Dagong is one of China's 4 big credit rating agencies, and is leading an initiate to create an independent  trans-national China/USA/Russia credit rating agency.

They downgraded US credit from A++ to A on August 2, 2011. On December 25, 2012, they put the sovereign credit ratings of the USA on Negative Watch List. Here is there reasoning. (find the original report here. http://en.dagongcredit.com/Upload/File/201212/6d227041dcad4e40910fb851cb2d7de1.pdf - I repost here because it is slow/difficult at that link.)

Dagong Puts the United States of America’s Credit Ratings on 

Negative Watch List 

Dagong Global Credit Rating Co., Ltd. 

December 25, 2012

Dagong Puts the United States of America’s Credit Ratings on Negative Watch List  Dagong Global Credit Rating Co., Ltd. December 25, 2012 Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as  “Dagong”)  downgraded the local and foreign currency sovereign credit ratings of the United  States of America (hereinafter referred to as “U.S.”) from A+ to A, and each with a  negative outlook on August 2, 2011. According to the changes in the situation during  the surveillance period, Dagong has decided to put the sovereign credit ratings of the  U.S. on Negative Watch List. The main reasons are as follows:  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. It  once again highlights that the decline of the U.S. federal government’s capacity in  interest integration and decision-making is the political reason of the weakened  solvency. On the problem of how to tackle the national debt crisis, each political  party insists on the proposition favorable for its own interest. Therefore, it is difficult  to form a long-term consensus on solving the debt problem ultimately, which leads  to the unceasingly fiscal deterioration of the government.

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. Increasing fiscal revenue, cutting fiscal expenditure and reducing the  scale of debt are the ultimate ways to improve the government indebtedness, but  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 continuous credit expansion to maintain its  consumption through borrowing by taking advantage of the status of the U.S. dollar  without touching on the ultimate issue on solvency manifests the lack of willingness to repay. 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.

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 debt burden of  the federal government increased 9.1% and 11.7% on year-on-year basis in 2011 and  2012 respectively, far exceeding the nominal GDP growth rate of 3.9% and 3.4% as  well as fiscal revenue growth rate of 4.9% and 6.2% over the same period. The debt  outstanding of the federal government has risen by 60.7% since the credit crisis in  2008, while the nominal GDP has increased by only 9.2% and fiscal revenue increased  by 7.4% over the same period. By the end of 2012, its debt outstanding is expected  to rise to 104.8% of GDP and 608.7% of fiscal revenue. 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.

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, and the economy may go into a  slight recession in 2013 due to the emergence of fiscal cliff. Consequently the federal  government revenue base will fluctuate, expanding the degree of deviation between  debt repayment sources and wealth creation capability.

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. In order to  avoid suffering an economic recession resulted from the abated virtual social  consumption capacity established by the long-standing and excessive credit  expansion, 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 of breaking due to the frequent  occurrence of emergencies such as the debt limit.

In summary, Dagong views that as the negative effects from key factors affecting the  U.S. federal government solvency such as the debt repayment environment, wealth  creation capability, debt repayment sources have been increasing, emergencies such  as fiscal cliff and debt limit will further increase the vulnerability in the government  solvency. Therefore, Dagong has put the U.S. federal government credit ratings on  the negative watch list. Dagong will adjust the credit ratings according to the real  circumstance to reflect the soundness of the U.S. federal government debt.

   

Free and Restricted Markets: The Cost Of Treating Adults Like Children

Often, people contrast "free markets" and "regulated markets." However, the term "regulated" is a misnomer. To call a market "regulated" implies that you can actually regulate it, or make it regular. Unfortunately, our regulations do not actually regulate markets, they only restrict particular aspects of them and subsidize others. Because of this, I suggest that they should not be referred to as regulated markets but "restricted" markets.

This philosophy of restricting markets is typically justified from two different, although related, motivations.

• 1) people's "best" judgments often get them in trouble, and so we must restrict them from making those bad choices.
• 2) centrally planned policies will create greater wealth than the sum of the individual best judgments of citizens.

Much of this blog will be devoted to addressing the second justification. In this post, I want to address the first justification for restricting markets, that adults do not know what is good for them, and must be protected from their own choices.

PROTECTING PEOPLE FROM THEMSELVES

I will start by agreeing that this is certainly true with children, whom we protect from oncoming traffic in putting their hands on a hot stove. They are ignorant of the effects of their choices, and so we restrict their choices to avoid them experiencing the negative effects. This restriction is a recognition that reality operates according to its own cause effect principles, regardless of what the child intended. The child's ignorance can be destructive to themselves for others, even fatal, so we restrict the choices because we understand the potential destructive consequences. We use our knowledge of reality to create restrictions to compensate for their ignorance.

When it comes to adults, this justification becomes increasingly problematic. On the one hand, in economic terms, many adults have not learned how to avoid oncoming traffic, and do not recognize that a hot stove will burn them. Poverty, bankruptcy, and a profound under utilization of people's potential are all evidence of the effects of people's ignorance on their lives. It is fair to describe this as immature, childish behavior, and it makes sense for a guardian to protect them from themselves by restricting their behavior.

On the other hand, many other adults have a greater understanding of the processes involved, and choose behaviors that have the potential for either profit or loss according to their tolerance for risk. Some of them succeed wildly, and create new technologies and profit/wealth for their communities and investors. Others fail in their intended results to various degrees, and create losses for their communities and investors. This is mature adult behavior, and it is both counterproductive and an indignity for a guardian to treat them like children and protect them from their own risk tolerance by restricting their behavior.

In summary, when we treat legal adults as if they were children and restrict their choices, we can both protect them from potential harm, but also prevent them from creating tremendous good for themselves and others.

WHAT DOES IT MEAN TO BE AN "ADULT?"

This conversation hinges on our concept of what it means to be a "legal adult." Currently, our legal and social definition of an adult is someone who has lived a defined number of years and who has "basic mental competence. Until they are an adult, their parents/Guardians are legally responsible for their actions, and are the only legal signatory to a contract. Once someone is deemed a legal adult, they become able to enter into legal contracts, where they are both protected by and liable to the laws that underlie those contracts.

The ability to enter contracts is the central feature of becoming a legal adult in modern society. Note that, as long as someone is not mentally retarded (which is a more appropriate term in this context than "developmentally challenged"), they become a legal adult when they have lived the defined number of years, which are 18 in most of the United States. This is true regardless of their levels of knowledge or ignorance of the basic skills necessary to survive and thrive in modern society. There is no test that someone must pass to demonstrate that they understand the basic laws of the society, the basic principles of contract and credit, or the impact of their actions on their health, their family, their communities.

In one sense, this is a fine system, because we do not discriminate against people, but allow everyone to enter society as an adult and to achieve whatever levels of success or failure they achieve. However, this creates two challenges which we outlined above:

First, treating all people as equally competent to enter into different types of contracts is profoundly dangerous. Ignorance is not bliss; in fact, it can be tremendously destructive. Because we recognize this as a simple fact of existence, we as a society feel the desire to protect people from their ignorance, and so we restrict their behavior from actions that we deem might be destructive to themselves or others.

Second, treating people as equally _incompetent_ to enter into different types of contracts is insulting and demeaning. It not only steals the dignity of the human being who wants to make the choice, but it creates obstacles to the creative process of wealth and technology creation for the betterment of the individuals and humanity.

A RADICAL SOLUTION: DEMONSTRATING COMPETENCE TO ENTER CONTRACTS

One solution to this issue is to expand and defined what it means to have "basic mental competence," by understanding that ignorance and competence are contextually determined.

We already do this in some contexts. For example, there are certain types of Financial instruments that only people with specific qualifications are allowed to invest in. We only give driver's liscenes to people who have passed a driving test that includes understanding the laws and competence with the vehicle.

If we were to apply this more generally, we could create a system in which the contracts that we are allowed to enter into as adults are restricted based on a demonstration that we understanding the processes and risks involved in that contract, i.e., that we are competent to into that contact. Instead of becoming a "legal adult" in one fell swoop, with a blanket capacity to enter into legal contracts, we can create tests that people must pass demonstrating competence to enter into contracts. Until people have passed the appropriate tests and demonstrated competence, we treat them like children in that context, and do not allow them to enter into those contracts. Once they have passed those tests and demonstrated competence, we treat them as adults in that context, and allow them to enter into legal contracts and hold them responsible for the consequences of those choices.

I understand that this idea is radical and provocative given our current traditions. However, I also believe that it is uncontroversial in its sensibility and simplicity. I publish it to begin a dialogue on the subject. What your thoughts?