A little after Wednesday's close Moody's, the bond rating agency, issued a statement in which it warned that it might - just might - have to downgrade US government debt. On the news the E-mini S&P futures dropped more than 10 points in 5 minutes to a low of 1302.25. Do you hear the "Looney Tunes" theme in the background?
You will recall that Moody's is one of the rating agencies that assured the investing world that most mortgage-backed securities were of AAA quality when in fact they were junk. Now they hint that US government securities might be junk when in fact they are of AAA quality. What gives?
The simplest explanation is that Moody's and the other rating agencies are in Wall Street's pocket. Yesterday's announcement was timed to give Wall Street the chance to accumulate stocks sold by those who foolishly took Moody's warning seriously.
Let me be clear about one thing. The U.S. government CANNOT default on its debt. Why?
The U.S. debt is denominated in dollars. If the U.S. Treasury cannot redeem the debt by using tax revenue or by issuing more debt then holders of U.S. debt will simply sell their securities to the Federal Reserve. Moreover, if investors don't want to lend to the U.S. government for some bizarre reason the Fed will be happy to step into the breech. The result in both cases would be quantitative easing on a scale never seen before. This would be incredibly bullish for U.S. and world stock markets, at least in its early stages.
So don't let the bogey man of the failure of U.S. debt ceiling negotiations bother you. It is just a ploy by both Republicans and Democrats to grab more tax revenue. We can only hope this ploy fails.