The Market

by Mike Masnick

Filed Under:
debt, economy, opinions, ratings, united states


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.

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  1. identicon
    A Monkey with Atitude, 8 Aug 2011 @ 9:31am

    Re: Re: Re: Re: Re: Re: Re: 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.

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