Uncle Sam’s muzzle and our savings: Can we trust what we’re being told?

Will there be a U.S. credit rating downgrade as a result of the debt ceiling debacle? Probably not. Why? Let’s take a look at past experiences.

In the past, ratings agencies have learned: Downgrade Uncle Sam’s credit, and Very Bad Things (VBT) will happen to you. Standard and Poor’s surveyed the political and economic landscape after the 2011 debt ceiling battle, which was not unlike this one, and took the bold and lonely move to tick down the US rating just a tiny notch from AAA to AA+.

Standard and Poor’s were the only major ratings agency to downgrade the nation’s rating, and this set off a minor panic among investors. How did the U.S. government respond? They blamed S&P for the entire subprime lending crisis and the housing meltdown. The government denies it was retaliation, but S&P disputes that.

Even though every other major ratings agency also liked the risky mortgage-backed securities just as much as S&P… even though Ben Bernanke expressed confidence the crisis was over and would soon stabilize… even though Hank Paulson said everything was pretty much under control… in the opinion of Eric Holder and the Department of Justice, it was entirely S&P’s fault for feeling similarly confident in investment nuclear waste. S&P was somehow single-handedly to blame for system-wide errors in judgment that Moody’s and Fitch also made. So it is difficult to not see this as retaliation.

Smaller ratings agency Egan-Jones also felt the wrath of Uncle Sam after downgrades. Egan-Jones, a small firm with about 20 employees, downgraded U.S. debt weeks before S&P. Two days later, they found themselves under heavy investigation by the SEC, accused of lying on an application – a charge they dispute. Not having learned their lesson, in 2012 they again downgraded government debt. The government responded with a muzzle.

Here is the lesson to be learned by watching this circus sideshow: If a credit ratings agency is going to be wrong on U.S. government debt, it is best to be wrong boldly, confidently, and in complete lockstep with everyone else who is also wrong. But no matter how right they may be, they better not be right – especially if they are right alone – or those “Very Bad Things” will happen.

What sort of chilling effect does this sort of intimidation have on others on Wall Street? How many can plainly see that the emperors in Washington have no clothes? If this type of retaliation is really going on, can you really trust anyone with a rosy picture of our fiscal future?

China has begun to publicly call out our government on its nakedness. They are the largest foreign hold of our debt. China also wants to strip us of our coveted reserve currency status and perhaps take our place. Obviously, as much as American citizens resent being held hostage by the stupidity of another Washington impasse, the rest of the world resents it even more.

If any credit ratings agency actually did go so far as to downgrade the U.S. credit rating after this debt ceiling crisis is over, it would be a courageous move on their part. However, should they do so, they should also not be surprised to find themselves in the crosshairs of the government. Time will tell, but investors would be wise to protect themselves from this uncertainty regardless of what the credit ratings agency say. Gold and silver are a way to do that. Let us tell you how.

debt ceiling, Featured