Monday, August 8, 2011

How Accurate is S&P's Overall View of the World?

S&P during a conference call, this morning:
We think the dollar will remain the key world reserve currency under any plausible scenario.
Any plausible scenario? How's this for a scenario? As the U.S. Treasury issues more and more debt, the Fed steps into to buy the debt with newly printed money. The price inflationary consequences of the money printing causes overseas holders of dollars to sell their dollars.

If you don't think the S&P is a political machine, you would have to believe that the dollar is not on the brink of losing its reserve currency status----and that it isn't even a plausible scenario.

The downgrade of  U.S, debt looks very political to me. Give their comment on the dollar, it is clear S&P can see a perfectly absurd rose-colored view of the world when it wants to.


  1. I think the question is: what did S&P really mean when they downgraded the US debt? Given the ability of the US government to meet its obligations by printing money, the S&P downgrade only makes sense as a statement about the ability of the US government to return to bond investors the same amount in real terms that they initially loaned. Thus, the downgrade is not so much a downgrade of the debt as of the currency's likely ability to retain its value. Obviously, this is an important factor in the extent to which the US dollar's reserve currency status is eroded.

  2. Let me translate:

    "We know the dollar will remain the key world reserve currency because the USA has enough military surveillance, firepower, and jail space to make it so"