We're in for a wild ride. Exponentially accelerating technological, cultural, and socioeconomic evolution means that every year will see more developments than the previous one. More change will happen between now and 2050 than during all of humanity's past. Let's explore the 21st century and ride this historic wave of planetary transition with a confident open mind.

Tuesday, November 3, 2009

Credit Rating Agencies Are Financial Weapons

World needs new international credit rating mechanism since biggest credit agencies are US based and thus are pressured to distort their reporting on Western nations. 

Also a couple words on Warren Buffet's recent moves

Moody's consideration this week to upgrade the credit rating of Burlington Northern Santa Fe is a wonderful example of why the world needs an international UN supervised credit worthiness system. The reason why BNSF's ratings may go up is because of Warren Buffet's decision to fully invest into a vast railroad network covering 2/3 of United States (stretching from the key region of Texas to China's port middleman of California). As the world's second richest man and one popularly considered to be the best investor, Buffett's moves are always carefully watched and analyzed. Although calling BNSF acquisition a possible boost to Obama's policies is a bit of a stretch, the 79 year old billionaire's purchases usually resonate deeply in the investing world.

Since Buffett's Berkshire Hathaway is a key owner of Moody's,  one of his assets is about to rate up the value of another. That would be news if such conflict of interest wasn't so common as to be the norm. What has been less noticed and talked about is Buffett's recent gradual sale of his stocks in Moody's itself. The biggest shareholder in the world's biggest credit rating agency (Moody's has 40% of this market and thus the power to acquisitions cripple entire countries through rating them down and reducing capital investment flow) decided to quietly start decoupling himself from it.


The era of investigators investigating themselves is coming to an end. Moody's, Standard & Poor's, and Fitch Ratings together control majority of the world's rating market and are all based in United States. No surprise that United States continues to have the best triple A investment rating even though its macroeconomic situation and debt resemble something seen in the third world. USA's current and former satellite nations (although Germany is moving out of its satellite status now that its ever growing public debt is protected by Euro as reserve currency) benefit the most from this political protection. Japan has been famously running a public debt for years that is far above the 60% per GDP that is generally considered the safe limit in public discussion.

We're familiar how downgrades and upgrades by US credit rating agencies have been the matter of life and death for numerous countries in the past 50 years. The quality of life for endless millions of people around the world was dependent on the "expert" analysis of these corporations and the investment money it can bring. This applies to countries that aren't colonies or special friends. Moody's couldn't logically downgrade and weaken Cold War allies regardless of their macroeconomic fundamentals. Although Japan is in the same public debt company as Zimbabwe, nobody is screaming against investing in it. Naturally, the same US gov based restraint prevented the agencies from predicting the financial collapse of 2008.

Powerful countries like China cannot enter the English speaker dominated rating market since a Chinese credit agency would be in the same position when it comes to full analysis. The mere fact that people wouldn't believe a Chinese version of Moody's yet continue to listen to the big 3 in US as if it means anything (at least in regards to rating for countries as a whole) is another demonstration of the faith based nature of economics. An argument can be made that the Western world as a whole suffered decreased economic growth due to the politically motivated self restraint of the agencies whose job is to see what's worth investing in and loaning money to. Proper introspection couldn't be achieved.

It would be ludicrous for the agencies to rate each other's effectiveness or have a US government body do so. Even finding general real numbers behind any country's macroeconomic situation from IMF, World Bank, or CIA World Factbook is impossible since these organizations serve oligarchs and governments in the Western world. If IMF wasn't disproportionately influenced by US it would have prescribed the same bitter treatment to its master as it does for many countries in the world (such as fighting large scale corruption within key economic sectors). We continue to see the ridiculous spectacle of morbidly obese countries telling everybody else to get healthier (which they actually did if one looks at anemic GDP growth in the West compared to the rest of the world).

If capitalism is to remain in the years ahead then there needs to be a very robust international UN controlled credit rating agency. It has to be under UN supervision with transparency and input from all the nations and not just be an act of creation by G20 (recent switch of world's economic control from G9 to G20 just expands the ridiculous notion of a few rich nations deciding global economic policy instead of UN).

It remains to be seen whether Buffett has the intention of fully selling off his share in Moody's (and is just doing it gradually to not cause a stir) or if he still thinks there is utility in this insanely powerful organization. As for his investment into railroads leading to and from California ports bringing Chinese goods, we will soon see if that is a sign of faith in the growth of China or US. Buffet has often said that just like a great company, a great country can survive a period of mismanagement. It may very well be that he is old enough to actually have a bit of a nationalist sentiment but any investment he makes in GE or American infrastructure may be part of a bigger picture. His investment into production of electric cars in China certainly shows he thinks Chinese may beat us in this field (and this country has a lot of natural resources to transport by Warren owned rail to the ships departing for Chinese factories).

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