The headline re: S&P’s downgrade of a host of European sovereigns, including France, is another non-event. Ditto the downgrade of the US before it (“Investors seek safety of US Treasuries)“ . The credit rating agencies do not measure up to the credentials required for a competent canary in the coal mine.

Their chance began in 2004, when the annual increase in housing values of 25% or more were taking place in a wage environment that saw 1 - 2% annual increases (incomes fund mortgages…). The credit rating triumvirate responded by drunkenly endorsing all quality of securities with housing underlying them, good and bad. Transaction based fee revenue is a powerful toxin.

Now they ask investors to respect their “downgrades” of sovereigns which took on the burden of the failed housing backed securities held by domestic banks, the ones the credit agencies ambitiously endorsed. It’s all but common knowledge that there has not been a AAA rated sovereign for many years. They all owe each other, in one form or another, via sovereign debt or through their banking systems (thus, even Germany has the risk) . The credit agencies are the last to know.

When the clock struck midnight on September 15, 2008, an old debt came up for reckoning. Since then, a great deal of posturing and manipulating of due dates by sovereigns, banks and corporations has pushed the reckoning out as best it could. Like gravity, the reckoning of the profligate and reckless global spend that occurred over a decade will have its way. At that point, there can be a renewal of growth and development. But nobody wants to pay.

Sovereign debt holders whine that they are due full value and if they don’t get it, they’ll not provide the free market capital that is the force behind global business. Where are they going to go? Where will they put their capital instead? They are as beholden to invest in the sovereigns & their markets as the sovereigns themselves are. It is economics 101. You can allocate, choose one over another, but the whole is a closed loop.

If the sovereigns suffer, so shall private capital. And the whimsy that Asia, China specifically, will be their investment of choice is laughable. China cannot establish its own currency as a reserve because it lacks the integrity of economics and politics that are the legs of a reserve currency. No one trusts it as a reserve…gold will tell you this. Add that its economy cannot act as a consumer of the world’s goods & services, only as a provider…and you have a sovereign that would tip along with all others.

An old spend waits to be reckoned. The rollovers and extensions are near expired. The losses will be shared by taxpayers and creditors alike…gravity will have its way. From that, the next phase of growth can find its footing.