How to Profit from Chinese Downgrade of American Debt

Although the United States was able to maintain its AAA credit rating with the top three ratings agencies after it avoided a default on its debt, a little known Chinese rating agency has lowered its rating of American debt from A+ to A with a negative outlook. Earlier this week, President Barack Obama and Congressional leaders were able to avert a possible financial disaster when they agreed to a compromise that allowed the federal government's debt ceiling to be raised. While the United States was able to escape the fiscal crisis with its sterling credit rating unchanged by Moody's Investors Service, Fitch Ratings, and Standard & Poor's, the upstart Chinese rating agency wasn't so charitable. Among the reasons for the downgrade by Dagong Global Credit Rating were "defects" in the American political structure. Dagong Global Credit Rating said that "the difference in political views between the Democrats and Republicans has been acting as a curb on the decision-making efficiency of the US government ever since the mid-election in the US. The decision on the debt limit concerns the sustainability of government financing, the safety of the US and world economy, as well as the interest of the Treasury holders; at this crucial juncture, neither the Democratic Party nor Republican Party has shown any consideration for the general interest in order to argue for their own partisan interest." Dagong Global Credit Rating also said that raising the debt ceiling was only a temporary fix and actually made the United States government's problems worse because the move would increase the country's deficit. The rating agency also pointed out that although the raised debt ceiling was supposedly offset by spending cuts, the proposed spending cuts would be inadequate once inflation is factored in because the spending cuts would take place over the next eight years. Dagong Global Credit Rating went on to say that "in order to maintain the current debt size it is necessary for the US to cut its deficit by at least $4 trillion within the next 5 years; obviously the deficit cut program approved by the Congress cannot meet the demand of debt deduction, in addition it reflects a declining willingness of and increasing difficulty for the government in cutting the deficit, which will be unable to provide strong support to the current credit rating." The credit rating agency also warned that America's abilities to pay its long term debts would be in question as long as the country's spending outpaced its economic growth. This isn't the first time that Dagong Global Credit Rating has lowered the credit rating of United States debt; last fall Dagong lowered its rating in response to further loosening of monetary policy. While some may question the motives of the Chinese ratings agency, it's worth noting that China holds nearly $1.2 trillion worth of American debt and much of its economic growth has been fueled by American dollars, so any major weakening of the dollar or the value of American debt comes at a major cost to China. There are a number of ways for investors to play the downgrade of American debt by the Chinese rating agency. For those who see the downgrade as some sort of political snub, the iShares Barclays 20+ Year Treasury Bond TLT and the iShares Barclays 7-10 Year Treasury IEF are worth looking into. Although it came down to the last minute, common sense persevered and a deal was struck that prevented a default of American debt. Those who believed that there was no way that President Obama and Congressional leaders would actually allow a default to occur were proven right. If the move by the Chinese rating agency was based more on politics than economic reality, American treasuries may still be a good long term investment. On the other hand, the Chinese rating agency may just be guilty of being more honest than the better known Moody's Investors Service, Fitch Ratings and Standard & Poor's. Does the United States really deserve the highest possible credit rating when the ability to service its debt was only saved by a last minute deal that was more of a temporary fix than a long term solution to the underlying issues? Investors who feel that the outlook for American debt is becoming increasingly negative might want to consider the ProShares UltraShort 20+ Year Treasury TBT, it's price could rise considerably if the Chinese rating agency proves to be justified in its downgrade . For those who feel that the bond market is too risky at this point and are looking for a safe haven to put their funds, the CurrencyShares Swiss Franc Trust FXF and the SPDR Gold Shares GLD are two ETFs to consider. Investors who prefer the high growth rates of stocks but are worried about the future of the American economy might want to look into the iShares FTSE China 25 Index Fund FXI, the iShares MSCI Brazil Index Fund EWZ and the iShares MSCI Australia Index Fund EWA. Each of these country's economies have a lot going for them and if the dollar comes under further pressure, the relative values of their stock prices could climb even higher.