians could mandate that the government statisticians lie about the inflation rate (make it artificially low to lower CPI-index bonds payout rate).
But the currency markets would not be so easily fooled.
Where did I make any claim related to that? The only remark I made was that, "entity X can print money at will" does not imply "entity X has AAA status", as the comment I replied to seemed to imply.
I did not check this, but Zimbabwe definitely did not have an AAA rating in, say, 2008.
There's nothing rent-seeking about it; anyone can start a ratings agency. All Moody's et al have is what we would now call "mindshare" . It's no more rent seeking than say the Met Office having a monopoly on weather forecasting...
It's more than mindshare, it's also the fact that the ratings given by NRSROs ( http://en.wikipedia.org/wiki/Nationally_Recognized_Statistic... ) are often written into statutes. There are many massive funds that are restricted by legislation from investing money somewhere that Moody's has rated at lower than X, X often being AAA.
As the article states and as we found in the recession, there can't possibly be this many AAA rated organizations. I'll give an example at the risk of my memory failing and there being a difference in which exact organization it was:
Days before they went bust, GMAC bonds were still AAA rated.
I believe that until about 1995 there were fewer than 5 bond issuers subject to Chapter 11 proceedings (strategic bankruptcies) that were AAA at the time of the Chapter 11 filing: Texaco and, I think, Manville the asbestos maker. There was also one AAA muni bond that defaulted. There were several cases where issuers like Lilco (Long Island Lighting) were rapidly downgraded from AAA to junk.
I don't believe that this inherently true. The market generally revoles around risk, additional returns are possible when taking more risk. Higher rates of issuance just mean that there is more availability and possibly drive the prices down due to supply.
Now, a lower rating would result in a hirer interest, as lower ratings means higher risk (at least in theory, but what this article actually shows is that this isn't the case).
