Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

Despite living in ignomy, the rating agencies never seem embarrassed and never seem to quit. You know who they are: Standard & Poor’s, Moody’s and Fitch, the infamous trio that gave AAA ratings to total junk, costing American families billions, because these guys were paid by those they rated. (No conflict of interest, right?)

Have you seen any of these big-time crooks prosecuted? No? What about a single mother whose children are starving, and who shoplifts a few dollars worth of food? Yes, the prosecutors will see she is punished “as a lesson to others.” Thus is American justice. But that’s a separate story.

Before the fake “debt crisis” was solved (whew!), these three bandits threatened to downgrade the U.S. AAA bond rating. (What’s wrong boys? The federal government not paying you for a high rating?) The fact that this would leave some monetarily non-sovereign, private companies with a higher credit rating than the Monetarily Sovereign U.S. government — an impossible situation for several reasons — did not seem to trouble any of the three.

Until recently though, Fitch had been less noisy about the fake “debt crisis.” It had allowed Standard & Poor’s and Moody’s to hog the spotlight, demonstrating their ignorance loudly, and while Fitch did issue quiet little threats, it seemed to remain, appropriately, in the shadows.

But no. Why let the other guys get all the publicity? So Fitch decided to issue its own stern warning:

“On current trends Fitch projects that US government debt, including debt incurred by state and local governments as well as the federal government, will reach 100% of GDP by the end of 2012, and will continue to rise over the medium term, a profile that is not consistent with the US retaining its AAA sovereign rating.”

There’s an old saying: “You can keep your mouth closed and let people think you are stupid, or you can open your mouth and prove to people you are stupid.” Fitch opened its mouth. By lumping US government sovereign debt with state and local debt, and then comparing all this debt hash with GDP, Fitch indicated it has zero concept of economic risk. Pretty bad for an economic risk rating company, huh?

The U.S. is Monetarily Sovereign. It never, ever, ever can run out of money. It creates money by paying bills. If the federal debt (i.e. T-securities outstanding) were 10 times its current size, the U.S. would have no difficulty, not only servicing it, but paying it off — in one day. The U.S. does not need to borrow; T-securities are a relic of the gold standard days; they could and should be eliminated, immediately. They have zero effect on the federal government’s ability to spend or need to tax. Fitch doesn’t understand that.

By contrast, the states and local governments are monetarily non-sovereign, just like you and me. They can and do run out of money. They do not create money by paying bills; they transfer money. They do need to borrow, and increased debt does affect their ability to spend and need to tax. Fitch doesn’t understand that.

So when discussing debt risk, it makes absolutely no sense to lump a Monetarily Sovereign government’s debts with monetarily non-sovereign governments’ debts. Fitch doesn’t understand that.

Then there is the comparison with GDP. What does it mean? What is the significance of a high debt/GDP ratio? No one knows what this oft-quoted, never explained ratio means. The federal government does not service its debts with GDP. Does a high ratio indicate difficulty servicing debt? No. The federal government services its debts simply by crediting the bank accounts of its creditors. GDP is not remotely involved.

Even the states and local governments do not service their debts with GDP. They levy taxes to service their individual debts. So, does GDP affect taxes? Well, sort of. If the taxes are based on business profits, personal income and property value, then in a relatively distant way, GDP can affect state and local taxes, except for one, small detail: State and local taxes are adjusted according to state and local need. So if business earnings, your personal income and the value of your house go down, and the governments need more money, they raise the tax rates. Fitch doesn’t understand that.

If GDP has zero relevance to servicing debt, what does total government debt/GDP mean? Well, er, uh, it means the debt owed by all the various government entities in the U.S. is less-than, equal-to or more-than the total domestic production in the U.S. And what does that mean? Not a damn thing.

The next time you see this ratio — debt/GDP — or hear it discussed in any meaningful context, know this: The speaker or the writer has no idea what the heck he/she is talking about. Debt/GPD is a meaningless ratio, much sound and fury signifying nothing. Fitch doesn’t understand that.

In short, this rating agency, whose reason for existence is predicated on their ability to analyze economic factors to determine economic credit risk, does not understand the most basic, elemental foundation of all modern economics: Monetary Sovereignty. If these guys were architects, we all would have to live in tents, because the buildings would come crashing down.

Welcome to the clueless patrol, Fitch. Next time I buy a bond, remind me to check the ratings you publish.


Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings