The ratings agencies and conventional wisdom get the once over in this piece.
A related surprise from America this year could be that the seemingly profligate expansion of budget deficits, far from undermining America’s reserve currency status, actually strengthens the dollar. This may sound perverse, especially since there were rumours last week that credit-rating agencies might downgrade US government debt because of the unprecedented size of the proposed fiscal stimulus. But the idea that organisations as discredited by the credit crunch as Moody’s or S&P should have any opinion at all on the US Treasury’s credit is inherently absurd — like asking Bernie Madoff to opine on the integrity of the Supreme Court. And even if the rating agencies still commanded the prestige they once enjoyed, their analysis of sovereign credits borrowing in their own currencies has always been a joke. Remember June 2002, when Moody’s downgraded Japan to a lower rating than Botswana and Estonia? In the following 12 months, Japanese bonds did not collapse as Moody’s expected. Instead, they enjoyed the most astonishing rally of all time, with ten-year yields falling to 0.5 per cent by mid-2003. History shows, in fact, that the sovereign bonds of leading economies rarely, if ever, respond to mushrooming fiscal deficits or to alleged credit risks.
