So Standard and Poor’s decided to downgrade the US rating from AAA to AA+ and all hell broke loose. We heard all kind of predictions on the end of the world but guess what nothing happened.
And today "Fitch" one of the other rating agency decided to retain the AAA rating for US government bonds. It is pretty obvious that there is a difference of opinion between the ways S&P looks at the US government bonds than the way Fitch looks at them.
So which one should we trust? Let me ask another question “Who cares?”
The rating of US government should matter to those who are investing in the bonds issued by US government e.g. the Chinese government who hold billions of US dollars in US T-bills as these bonds are called. Now if the US bonds are downgraded as by S&P then the Chinese government decides to not invest in the US bonds what option does it has? Either it can buy gold, which any ways is almost at all time high, or it can invest in other currencies.
Let us look at the options available:
• Yen: May be 20 years ago it was an alternative but today it is an also ran currency and due to unfortunate natural disasters in Japan the country will take a long time to recover and currency will also lag.
• Euro: It never even ran and lost the race at the starting point itself.
• Chinese Yuan: Trust me even the Chinese government will not invest in its own currency
So what option is left? The good old USD. AAA or AA+ that is the only acceptable currency for international commerce and no alternative is on the horizon for a long time.
Now let us just take the argument even further. So the US rating has been downgraded, but what does it means?
It means the US government will have to pay a higher rate of interest on its borrowing. So what is the problem? If I am a lender to US government and I am getting a higher rate of interest for holding a bond that does not have any equal anywhere in the world and is still backed by the might and the pride of the US government, then should I be happy or worried?
Thanks for reading.