n-Financial Theology - The Religion of Credit Rating Agencies And De Facto Default

1. In the previous blog it was asserted that default is a structural Invariance. Just so we are clear: Invariance is a fancy term for what ancient philosophers called 'truth' or something you had personally solved or found and were willing to pass on to the next generation as a matter of inter-generational survival. We might even call it religion, from "re-ligere" to re-tie, to re-link, to re-connect the rules of the heaven and Earth. Religion, the anthropologists tell us, is the original emergence of cosmogony and cosmology. Later this fount of knowledge is abused by the priestly class for the purposes of self-survival...but that is another story. For micro-cosmic purposes de facto default is for all intents and purposes of financial physics and financial theology, the same. For "de facto default," see: http://video.ft.com/v/1036970088001/De-facto-default-

2. The truth guardians of the financial markets are the credit rating agencies. So big is their influence on the way the world works because of a fundamental question they must answer: Is a particular financial obligation X going to be paid in full on time?

3. We, that is, every non-credit rating individual in the world, depend on the credit rating agency to speak the truth. They are the last bastion before the liars and jokers defraud us of our hard earned wealth. If they were politicised, regulatorily captured, conflicted in their conscience, then default as an invariance could be put off forever, and by definition, the reality of default be made into nonsense.

4. To get a flavour of how the rating agencies participate in the ritualisation of market truth, where market truth is the pronouncement of DEATH via default, see: http://www.zerohedge.com/article/ecb-finds-rating-agencies-have-suddenly-found-religion-it-prepares-flip-flop-accepting-greek. Note the title of this article-> "As ECB Finds Rating Agencies Have Suddenly Found Religion, It Prepares To Flip Flop On Accepting Greek Bond Collateral.". Also, see Moody's castration of the Chinese debt in: http://www.zerohedge.com/article/moodys-july-4-bomb-rater-finds-10-chinese-gdp-bad-debt-claims-china-debt-problem-bigger-stat. For the classic anthropological perspectives on the rites of passage and the micro-rites of passage concerning death, see Van Gennep and Robert Hertz. (Hint for the budding social anthropologist: there's a functor between the category of [rites of passage] and [funerary rituals of death].)

5. In simple category terms, let the objects A, B and C represent [actions of any and all market participants], [actions of a credit rating agency], and [default or not-default]. Clearly, the morphisms f:A->B, g:B->C, and h:A->C, where h:gf, form a 1-category. f is in the most general sense the transformation of market noise to market information, and g is the transformation of market information to credit rating, and h is the de facto rating by the markets. So, h:gf indicates the convergence of truth and the approximate truth in C.

Challenge: if you can draw the category in 5 and walk through each of the objects and morphisms, you can see the basic structural paths of financial market beliefs.