Prospect of US Default Absurd

Tuesday, February 09, 2010

(Bloomberg) - Nobel laureate Joseph E. Stiglitz said the prospect of a default by the U.S. or the U.K. is an “absurd” notion constructed in financial markets.

Both nations “deserve to keep the Aaa rating” and “the likelihood of a default is so small, particularly in the U.S. because all we do is print money to pay it back,” he said in response to questions after a speech in London yesterday. “The notion of a default is so absurd, it’s another reflection of the absurdities in the financial markets.”
An excellent point by Stiglitz pointing out the absurdity of Moody's, S&P and Fitch placing credit ratings on countries and a CDS market gauging the probability of default for countries that print their own currency. No country that has its own currency will default, they will just inflate to pay it back. The risk is not one of default, but devaluation of the currency the debt is denominated in. The ratings should be ones that deal with the potential for currency debasement, not credit risk. Obviously, if the country uses a collective currency such as the euro or another country's paper, it makes sense to have these rating mechanisms.
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