The Gold Standard | Miller’s faulty brew

Just yesterday, I wrote in this blog post that Chinese households should be blaming the Chinese government rather than the Chinese government wagging a finger at the US. Looks like they all read this blog! See this article in New York Times:

“The United States’ sovereign credit rating suffered a downgrade, why did we become the biggest victim?” one microblogger wrote on Sina Weibo, one of the more popular sites, which had hundreds of such postings.

That is the right question to ask.

Professor Barry Eichengreen gives a simple and correct answer to the question that this blog post in Wall Street Journal poses: “Would China bail out the global economy again?”. Prof. Eichengreen says NO. He is dead right. First of all, the question is wrongly worded. There is a presumption that China bailed out the world, the first time around, after 2008. That is only partially correct. China tried to bail itself out and is now counting the costs of that bail-out. Second, all countries engaged in massive stimulus. Not just China.

Knowing what we know about Chinese economy – persistent inflation, huge credit bubble, problem loans to local governments, off-balance-sheet financing of banks, rising borrowing costs for Small and Medium Enterprises and

Chinese society – censorship, anger at suppression of information, daily protests and

Geopolitics – fresh global espionage charges laid at China’s doors,

it has to be safely assumed that China is very much part of the problem and not solution.

The rant by Mr. Bill Miller against the S&P decision to downgrade the US credit rating is flawed on several counts. It is not the fault of the S&P that the credit-rating agencies have a legal sanctity. It is the fault of the US government. It was a convenient geo-political device too as long as the US was not the target. Now that the United States has become the target, suddenly, their legal status is back in the spotlight. Why did the US government not move to strip them of this status immediately after 2008? This is part of the long list of pending reforms that the US has failed to enact, post-2008 crisis. That alone merits a downgrade.

Second, if Moody’s and Fitch did not join the S&P and therefore were right, then why are you bothered by the opinion of one credit-rating agency?

According to Mr. Miller, the market had concluded that S&P was wrong. Fine. If so, what is the point of the piece, then? Why should we be exercised by the opinion of one credit-rating agency (out of three) that the market has judged wrong? Why is he wasting his time and ours?

Finally, if the United States that borrows in its own currency can never nominally default, then why was there no outcry when Japan which too borrows in its own currency and that too predominantly from its own people was downgraded?

TGS reckons that the market meltdown would have happened in any case. It was a matter of time before news flow and data points would have led investors to the inevitable conclusion that the phantom growth momentum engineered by stimulus measures in 2009 was in no position to become self-sustaining.

S&P should be complimented for hastening the dawn of that reality. Any criticism of S&P either by the US government or by investors can only be and is self-serving.

That said, I must share a humorous response from a friend of mine:

S&P with its inaction in 2008 made the world poor and now with its action has turned the world poorer. They are living up to their name!

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.