Another ratings agency downgrades US debt
This time, it's not the fiscal cliff, but a reaction to the Fed's QE3 plans.
Ratings firm Egan-Jones cut its credit rating on the U.S. government to "AA-" from "AA," citing its opinion that quantitative easing from the Federal Reserve would hurt the U.S. economy and the country's credit quality.
The Fed on Thursday said it would pump $40 billion into the U.S. economy each month until it saw a sustained upturn in the weak jobs market. (Read more: Fed's 'QE Infinity' - Four Things That Could Go Wrong)
In its downgrade, the firm said that issuing more currency and depressing interest rates through purchasing mortgage-backed securities does little to raise the U.S.'s real gross domestic product, but reduces the value of the dollar.
In turn, this increases the cost of commodities, which will pressure the profitability of businesses and increase the costs of consumers thereby reducing consumer purchasing power, the firm said.
In April, Egan-Jones cuts the U.S. credit rating to "AA" from "AA+" with a negative watch, citing a lack of progress in cutting the mounting federal debt.
The two previous incarnations of quantitative easing had mixed results - at best. Instead of having extra cash to lend out to spur growth and jobs, banks pocketed the money to add to their reserves. Why the Federal Reserve thinks this QE program will be any different is unclear.
Maybe they think "3 times a charm?"
As for the ratings downgrade, get used to it. Moody's has already said they will downgrade the United States if Congress and the president can'g get together and solve our fiscal problems before the "fiscal cliff" deadline on December 31. We're not in danger of having our rating downgraded to the level of Greece - yet. But each downgrade represents a failure by President Obama to lead.
Update from Bruce Johnson:
As the saying goes, for every action, there is an equal and opposite reaction. And so it is
in economics. The Fed moved to further stimulate what we are curiously told by politicians is doing just fine. By Ben's insistence to hold a bigger beach ball under water, he displaces the value of the dollar and cheerleads inflation. Our government at work.
With the Fed balance sheet now moving past 3 Trillion dollars and on its way to 4 Trillion, Egan Jones, a rating agency, just downgraded "US government debt to "AA-" from "AA," on their opinion that quantitative easing from the Federal Reserve would hurt the U.S. economy and the country's credit quality." Article
Ho hum. A warning from a rating agency. What do they know? We've been through this before, and stocks are on a 5 year high.
In quiet fashion, on a Friday full of disturbing overseas events crowding the news, Bernanke and this administration, and Congress for that matter, just received a stern warning on the consequences of their actions, and non actions. Harry, are you there?
With Bernanke's announcement of QE (fill in the blank), we have been forewarned that Ben will buy, each month until further notice, $40 Billion of mortgage backed securities. This will have the effect of taking what is likely bad paper created through the irresponsible mortgage creation system (enabled by GSEs Fannie and Freddie), from the banks and replacing it with cash balances at the Federal Reserve.
The intent is to put some cash out there. It is starting to look like a video game in which dollars are really pixels, and mortgages are really little poison mushrooms. Play away Ben. Take it easy on those thumbs.
But as Bernanke insists he is correct, as he continues to do the same thing over and over again and expect different results, he gets more of the same. The downgrading of our national debt rating being one of those by products.
As the Fed accumulated interest bearing securities through their operations, and simultaneously eased rates and twisted the yield curve, the Fed actually profited by the higher evaluations of its ever growing securities position. Lower rates brought higher values. A lovely arrangement, for a while. "Look", they said, "we are actually making money!"
Mr. Bernanke is in so deep now, bottom looks like up. Trying to jump start the economy by flooding the system with money and ruining the currency isn't working. Higher food costs and higher energy costs, all subject to currency issues, strips the consumer of disposable income. Disposable income is what drives a service economy, which is what we have. The rising cost of day to day living over weighs any benefit of lower rates.
Mr. Bernanke, do your theories take these considerations into account?