Keystone Blog

ately, every time I turn on the news, listen to the endless economic diatribes, I feel like I’m living in the Chicken Little Fable. The poor little chicken, who after being hit on the head by an acorn, believes the sky is falling and the world is coming to an end. This leads to mass hysteria of imminent disaster by Chicken Little and her friends. In the end Foxy Loxy, in his guise of protector, leads them to his den where they are eaten.

Really, what has happened between the US politicians finally agreeing on raising their debt ceiling and now that has lead to convulsions in the stock market and other financial markets. One little thing; Standard and Poors (S&P) reducing the US credit rating from Triple A to Double A Plus.

First, who is Standard & Poors and secondly what is the difference between Triple A and Double A Plus?

Standard & Poors is one of the three major credit rating agencies that have been criticized for giving high ratings to mortgage-back securities (MBS) and collateralized debt obligations (CDO) that lead to the subprime debacle, and the global economic downturn. The reality is that without their Triple A rating on these investments, the banks could not have done what they did and the US government (taxpayers) would not have had to bail the banks out which is largely responsible for the enormous deficit. But who pays for these ratings? Who pays the wages of the people making the decisions to determine credit ratings? What determines the bottom line of these publicly traded companies? The very companies, banks, insurance companies, etc., that want their securities rated. What a conflict of interest. To take it even further, S&P is part of the publicly-traded McGraw Hill Companies. Wikipedia explains McGraw-Hill Companies:

“The McGraw-Hill Companies, Inc., (NYSE: MHP) is a publicly traded corporation headquartered in Rockefeller Center in New York City. Its primary areas of business are education, publishing, broadcasting, and financial and business services. It publishes numerous textbooks and magazines, including Architectural Record and Aviation Week, and is the parent company of Standard & Poor's, Platts, and J.D. Power and Associates. It is the majority owner of the Canadian publisher McGraw-Hill Ryerson (TSX).^[2] The company has its corporate headquarters in 1221 Avenue of the Americas, Midtown Manhattan, New York City.^[3]”

Feeling like Chicken Little yet? This morning on one of the major American news networks, there was a question that had Twitter all aflutter – “Are the poor responsible for the debt?” Huh? Who could fall for this?

Here is an interesting blog from April 19, 2011 – Analysts dismiss S&P criticism of US Economy.

he second question was: what is the difference between Triple A and Double A Plus. Not much. CNN described it as the difference between two words. The likely hood of being paid back with a Double A plus rating is “very strong” and a triple A Credit rating is “extremely strong”.

The reality is that the United States, in relation to percentage of GDP, is able to pay its debt. Nothing has really changed. Yes, the United States will have to get its spending in order and it has to do it by cutting spending, eliminating tax loopholes and increasing taxes. The curtain on the political grandstanding pantomime will have to close.

So what am I going to do with my investments.? Nothing. I am not going to be lead into mass hysteria about nothing, but I am going out for a coffee.