Is This How It Looks When The Ratings Agencies Destroy The Economy?


Photo: US Marings

Make no mistake, if some ominous words from Moody’s help the two sides in the debt ceiling fight come to an agreement and avert a disaster, that’s plainly a good thing.But the ratings agencies haven’t just been warning about the debt ceiling, they’ve also been warning about the debt itself, and it being unsustainably high in their words.

In other words, in part to appease the raters, because the government prizes its AAA rating, the US is guaranteed to see ongoing premature austerity.

This is what Richard Koo has warned about, when he said, bluntly: “western ratings agencies do not understand why fiscal deficits have increased.”

S&P, Moody’s, etc. don’t understand the nature of balance sheet recessions (like what’s going on now in Japan and the US) and the relationship between the spike in private borrowing and the natural corollary to that: exploding deficits. And because they don’t get that, their ratings lead to bad policies.

And that’s what we’re seeing now, with the raters creating news just about every day on the sovereign debt front. Welcome to Richard Koo’s nightmare.

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