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Support for our Wealth Destruction-GDP Growth Hypothesis

June 13, 2012

Early this week, the New York Times published an article whose main conclusion was that US household networth in 2010, adjusted for inflation, was at the same level as it was in the early 1990s.   So, there was wealth destruction of an amazing scale during the dot-com and housing sector bubbles.  It was this wealth destruction which propelled high growth in the US (and other industrialized countries) in the decade prior to the financial crisis.  Because rating agencies, for their sovereign ratings, focussed on very narrow metrics, they missed this effect and assigned unjustifiably high sovereign credit ratings.  The New York times article lends credence to our wealth destruction – growth hypothesis which we had postulated in our piece Wealth Destruction and Extension of the Consolidated Debt Thesis. (See https://crediteye.wordpress.com/2012/02/15/wealth-destruction-extension-of-the-consolidated-debt-thesis/).

Talking about rating agencies, it makes no sense for governments to criticise the agencies when there is rating downgrade but wear a rating upgrade as a badge of honour.  Yesterday, India joined the bandwagon of countries which criticize the agencies when they make unfriendly noises regarding their sovereign rating. The same Indian government, in 2007, went around tom-tomming about town on a rating upgrade.   To criticize the agencies now is foolish and it destroys the credibility of the government.  The course of action for governments should be the following:

1) Ignore the agencies when they are taking unfriendly rating action.  To criticize them would only draw attention to the agencies and their actions.  Focus rather on improving macro-economic fundamentals

2) Once the fundamentals improve and the rating agencies are talking about an upgrade, come out clearly and state that the government will no longer be rated and will not be providing data or analytical support to the agencies.  Its officials will no longer interact with the so-called sovereign rating credit analysts

3) Provide all data transparently on a government website that can be accessed by all investors.  Also, have officers, similar to investor relations officers of companies, who would be ready to provide any additional information/clarification to long-term investors.  This does away with the need for an intermediary to assess sovereign credit strength.

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From → Credit Analysis

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