Insanity: Getting Worked Up Over One Company's Slight Change Of Opinion In The Creditworthiness Of The US
from the it's-an-opinion dept
You may have heard (or, at least, I hope you heard) that, late Friday, S&P downgraded the US’s credit rating from AAA to AA-plus, causing all sorts of hair pulling and worry. Here’s the part that makes no sense: S&P’s rating of the safety of US debt is simply an opinion. It’s certainly a high profile opinion, but it’s still an opinion. What I can’t figure out is why anyone is making a big deal of one private company making a slight change to its opinion. People are acting as if this change is a change in facts. They’re acting as if an S&P downgrade actually makes US debt less trusthworthy. It does not. The US may very well not be that trustworthy on its debt (in fact, I find that argument quite compelling these days), but having one company say that is meaningless.
We’ve discussed this before. For absolutely no good reason, the US government decided to put the opinion of various rating agencies into law, requiring certain institutions to maintain certain percentages of “highly rated” bonds in order to engage in certain activities. The insanity is that it effectively forced the world to think about ratings from S&P and Moody’s as if they were fact, even though they’re really just opinions. And to do all of this even if their ratings go against one’s own opinion. And, of course, we all know that the ratings agencies are far from perfect, and have an unfortunate history that suggests that, at times, they’ve succumbed to pressure.
So, even if you believe that the US government’s financial position is a disaster (and, again, a case can be made for that), it’s crazy to pretend that one company changing its opinion (just slightly) has any actual meaning. Most of the market can and does make its own decisions on the creditworthiness of US debt, no matter what S&P says. In other words, the (slim) risk of the US actually defaulting is already priced in. The S&P saying what people are already thinking doesn’t mean that anything fundamental changed… other than its opinion.
Markets are made based on the interaction of buyers and sellers. Not the (sometimes questionable) opinions of just a few firms.
Filed Under: debt, economy, opinions, ratings, united states
Companies: s&p
Comments on “Insanity: Getting Worked Up Over One Company's Slight Change Of Opinion In The Creditworthiness Of The US”
Well, I wouldn’t trust the US government to give me the correct time of day. Let alone trust them with money.
How can you run a country where you continuously spend more money than you make and still expect you can get a good rating?
I understand the whole idea of ‘you’ve got to spend money to make money’, but in this case, it feels more like spending money for the sake of spending money. It’s not as if the US is getting better because of it.
And let’s just ignore the crazy amount of money that elections cost. I’d say vote for the person who tries to make it to the White House on the smallest budget possible.
Also, sure it’s nice to hear that you have a AAA-rating, but what does it mean, and how is AAA better than AA+? What is the difference? Why not have an A-B-C rating or a 1-10 scale?
Ok, I’ll stop rambling now.
Re: Time of day...
Most people do trust the US government to give them the correct time of day, actually.
http://www.time.gov/timezone.cgi?Mountain/d/-7/java
Now spending money – I have to agree that spending less than you make seems reasonable.
Re: Re: Time of day...
I dunno, I think I’d still prefer the one the rest of the world gets its time from.
wwp.greenwichmeantime.com/
Re: Re: Re: Time of day...
Count me out of the rest of the world, cause I usually set my NTP to an atomic clock server setup within the US.
Re: Re:
AAA is considered prime lending. No default risk at all. A drop from that point means there’s at least some risk of default, which means the debt will cost the US more to maintain, as lenders will require more interest to cover the risk, no matter how slight that is.
The difference between AAA and AA+ might be half a percent in interest. Doesn’t seem like a lot, but on a debt in the trillions of dollars, it can hit hundreds of billions of dollars extra every year in interest.
That has to be factored into new budgets, which are already heavy with red ink.
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And not only that. Contracts on everything you can think of are based on those ratings; a switch of rating triggers different clauses, so that the trashy opinion of an agency has very real repercussions everywhere from financial shenanigans to the main street.
The article is very simolistic…
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=simplistic.
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The point is that IF there is a risk of default now – as S&P have indicated is their opinion – it already existed prior to the downgrade. Nothing significant has changed.
If the default risk grew substantially but the three ratings agencies kept the U.S. at AAA, would that mean the risk doesn’t exist? Of course not.
Why we leave our economic well-being in the hands of dubious, private, for-profit companies with a recent history of making horrible decisions (AAA sub-prime mortgage packages?) is beyond me. I think that was a point Mike was making.
Re: Time
> Well, I wouldn’t trust the US government to give me the correct time of day.
Wait, what?
Most of the world trusts the US government to give them the correct time of day. One of the most common (perhaps THE most common) primary time sources all over the world is the GPS constellation (mainly because it is really convenient – no need for a cable to the national laboratory, you just need an antenna). And who adjusts the GPS satellites’ time? The US government.
Re: Re: Time
I said *I* wouldn’t trust them. That the rest of the world is that misguided, then that’s their problem, not mine. 😛
Re: Re: Time
I don’t think that the US government has been giving North Korea the time of day. Perhaps that’s why they are 50-75 years behind the rest of the civilized world. I vote that the US government start giving North Korea the time of day, so they can join us in this century.
Re: Re:
Well, I wouldn’t trust the US government to give me the correct time of day. Let alone trust them with money.
You use dollars don’t you?
So you DO trust them with money!
ow can you run a country where you continuously spend more money than you make
Oh no! you’ve fallen for the “government finance is like household finance fallacy.
The basic point is that what you call money is in fact (mostly government) debt. The sum of all the debits and credits in the world is a big fat zero. If you want to have some credit in your bank account then someone else somewhere has to have a deficit.
The fact is that the government pretty much has to run a deficit in order to keep a supply of money in the economy. It is true that things go bad if the deficit goes too big – but they also go bad if the deficit gets too small (cf the 1930’s).
The first problem with ratings agencies like S & P is that their main business is rating the creditworthiness of businesses. This is different from rating the creditworthiness of nations – and frankly I think they should simply not be doing it.
The other problem with ratings agencies is tha the people that work in them are not politically neutral ( no one really is). Consequently their ratings tend to push a certain political agenda. Big, first world countries like the US have in the past been able to ignore this because they got top rating more or less automatically – but it has wreaked havoc in the 3rd world – where a po faced idea of financial “soundness” has led to economic collapse and people dying.
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Richard – can you elaborate on this fallacy? or supply a link that explains this thinking. it always seemed to me a straight-forward analogy so i’d like too see why i’m wrong.
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Quite a good link here
http://www.loansafe.org/comparing-government-to-household-is-fallacy
Re: Re: Re:2 Re:
So basically, because the US can print money, you can’t treat it like a household. This is baloney. The free market will punish anyone who tries to abuse the system. The US has to buy stuff from other countries. Yes, the US can’t go “broke”, but eventually, no one will take their monopoly money if they keep printing it off. The US is lucky that the US dollar is the only currency accepted for oil. Once that changes, your dollar will crash, and everything will become expensive.
The household analogy is useful because fiscal discipline is a good quality, for people or governments. The punishment for fiscal mismanagement is just different.
Re: Re: Re:3 Re:
So basically, because the US can print money, you can’t treat it like a household. This is baloney. The free market will punish anyone who tries to abuse the system.
The free market requires a system of exchange in order to even exist. Governments that print money are in the business of supplying this requirement. The free market depends on them – not the other way around. The free market cannot punish the US government without committing suicide.
The US has to buy stuff from other countries.
Which is why the number that matters is the balance of payments – not the national debt – as I pointed out elsewhere in these comments.
Re: Re: Re:3 Re:
Most households can’t arbitrarily increase their income because they want to, Nations can.
A better ‘household’ analogy would be to assume your own personal income was a percentage of what everyone else on your block earned/spent (i.e. income/sales tax). When people on your block curtail their spending it reduces sales tax. This causes some of your block goes out of business due to slower demand and now they don’t have income so your income now goes down again.
If your response is to cut your spending, even more people go out of work and your income goes down yet again. It’s quite the fun cycle.
OR you can provide the now unemployed people a stipend to tide them over until the economy improves. This gives them some money to spend and keeps other ‘households’ on the block from going out of business thus making the downturn less harsh and the recovery quicker. Bonus points if you had everybody on the block pre-pay into a fund to pay this unemployment amounts (which the US does do).
Oh and you can’t cut enough to balance your books. The only thing you can possibly do is to increase your income through more economic activity.
But lets keep cutting because it ‘sounds good’.
The old adage “Vote Republican, it’s easier than thinking” applies in spades…
Re: Re: Re: Economics of the Federal Deficit
Teaching the Fallacy of Composition: The Federal Budget Deficit should help with one aspect of the confusion.
Another aspect is that the “federal deficit” is so poorly defined as to be meaningless: The Concise Encyclopedia of Economics: Federal Deficit.
Re: Re: Re:2 Economics of the Federal Deficit
Great Link
Thanks
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‘You use dollars don’t you?’
Read his profile. He’s in the Netherlands, so no, in fact, he doesn’t use US dollars.
Re: Re: Re:
The sum of all the debits and credits in the world is a big fat zero. If you want to have some credit in your bank account then someone else somewhere has to have a deficit.
If you believe that a bank lends an amount of money equal to deposits, they you don’t understand how the financial system works. Banks typically lend more money than they have on hand.
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Banks typically lend more money than they have on hand.
This has no effect on the basic accounting identity – if you count everything up correctly.
The bank has simply created a debt-credit pair (just like an electron-positron pair)
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No I use Euros. You mistake me for an American.
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Even as a UK citizen I have to use other countries’ money from time to time I’ve used Dollars, Euros, Swiss Francs, various types of Kroners, Rand, Roubles, various dinars etc – I assumed that even if you weren’t an American you would still use dollars occasionally.
Re: Re: Re:2 Re:
But having to use the money doesn’t mean trusting the issuing organization 🙂 (that too is a fallacy)
Re: Re: Re:3 Re:
Using the money does imply trusting the issuing organisation to some extent – it does not of course imply that you think they are competant – merely that their organisation has sufficient inertia that the money will not lose its value significantly during the period for which you hold it.
If you had visited Zimbabwe a few years ago you might well have declined to use their money on the grounds that you didn’t trust it.
Re: Re: Re:4 Re:
I wonder if while visiting the US I try use anything but US currency…..
even if I don’t trust the currency.
Re: Re: Re:4 Re:
I wonder if while visiting the US I try use anything but US currency…..
even if I don’t trust the currency.
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And your government buys US T-bills. So yes you do ‘trust’ the US by way of your elected officials. Try not buying T-bills if you can…they are the grease on the global economic axle’s.
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Yes I understand that my money comes from the government. (even here in Euro-land)
But, it’s actually quite simple to understand balancing.
You have a ledger sheet where you write down your expenses.
And you have a ledger sheet where you write down your income.
And the trick to making the balance is to somehow find a way to have about the same, or preferably less expenses than what your income is.
Obviously, that doesn’t work all the time.
Sometimes you have to spend more than you make, that’s when you tap into reserves or take out a loan.
This all also works for countries.
But in the US’ case (and no doubt the case for many other countries, like for instance Greece), they’ve been spending more than they make for quite a number of years.
And that’s just not a long-term tenable situation. Someone has to pay back those loans as well.
But because the balance is such that they don’t have anything left except for a big gaping hole in the budget, the US can’t pay back what its owed.
Sure, a country may not be the same as my household, but balancing for a country works the same way as balancing for a household, just with bigger numbers.
Fact is, if you keep spending more money than you make, you have a serious issue, and you need to figure out where you can cut spending AND/OR increase income.
In the case of the US there is a huge amount of extra income to be generated through the raising of the taxes for higher incomes (you know the people who have been tax exempt, because they ‘create jobs’ (in other countries)). That’s why, for me as an outsider, it was quite bizarre to see how that just wasn’t acceptable for the republican extremists (the tea party favourites).
Every economist said: the only sensible thing to do here is to cut costs and raise taxes.
But noooooooooooo, we’re having none of that, we’d rather risk defaulting the entire country (and do more damage than any terrorist could ever do) than raise a single tax for the so-called job-creators (who don’t really create jobs for Americans).
Re: Re: Re: Re:
I agree with a lot of what you said however, on the technical point:
And the trick to making the balance is to somehow find a way to have about the same, or preferably less expenses than what your income is.
The critical differences between a household and a state are.
1) A state can inflate its debt away by printing more money*.
2) Whatever a state does on the expenditure side has an impact on the income side so cutting expenditure (or raising taxes) can cause income to fall too.
It follows that the methods that work for a household dimply don’t apply to a state.
* Of course Euro members are in a slightly different position. Greece, Portugal, Ireland, Spain and Italy gave up the ability to print their own money – which is (arguably) why they are in the current mess – until Germany either agrees to print money for them – or leave the Euro itself.
Re: Re: Re:2 Re:
Printing more money does affect the value of said money. A process generally known as inflation, and there have been countries where they’ve printed so much money, that bread costs somewhere in the 6 digit range.
There are very definite downsides to just printing more money in order to get rid of debts, maybe not for the governments per se but for their constituents definitely.
It’d be better to find a sustainable solution, and that’s by making the balance more even. In so far as expenses and incomes more on the same level.
Re: Re: Re:3 Re:
Printing more money does affect the value of said money. A process generally known as inflation, and there have been countries where they’ve printed so much money, that bread costs somewhere in the 6 digit range.
Never said it didn’t – the core point though is this.
The government runs its finances primarily by looking at the effect its actions have on the wider economy and can ignore its own private balance sheet.
A household runs its finances by looking at its own internal balance sheet and can ignore the impact it has on the wider economy.
Sometimes the two will make similar decisions – but for completely different reasons.
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Upon reading the link you gave Richard, I have the following to add.
Sure, the US is not at risk of dying.
So, the money lenders have very little risk that the country is going away anytime soon. But that isn’t a 100% given certainty.
And at some point, you have to wonder: “are we doing the right thing?” At least, if you keep digging yourself deeper in debt for billions a year.
Money is, if you really think about it, already a bizarre thing, because where does it really come from, and why does it have such a weird effect on society?
But if countries can spend money willy-nilly, what would be the point of keeping a balance? Why not just keep spending without any regards for what comes in. After all you can just turn over the debt and bring in more money, right? “The sky is the limit”?
In fact, what would be the point of money? Would we really need it?
Re: Re: Re:2 Re:
But if countries can spend money willy-nilly, what would be the point of keeping a balance?
As I said in my original post governments are not completely unconstrained in their ability to increase debt. Essentially the trick governments have to play is to keep economic activity at the right level. Since government debt effectively forms the supply of money for the rest of us then getting rid of it would leave all of us broke (or at least using Gold or barter).
The other part of the supply of money is bank loans in excess of bank assets.
When we hit the credit crunch the banks stopped lending – reducing the supply of money and threatening a recession. Governments stepped in to fill the resulting hole – which is one reason why their debts went up.
The problem with government debt is that it is a red herring. The real number we should look at is the balance of payments. That is the aspect of national finance that really does resemble household finance (and btw it has been going south in most western countries ever since we decided it was a good idea to let our economies be dominated by middlemen profiting from good imported from other countries.)
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Thanks for your input, we will put it where it belongs (Circular Filed, under non-citizen) course neither do the actual citizens so don’t feel to bad…
And no most of the economist, I work with for what its worth, agree with you (neither does Greenspan (about the best their is), as he stated on Meet the press yesterday, – Lowering Government expenditures has less negative impact on economy, and many benefits, but raising taxes has a short term improvement in government revenues, but retards the economy both short and long term)
The IMF also doesn’t agree with your speaking head economist either.
Re: Re: Re:2 Re:
Lowering Government expenditures has less negative impact on economy, and many benefits, but raising taxes has a short term improvement in government revenues, but retards the economy both short and long term
An overgeneralisation that seems to depend on faith (backed by not a little self interest) if you ask me.
Re: Re: Re:3 Re:
Let us take this theory to the extreme. Do you believe that zero tax, zero government spending would work?
I thought not. So there is a point at which raising taxation would be prefereable to lowering expenditure. The remaining question is whether we (in any particular country) are above or below that point now? That is clearly something that requires detailed analysis and a sweeping statement like the one you made simply cannot possibly be the answer.
Re: Re: Re:4 Re:
Let us take this theory to the extreme. Do you believe that zero tax, zero government spending would work?
“Work” as in allow the economy to operate at a high level?
Absolutely.
Re: Re: Re:5 Re:
You will be invaded by Canada since you will have no defence forces.
Before that of course you will have anarchy be cause there will be no police force and all the prisoners will walk free when the prison guards knock off because they aren’t being paid…
do I need to go on?
Re: Re: Re:6 Re:
Not if you privatize the police force.
Re: Re: Re:6 Re:
LOL your a cute troll… Lets take things all the way to the other side…
Everyone’s a prisoner, Law enforcer, Military agent, criminal, slave, or overseer… Orson would be proud of you… Bread now coasts 200 million dollars, and you stand in long lines to get it. (Hmmmm sound like anywhere else in history? if not i would recommend a basic class in History)
Its fun to play the game…
Back to reality, no one advocated zero taxes, but as all true analysis shows (not your website, with a DNS Server listing as Antichrist. and Christ.) a point is reached with tax level and economic output where things level out (and the Government reaches maximum revenues). This isn’t the high side or the low side, but some where in the middle. Given the current crunch right now you need to boost the Economic output, so you lower the taxes, allow the economy time to ramp up, then you begin to incrementally raise taxes if needed (dependent on spending), now if you as the government are spending less (why all the pork-barrel spending? creates no jobs), you do not need the revenue, or maybe you want it to pay down the debt much quicker, you can do this and while economic output will be retarded, it would be considered a bump in the road as you made sure to do this only when things are moving along robustly.
You problem right now comes in many facets, credit is hard to get, government is murky on regulations and taxes (we know about 5000 new regulations came from our beloved leaders this calendar year), and know really knows what that stupid disaster of a health care reform will cost (14 trillion was the last number I have heard). So when things get unstable and murky businesses must hold on to liquid assets (i.e. cash) before making investments in people and the like. A clear message and the backbone to do it would solve about half the problems in economy alone.
Re: Re: Re:6 Re:
The Baldwins have been attacked by Canada!
Re: Re: Re:7 Re:
Back to reality, no one advocated zero taxes,
Sorry – you did:
“Lowering Government expenditures has less negative impact on economy, and many benefits, but raising taxes has a short term improvement in government revenues, but retards the economy both short and long term)”
You didn’t say “at current levels of expenditure” you made the statement as if it was universally true. If the statement is universally true then logic would drive spending and tax down to zero.
Once you admit that there is a sweet spot then it isn’t enough just to make your original sweeping statement, you have to come up with some justification as to why the sweet spot is at lower levels of tax/spend rather than higher. That is a complicated argument beyond the scope of this forum and you certainly haven’t offered enough evidence here.
Re: Re: Re:6 Re:
You assume that taxes and government expenditures are the only way to pay for those things, and therefore if the government doesn’t provide it, it must not exist at all.
This is incorrect.
Re: Re: Re:3 Re:
Technically the money your so proud that the Government can just print is all based on Faith…
And and no faith at all, just look at the cold hard numerical facts from the reports, i recommend a compare and contrast of say Jimmy Carter, and Bill Clinton (the years, look at tax rates vs revenue vs GDP, as one simple comparison)
But oh wait your married to the idea of BIG Government and print our way free… no room for debate or free thought… le sigh…
Re: Re: Re:2 Re:
There is a reason austerity rarely works short-term. Medium and long term, it can work, but it has to be coupled with ‘rational’ economic policies, rather than rational economic policies.
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No Richard, wealth is not zero sum.
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Wealth is not zero sum – but money is.
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Why don’t you understand?
It’s just a matter of time until we ae downgraded to AA-check-minus!
And then it’s just a slippery slope from there until AA-frownie-face!
Didn’t you learn anything from elementary school quiz grading systems?
Re: 1
@Marcel de Jong:
For a good time call (303) 499-7111
Marcel de Jong wrote:
“Well, I wouldn’t trust the US government to give me the correct time of day?”
Re: Re: 1
Yes, and sound takes time to reach a destination… so how accurate would that time be, if I called FROM THE NETHERLANDS to find out what time it is in New York city using that phone number? 😛
The US government writing rating agencies’ opinions into the law made those companies opinions into financial facts.
Too much
Marcel,
i think you are completely out of line with your remarks. I am positive that the US government can give you the correct time of day. It’s only a question of finding the right corporation to do the job, or perhaps forming a committee of in-house governmental experts on the subject of time, time-telling, and its implications thereof on the general public.
Giving the correct time is a mission that the US government can undertake and fulfill successfully, without raising the debt ceiling more than a few hundred billion dollars.
So shame on you, Marcel!
Not only is it an opinion, but weren’t they some of the same crowd that passed positive opinions about the banks and their issues? The ones that got us into trouble in the first place?
“Oh, the housing market is just dandy, and here are some juicy mortgage derivatives you can bet the farm on-they’re AAA+ credit worthy!”
Sure.
Re: Re:
ut weren’t they some of the same crowd that passed positive opinions about the banks and their issues? The ones that got us into trouble in the first place?
“Today the credit rating of the US is reduced to AA+”
== “what we said yesterday was wrong”
So why should we believe them today?
No one’s worried about the country defaulting. We know it won’t but the downgrade has a real and tactile affect on the population, especially those already on the edge. Make no mistake this is bad in real dollars and once again the poor and middle class are going to bear the brunt of it.
Also how does using one experts opinion as fact based upon evidence change anything about our system? This is done throughout scientific communities, the preponderance of evidence says that asbestos is bad so it is made into law, the preponderance of evidence says that cigarettes are bad so we make it into law. The preponderance of evidence says investing in AAA rated institutions is the least amount of risk, especially for those most at risk. Not really different than anyone else, there are a lot of actuaries behind the downgrade and they deal in numbers.
Re: Re:
Also how does using one experts opinion as fact based upon evidence change anything about our system? This is done throughout scientific communities, the preponderance of evidence says that asbestos is bad so it is made into law, the preponderance of evidence says that cigarettes are bad so we make it into law. The preponderance of evidence says investing in AAA rated institutions is the least amount of risk, especially for those most at risk. Not really different than anyone else, there are a lot of actuaries behind the downgrade and they deal in numbers.
In the cases of asbestos/cigarettes we make a specific pre-existing opinion into law.
With the ratings agencies we give them a blank cheque for any opinion they might come up with in the future. This is VERY different.
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It is different, asbestos can be proven to cause harm in tissue, not only statistically. Using animals models(i.e. guinea pigs) you can see them develop tumors because of exposure, that is pretty much conclusive, now trying to measure intentions is at best a guess and estimate not something sure, that is the difference.
People actually tried that one was the psychiatrists that thought they could diagnose people and were proven wrong in a spectacular way by means of the Rosenhan Experiment and by Greenspan absolute faith on Game Theory which is based on the sole assumption that everybody will do things because of their self interest but if ever some players become selfless those equations from the Nash Equilibrium become something else there can not be any other psychological items for it to work and if there are they fail spectacularly just like Greenspan failed to noticed that a financial market without regulation would fail spectacularly, the math is flawless the assumptions underlying that math are a problem though.
Trying to measure the level of what others will do or choose to do is not possible at the moment and I’m not sure it will ever be possible to quantify it, so I do agree with Mike that what those agencies do is to base things on guesses and politicians have made the dumb idiotic move of codifying it into law which as noted by some have real consequences for people.
Is like trying to estimate how much of a chance the US government had of pulling out of the ICBM Treaty, for 30 years nobody would have bet on it, but then came Bush Jr. and changed everything. So the USA can be triple-A but if some crazy dude comes along and decides the US needs to default to save its own ass that would make that rating meaningless.
Just trying to enforce your point there.
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Yes. This. You can say, “The ratings agencies’ opinion shouldn’t matter all you want,” but my understanding is that the change in rating directly equates to higher interest rates on US debt. In that respect, it absolutely does matter, and there is absolutely something to get worked up about.
Unsuprising really
Not an economist but by observation 80+% of economics seems to be based on a perception or “leading opinion” and herd following anyway. When you start picking apart the decisions and results that come out of the abstracted models that most of it is based on it looks pretty shaky to me.
The reasons for the changes in 1 direction or another rarely seem to make logical sense applied to the “real world” of products and services and people. So to me this kind of “Team America”-style hand-waving panic response is at the very heart of global economics.
These are the same guys who rated mortgage backed securities AAA, and we all know how that turned out.
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Damn you beat me to what I wanted to point out.
“Internal rating agency emails from before the time the credit markets deteriorated, discovered and released publicly by U.S. congressional investigators, suggest that some rating agency employees suspected at the time that lax standards for rating structured credit products would produce negative results.[7] For example, one email between colleagues at Standard & Poor’s states “Rating agencies continue to create and [sic] even bigger monster–the CDO market. Let’s hope we are all wealthy and retired by the time this house of cards falters.”[8]”
source – https://secure.wikimedia.org/wikipedia/en/wiki/Credit_rating_agencies_and_the_subprime_crisis
Re: Rating Firms Blew it Before
Correct. There is also an inherent conflict of interest in many ratings. The companies seeking a rating pay the rating firms. The rating firms consequently and not surprisingly tend to give favorable ratings.
Re: Re: Rating Firms Blew it Before
Another reason why you can’t blame the free market for the 2008 meltdown. The fact that the security _sellers_ needed to get the rating was made law. This makes no sense. When you want to buy a house, _you_ hire the house inspector. You wouldn’t trust a house inspection commissioned by the seller of the house. There is too much risk of conflict of interest.
Lets tax wealth!
If you have over 2 Million dollars of wealth you get taxed at 2% of that wealth.
Income tax should be capped at 10% of the amount over 50K.
No deductions No expenses.
Companies get taxed at the same rate as individuals.
Then we deal with redistributive change, by getting rid of it.
Re: Re:
Let’s tax wealth
A bonanza for the tax avoidance accountants.
I prefer Morton’s Fork.
As has been pointed out by one interviewed analyst on CNN international, these are the same guys that gave Lehman Brothers a Triple-AAA rating just before it went belly up.
Grains of salt all round.
Opinions matter
“Hello, Mr. Patient? This is the Doe Medical Office. Dr. Doe saw a shadow on one of your X-rays and would like for you to come in for more tests at your earliest convenience. This is nothing to worry about.”
The shadow is a fact. The interpretation is an expert opinion. Call the shadow our profligate government spending and debt load. The interpretation is the rubric by which a rating agency (expert opinion) assigns a particular rating.
Add to this phone call the knowledge that you have a family history of cancer and you’ve been living an extremely high-risk lifestyle for years. You’ve also had some severe symptoms the past three years or so. Would you get “worked up” about that phone call?
I’d like to say that I’d be completely calm and reasonable. But the stakes are high and this is not something I’ve personally dealt with, so who knows… At the very least, this is going to cost me more time and money, so it is already a real impact, regardless of the final outcome.
Don't know what you're talking about again.
Hi Mike,
Normally I’m used to posting in response to your demonstrated ignorance on patents. It’s nice to see that you’re broadening your interests. Good for you!
It actually does make a difference. Some organizations have stated policies that say “thou shalt not own debt that is not AAA rated.” So now all these people need to figure out whether they need to sell their U.S. treasury holdings, ignore the S&P rating in favor of Moody’s rating (where that’s an option), or amend their policy (so they can hold U.S. debt, and the debt of other AA+ rated countries). That probably translates into at least some selling.
Do you understand now how your claim is incorrect?
XXOO, Anonymous
Re: Don't know what you're talking about again.
All based on someone’s opinion and not real fact.
The fact is that the US government hasn’t ever defaulted on a loan. That’s why they had a AAA rating despite several trillion dollars of debt. Why allowing another trillion of debt (they don’t actually owe that much more yet) changes that fact, I don’t know.
So remember, if your job gets screwed by this downgrade, it’s not the US government’s fault (they’ll be doing exactly what they’ve been doing before this) it’s S&P’s fault (and those that put too much stock in their opinion).
Re: Re: Don't know what you're talking about again.
Quote:
Just a little correction, the US also never paid any loans that they took, you can read all about it when other countries try to collect from the US government, they all complain that the hardest country to collect anything is called United States of America, it is also a meme on diplomatic U.N. corridors according to some inside sources(now retired sources probably).
Re: Re: Don't know what you're talking about again.
Never defaulted? How about promising to pay back debt in gold, and then changing their minds unilaterally in 1971?
Re: Don't know what you're talking about again.
…demonstrated ignorance on patents.
Underhanded and unnecessary.
they need to sell their U.S. treasury holdings
They don’t want to do that since they won’t get face value.
ignore the S&P rating in favor of Moody’s rating
This is what most organizations will probably end up doing. This doesn’t force them to lose a ton of money short term, and still fits within their policy.
amend their policy
Most organizations won’t change their policies. There’s no point in having policies if you don’t enforce them as they are.
Hugs,
TC
Re: Don't know what you're talking about again.
Like anonymous, I am appreciate the fact that you have delved into this issue. Of particular note, your analysis was quite rationale.
Since this whole debt ceiling/budget issue has blown-up there has been an immense amount of disinformation and word parsing to obfuscate what is really being said. The principle one being the phrase “debt reduction”. There is NO proposed debt reduction. From what I can tell, the current plan of the Administration is to spend slightly less in the future than originally proposed. Since the Congress and the President have not proposed an honest or logical solution to deficit spending, a downgrade in the US credit rating would seem appropriate. (Even though the rating firms themselves have not exactly proven to be honest either.)
The misleading budget game plan exposed. As a quick allegorical summary. When Obama took office he proposed to buy an allegorical $100,000 luxury car, instead of (blame) Bush’s $30,000 clunker of a car. The people get upset and begin to demand that Obama cut back on his proposed extravagant spending.
Obama comes back with a counter proposal to now buy a more modest $50,000 car. He then claims to have “saved” the American people $50,000. What is NOT mentioned is that he is still proposing to spend $20,000 more than originally proposed under (blame) Bush.
There will be NO reduction in the allegorical US credit card balance statement. If one keeps adding to their credit card balance, at some point – a lower credit score is justified.
Re: Don't know what you're talking about again.
Considering that you’ve failed to point out which part of Mike’s opinion is incorrect… no, I don’t think he ‘understands’. Of course, your devilishly good logic and argument skill may have swayed him from the Dark Path… Mike, feel free to say so if that’s the case.
Mike is talking about the insanity of allowing an opinion system dictating the very things you’re talking about happening. Or, more accurately, he’s talking about the insanity of allowing the opinion system create the worry that what you’re talking about would happen. So, how is he wrong in that? Oh! Wait! It’s an opinion! Impossible to be ‘wrong’. Oops.
Opinions may be misinformed, but I certainly don?t see anywhere (outside your opinion) that he?s misinformed, so? again, oops.
And congrats on the meta-fail logic there. First, attempting the logical fallacy of ‘because Mike is wrong about patents, he must be wrong here’, and dash in a bit of strawman since patents have nothing to do with this. And top that all off with the fact that “Mike is wrong about patents” is your opinion (evidenced by the fact that you support your claim with exactly nothing, but still say ?demonstrably wrong?), and we have a nice pile of fail. Great way to start your week. Hopefully, nowhere to go but up.
Re: Don't know what you're talking about again.
Normally I’m used to posting in response to your demonstrated ignorance on patents. It’s nice to see that you’re broadening your interests. Good for you!
Ah, condescending opening that isn’t just silly, but wrong. We’ve talked about financial stuff plenty over the years.
It actually does make a difference. Some organizations have stated policies that say “thou shalt not own debt that is not AAA rated.” So now all these people need to figure out whether they need to sell their U.S. treasury holdings, ignore the S&P rating in favor of Moody’s rating (where that’s an option), or amend their policy (so they can hold U.S. debt, and the debt of other AA+ rated countries). That probably translates into at least some selling.
I love the fact that you claim I’m ignorant, and then as proof make a statement that is actually in my article.
I’ll await your apology for commenting without reading.
Do you understand now how your claim is incorrect?
Considering you stated the same thing that’s in my post, no.
Re: Don't know what you're talking about again.
I don’t know what he understands, but what I see is a failure in logical thinking here.
Great example by the way LoL
When The Establishment begins admitting problems, it's bad.
And S&P is part of The Establishment.
“…it’s crazy to pretend that one company changing its opinion (just slightly) has any actual meaning.”
The only thing backing Federal Reserve Notes (we don’t HAVE dollars any more, people) is belief that those have value. I’d expect an “economist” to know about fiat currency. So a loss of trust in PAPER will ripple through. Collapse ould be quick, could be slow, but it’s definitely been signaled.
You may have noticed Rosy Scenario has been the rule since the Reagan admin, so this change is alarming — unless you’ve been awake for the last decade, then it’s just next stage of a known program. Having saddled us with endless debt that’s actually only on paper, they’re getting people ready for the inevitable “austerity” program that reduces what we get from gov’t. Not a dime less will be be spent on murdering foreigners who didn’t attack the US, but Social Security and Medicare are now “on the table”. — From a supposed Democrat who isn’t defending the foundations of the party. Obama is a just puppet of Wall Street as was Bush.
S7 P blame repubs
” … our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. “
http://www.sfgate.com/cgi-bin/blogs/abraham/detail?entry_id=94855
Re: S7 P blame repubs
Simple solution. If the US government defaults on its debts then the Congress and Senate become personally liable…
Importance of rating agencies
Your statement that the US has put the rating agency opinions into law, explains the importance of this downgrade. Most institutional investors have investment criteria based on these ratings. For those who cannot invest in anything below AAA or have an overall rating profile to maintain, this change may force them to dump their existing investments in US debt – effectively flooding the market. That would drive up the yield requirements for future US Debt, making it more expensive to raise capitol. This could put further economic stress on the country and result in further rating reductions.
However, as has been pointed out by Warren Buffet,this reduction makes no sense because the entire US debt is in US Dollars. To meet its debt payments (what the rating agencies are actually rating), it just needs to print more money. This would have negative effects on inflation, but that has little to do with the US’ credit worthiness.
Re: Importance of rating agencies
Getting paid back with inflated dollars gives the lender less value than they otherwise would get if they were paid back with the not-yet-inflated dollars that the loan was created under.
Much like if I lent you a pound of wheat with the understanding that you’d give me two pounds back, but you ended up repaying me with only a pound and a half, you could consider such a thing a default on the original terms of the loan.
The real risk
The real risk isn’t the government defaulting, it is the the devaluing of the money.
Re: The real risk
Just in case you’ve missed the last 2 years, that’s what the US and many other countries are trying to do.
Interest rates at 0%. The quantitative easing actions. Those are overt moves to devalue a currency.
Doing so has various positive effects. If the US devalues their currency, then US products become cheaper both at home, and abroad. That encourages people both inside and outside of the US to choose a US made product as opposed to a foreign product, either keeping that money in the US or bringing money from elsewhere into the US. Also, if money is easier to get (devalued), then entrepreneurs can more easily start up a company that produces jobs.
The trick is devaluing your currency at the right rate, first so you don’t end up with too much inflation, and so other countries don’t throw up tariffs or do the same thing back at you. Since this is a global recession, there obviously ends up being negotiations and agreements on how best to do these things.
Re: Re: The real risk
The risks of devaluation of currency are:
Loss of revenues for the manufacturing and services, unless it is fallowed by increased consumption, which in the U.S. it ain’t happening since the U.S. is considered to be at peak consumption times.
Devaluation means less expending since the money can buy less things.
Re: Re: Re: The real risk
Never said it was without risks.
But there are also risks in not devaluing your currency.
And I’m not sure about what you’re basing your ideas off of. Consumer spending (consumption) is waaay down from what it was, so we’re obviously not at peak.
Total BS!
Enough of this. If you haven’t read Michael Lewis, “The Big Short” — then do so.
S&P should have been dragged up in front of Congress 2 years ago… and sued by every major institutional bond buyer out there!
These bozos (along with Moodys, Fitch, etc.) were giving piece of shit bond portfolios AAA ratings and are arguably the largest contributors to the global recession we now face. Why any person or institution now listens to their ratings is an absolute wonder…
Watch the bond market collapse
Funny how you hand wave the results of this downgrade away. Here’s what’s going to happen over this week:
All those banks and other financial institutions who are REQUIRED to hold onto a certain amount of AAA rated bonds are going to scramble to replace their former USA bonds with something that is still rated at AAA. These institutions are going to take a hard hit for selling bonds no one wants and buying bonds everyone suddenly needs. That will translate most likely to higher interest rates as well as other costs across the board (You didn’t think these institutions would eat the difference did you?).
So hand wave today. And be proven FOS as the week progresses.
Re: Watch the bond market collapse
Mike isn’t hand waving. He’s not saying that this doesn’t mean anything and nothing going to change. He’s saying that this doesn’t mean anything yet everyone is going to freak the f**k out.
Re: Watch the bond market collapse
— Paul Krugman, Monday morning
Re: Watch the bond market collapse
All those banks and other financial institutions who are REQUIRED to hold onto a certain amount of AAA rated bonds are going to scramble to replace their former USA bonds with something that is still rated at AAA.
To be fair, most institutions that have requirements tend to focus on investment grade vs. non investment grade. S&P still says US is investment grade.
And, the point, again (as I raised in the post) is that any companies are required to have certain debt holdings based solely on the opinion of one firm with a bad track record
Well, I can see this morning being a prime opportunity to buy up US bonds at less than face value. Sure, banks may want to get rid of them, but individuals will want to buy them up since they will be cheap.
Now, this will most likely mean that a lot of money will be soaked up, but in the long run, it’s going to funnel money into the hands of individuals.
So, what I expect is a huge blow to the market, then a very slow but steady recovery once everyone realizes that this downgrade doesn’t mean shit.
TC
The down grade is extremely important, because when we took the dollar off the gold standard we separated its value from a tangible quality to one that’s subjective. The subjective S&P valuation is critical in believing our credits worth something. We earned the down grade. thank you voters, thank you congress. Can’t blame the president because congress has sole control over the budget. don’t like his veto power… over ride it. Cant over ride it, then you need to compromise and stop politicizing issues for personal gain.
Re: Re:
Only because we allow it to be.
I’m not saying that the opinion is valueless or uninformed… but instead of going all crazy over this and playing the blame game, how about we take a look at the numbers and see how to fix it or make a united stand behind ‘the dollar’ to show that the nation’s faith isn’t all that shaken by S&P’s opinion.
Another facet of the Opinion Problem
Here’s another issue I have with this opinion being made so powerfully affective… There’s a lot of headlines about how the Index futures are tumbling and how the Market is suffering (or is expected to suffer) because of this.
I put it in the same hat as when oil prices rise because someone runs out of milk for their cereal one morning (exaggeration, I know… but you get what I’m saying). I understand that the Market is generally risk-adverse (or at least seems so now a days) and therefore errs on the side of caution… but this seems a little excessive. When in the middle of a recession (sorry, I don’t feel like it’s as over as they claim), wouldn’t it make much more sense to say “ok, so S&P is down a grade… keep calm & carry on” so that the situation does not grow worse?
Or, to put it another way…
Choice 1: Buy into the S&P hype and definitely make things worse or,
Choice 2: Ignore the S&P and maybe suffer the consequences of buying into ‘bad debt’ (or whatever), which I don’t think all economists agree with S&P on anyway.
Re: Another facet of the Opinion Problem
Choice 2: Ignore the S&P and maybe suffer the consequences of buying into ‘bad debt’ (or whatever), which I don’t think all economists agree with S&P on anyway.
You’ve forgotten one of the rules.
The market can stay irrational longer than you can stay solvent. – Keynes
Re: Re: Another facet of the Opinion Problem
I don’t disagree with that rule… I was simply pointing out the question of taking one action that will have negative consequences versus an action that might have negative consequences.
And ultimately, I was hoping to illustrate my concern over us perpetuating a system that is not even going to give us the opportunity to make the choice. Because we’ve put so much weight behind this opinion, we can’t even choose to forge ahead in spite of the new ‘poorer rating’ because we’re all too bogged down in the mire of “OMG What does it mean!?!” running about.
As I’ve said before, basing economies on debt is a mistake that should never have been made and which needs to be rectified as soon as possible. There was an ancient Jewish tradition long ago known as jubilee, where every seventh year (if I remember it right), all personal debts would be unconditionally forgiven, among other things. Perhaps it’s something that should be tried here, in a limited sense – real people would be eligible, but not corporations.
Even Weirder!!!
Slashdot has a story up on the S&P credit rating downgrade being motivated by a math error: http://rss.slashdot.org/~r/Slashdot/slashdot/~3/et6Fp4tn4HM/SampPs-2-Trillion-Math-Mistake
It is funny.
Actually hilarious is more like it.
All those left wing nut cases who post here believing that
“my means that I worked so hard for should go to support some lay about because that person has needs” are now up in arms about the simple fact that there are only two sources of income for the average person – the fruits of their current labor and the fruits of their past labor.
Future labor can be mortgaged to support present consumption up to a point but after that point there is insufficient potential future income to support the very necessities of life. At that point future income can not support additional current consumption.
If it stop there it would be tragic for that person as that person would have effective sold himself into slavery much like the so current crop of called so called elitists are doing with college loans. Maybe some day they can pay then off but I dough it unless there is a high rate of unanticipated inflation but that is there business and if that is what they want, to be a slave, it is of no concern of mine.
Where it gets ridiculous is when they expect me to work my life away supporting myself and my family so that they can charge me high taxes as a means of wealth transfer so that they or others can lay about.
The problem in a net shell is that those who have the ability to manage a business do not feel that they should work for others and get nothing for their effort while the majority lay about. So they don’t. They set down. Because they can see that if they do work the system will simply take their work away and give it to some lay about.
And, since the managers of business do not want to work there is a high rate of unemployment. As there is no need for marginal help, off they go to the unemployment line.
But!It is morally unacceptable that people should have unfulfilled needs so governments steps in and supports these needs. All needs must be fulfilled anything less is not acceptable.
Now since the producers are not producing and there are unfulfilled needs and insufficient taxes to meet these needs there are only two acceptable solutions raises taxes, or borrow against producers future production. Under either solution producers income is reduces so producers do exactly wat slaves always do, work and produce as little as possible to get by which starts a down ward spiral. Producers stop producing as much as previously as they have no desire to be slaves, tax income current or future decreases so taxes are increased again to cover current needs.
It is hilarious.
The psychology was proven to be false centuries before the Romans tried it. [We just have better records of what the Romans did than their precursors so we have no idea of how far back the proof of the failure actually was with cave man the most likely source.] It did not work with chains in the Old South. It did not work in Soviet Russia. Nor is current form of bondage sponsored by the elitist left of government ownership and control of the means of production to support a group of lay about working.
No one in their right mind is going to spend their life working and get nothing so that a lay-abouts can continuously sponge off of them making then into nothing more than slaves.
Re: Re:
But!It is morally unacceptable that people should have unfulfilled needs so governments steps in and supports these needs. All needs must be fulfilled anything less is not acceptable.
transl..
“If they would rather die, they had better do it, and decrease the surplus population.”
Thank you Mr Scrooge….
Re: Re:
What’s a “lay about”?
Re: Re:
What are you on about?
By and large – the whole concept of credit, used like we use it today is totally and wholly FULL of FAIL.
The reason this opinion matters is because the markets say it does. There are three major credit rating companies, Moody’s, S&P 500, and Fitch’s.
Now when these people rate a country, bond, company, etc it determines interest rates because the market puts their faith in the opinion of the big three and as consequence their opinion is made fact.
I mean no disrespect but stick to copyright because your grasp of macroeconomics seem slightly askew.
Quick PANIC!
I honestly thing the world requires there to be something which we must all worry about at the same time. If its not the debt ceiling, its our credit rating, its government spending, its the war in Iraq, Its the war in Afganistan, it has to always be something. Foxnews, CNN, MSNBC, and like all need to have that damn headline which they feel is going to make people watch them over someone else.
Lets focus on what could happen, rather then have a rational discussion about what we should do next. Lets get a bunch of “experts” to come on TV and talk about how this is the fault of either side of the political spectrum, and what terrible thing could befall us next. Whose fault is it? We must know these things!!
Who cares whose fault it is. Getting to the bottom of that is not constructive and does not help us in any way shape or form. Depending on who you talk to this could be Obama’s fault. It could be a further extension of a problem which was Bush’s fault. Some can even go all the way back to say that this is actually Clinton’s fault. Was it Reid or Boehner? What is Cantor or Pelosi? Perhaps Bernanke or Geinhtner.
Who’s fault it is and the search for them is a waste of time and futher resourses we claim not to have. We need a solution. Not a tea party solution. Not a leftist solution. We need an actual solution. Both sides must act their age and do what is best for the country, not what is best for their reelection. They need to stop listening to the lobbyists and start listening to the experts. Assemble the economic department heads from Harvard, Standford, USC (FIGHT ON!), Columbia, Brown, NYU, MIT, and Princeton. Get them in a room together and give them the books. Ask them what they think, and what can we do. Call out the companies who are defrauding our nation, and wasting our tax dollars. We should no longer care what Bank of America, Wells Fargo, or any other corporate bank thinks. They are their for themselves and only themselves.
This is not a time to talk party lines or worry about where you might be working in the next 2 years. Worry about us (taxpayers/citizens) like you are supposed too. Do the job you were elected to do, Not the one you were payed to do.
Re: Quick PANIC!
Do not get the department heads from Harvard, Stanford, etc involved to fix this. There is a revolving door between the Ratings agencies, the US Treasury, the Fed, the Big Banks and these institutions. The financial analysts spew their propaganda at seminars, and afterwards everyone goes out for cocaine and hooker parties and decide how to fleece one institution or another for a couple of billion dollars.
We need transparency in the budget. Once the public sees where their tax dollars are going, they will or will not have confidence in the markets backed by the govt and the ratings agencies can go suck it.
Reputation Ruining Industry
As a today’s Concurring Opinions points out, credit ratings are just a way the 400 people who control half the wealth in the US use to keep the rest of us in our place. Welcome to the new feudal society.
but but but.
treasury yields went down friday.
that said what other posters have said about the ratings requirements, and the abilities of the companies to rate, still stands.
To all of this, I sing the comedian Kevin Meany's song
“I don’t care, I don’t care, I-I do-on’t care! I don’t care, I don’t care, I-I do-on’t care!”
repeat chorus
Works for me.
Some Republican bigwigs wanted an “Obama Downgrade” talking point to hurt Obama in 2012 and encourage more irresponsible spending cuts. Apparently they had some buddies at S&P that owed them a favor or something.
Of course, the markets weren’t fooled: they know that austerity measures will result in deflation and a depressed economy, and that whatever the letters are that S&P has assigned, US government debt is still just about the safest investment around. The result: interest rates down (i.e. the government can borrow more cheaply since the downgrade) as people buy more bonds, stocks down as people sell them to buy bonds.
Basically, the bond market knows that S&P is full of crap, and that they and all the other deficit hawks are ignoring the real problems with the economy.