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. icon
    Marcel de Jong (profile), 8 Aug 2011 @ 5:09am

    Re: Re:

    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).

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