Chinese Ratings Agency Warns of de Facto Default on U.S. Debt

The Moody’s of China, Dagong Global Credit Rating Co., has warned bond investors that the United States is on the path of insolvency. “In our opinion, the United States has already been defaulting,” Guan Jianzhong, Dagong’s president, was quoted telling China’s English-language Global Times. Dagong is China’s only credit rating agency that rates sovereign debt.

Since the start of the financial crisis, market observers have noted the possibility that the U.S. might repudiate its debt through inflation or a weakened currency. Since the Chinese are the largest foreign owners of U.S. debt — holding $1.1 trillion in U.S. Treasury securities — China is naturally concerned about the sinking value of its investment portfolio. Since January 2009, the dollar has lost 9% against a basket of major currencies; it has lost a quarter of its value in the last decade.

While the Chinese are the largest foreign owners of U.S. debt, the largest single owner is the U.S. Federal Reserve, which has acquired $1.56 trillion in Treasury debt made in two rounds of massive securities purchases in a policy known as quantitative easing.

And that’s what troubles a lot of owners of U.S. debt: the Federal Reserve, as the U.S.’ biggest creditor, would have the most say in any insolvency issues; notice that the Fed has not been critical of U.S. monetary policy as the Chinese have been — of course, because the Fed is the one that makes U.S. monetary policy. Also, the Fed can at will pay back all the debt it owes by turning on the printing press.