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The Chinese credit rating agency, Dagong, is not the first to downgrade the credit rating of the US. It's merely the most recent -- doing so on Christmas Day. Dagong cut the credit rating of the US from A+ to A. Western credit rating agencies are expected to follow suit, but not until the Fiscal Cliff deadline passes and world markets act.

The most interesting part of Dagong's announcement is that they have explained to investors the Five Reasons why the US credit worthiness now on their Negative Watch List. That means they see the soundness of US federal government debt trending downward in the future -- and investor risk increasing.

Below are the systemic risks in US sovereign investments, as the rating agency sees it:

First, Dagong is looking at a polarized and dysfunctional Federal government:

1. The political conflict and the defect in national debt management have pushed the creditworthiness of the federal government to the cliff again. After the U.S. federal government debt limit crisis caused by the partisan quarrels in August 2011, it has evolved into the current fiscal cliff and debt limit crisis due to the same reason.

On the problem of how to tackle the national debt crisis, each political party insists on the proposition favorable for its own interest... which leads to the unceasingly fiscal deterioration of the government.


Next, Dagong points to ongoing dollar debasement through Quantitative Easing, which they consider a form of repayment default.

2. With no fundamental plan and measures of ameliorating the solvency in place, the U.S. government is lacking the willingness of debt repayment, and the depreciation of debt outstanding through debt monetization has already indicated a trend of implicit default.

The U.S. government, instead of adopting effective measures to improve its indebtedness, came out with two consecutive rounds of Quantitative Easing over the year in order to realize internal circulation of government debt and sustain its solvency through monetization....  The creditors have been suffering real losses from the consequent persistent devaluation in the debt outstanding, and the U.S. government has shown a trend of implicit default on its debt.


Next, Dagong accuses the US of pulling a Bernie Madoff by using new investment money to cash out redemptions. They suggest that the US has no other meaningful revenue sources (appropriate taxes) or a policy of government investment in the nation's wealth creation processes.

3. The deterioration in the main factors impacting on the federal government solvency has further widened the degree of deviation between the debt repayment sources and the real wealth creation capability.

The wealth creation capability is the ultimate source of debt repayment and the greater the debt repayment sources deviate from the wealth creation capability the larger the risks.... The situation exacerbates the reliance of the debt repayment sources on debt income, and the debt repayment sources are diverging increasingly further from the wealth creation capability, indicating that the solvency of the federal government is on a descending trend.


Dagong finally gets around to the fiscal cliff, which is regarded internationally as a form of perverse economic self-harm on the part of the United States.

4. As a result of the pending fiscal cliff, the U.S. economy will probably fall into recession in 2013, and stay weak in the long term, which will further weaken the material basis for the government to repay debt.

The U.S. is facing an unprecedented crisis of excessive credit. The inevitability and chronicity in the credit bubble burst will directly lead to the continued slump in total social consumption, triggering a chain reaction of long-term economic downturn.... expanding the degree of deviation between debt repayment sources and wealth creation capability.


Lastly, Dagong touches upon the disgraceful Debt Limit tantrum that the world has come to expect from a moribund Federal government:

5. Debt limit lifting and debt monetization are becoming the long-term policy of the U.S., and the real solvency of the government will continue declining.

The U.S. government has adopted even greater unconventional credit expansion, which drags the country into a cycle of continuously lifting the debt limit to stimulate the economy while sustaining government solvency by excessive issuance of dollar. As the resulting risks of dollar depreciation keep accumulating, the decline in the government real solvency will become persistent, and the vulnerable credit relationships will bear increasing risk....


Meanwhile, in other news:

Obama to cut vacation short to deal with fiscal crisis

President Barack Obama is cutting short his Hawaiian holiday to leave for Washington on Wednesday to address the unfinished "fiscal cliff" negotiations with Congress, the White House said on Tuesday.

As the clock ticks toward a January 1 deadline, efforts to avert a sharp rise in taxes and deep spending cuts have stalled, worrying world financial markets.


Obama is expected to turn to a trusted Democratic ally, Senate Majority Leader Harry Reid, to help craft a quick deal. The president will also need at least tacit approval from Senate Minority Leader Mitch McConnell to insure Republicans will permit passage of what is likely to be a stripped down bill that prevents taxes from rising on all Americans.

The measure may not, however, contain difficult spending cuts both parties had sought to speed deficit reduction. It is unclear how the president will seek to address the draconian across-the-board government spending reductions set to go into effect early in the year without a deal.


Observers are pessimistic that lawmakers, who have repeatedly come close to agreement only to see negotiations collapse, can wrap up a deal in the few days left before the end-of-year cut-off point.

The impact of a blown deadline would likely be first seen in financial markets, which wobbled last week after House of Representatives Speaker John Boehner's "Plan B" tax and spending effort fell flat.


President Obama does not seem to think that the Fiscal Cliff is some kind of hoax, as so many of his constituents seem to believe.

So, what's your take on this?

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