The Wile E. Coyote Moment

Krugman makes this comment on September 20, 2007 . He's right, he's wrong and he's right. The Dollar should be plunging by now - correct. But it's not (not enough anyway) so his opine is wrong in factual result. But he's right to note and be puzzled that the fall "keeps not arriving"...

"...I could say that I saw this coming; the problem is that I’ve been seeing it coming for several years, and it keeps not arriving (and I don’t know if this is really it, even now.) The argument I and others have made is that the U.S. trade deficit is, fundamentally, not sustainable in the long run, which means that sooner or later the dollar has to decline a lot. But international investors have been buying U.S. bonds at real interest rates barely higher than those offered in euros or yen — in effect, they’ve been betting that the dollar won’t ever decline.So, according to the story, one of these days there will be a Wile E. Coyote moment for the dollar: the moment when the cartoon character, who has run off a cliff, looks down and realizes that he’s standing on thin air – and plunges. In this case, investors suddenly realize that Stein’s Law applies — “If something cannot go on forever, it will stop” – and they realize they need to get out of dollars, causing the currency to plunge. Maybe the dollar’s Wile E. Coyote moment has arrived – although, again, I’ve been wrong about this so far."

Maybe the reason is this? (via George Washington's Blog )

Is Uncle Sam Blackmailing the Credit Rating Agencies?

As I have previously written, based upon standard criteria, America should lose its AAA sovereign credit rating. Last night, at an investment talk I attended, the manager of more than a billion dollars in investments said the same thing. Interestingly, he asked out loud whether Uncle Sam is blackmailing the credit rating agencies.

What does he mean?

Well, the credit-rating agencies committed fraud in keeping the credit ratings for corporations where failing too high for years. (See this and this). The government could easily prosecute them criminally for fraud.

But the government wants to keep its AAA credit rating. And the same companies that fraudulently kept corporate credit ratings too high could keep America's sovereign credit rating too high, if they have a little . . . incentive.