The Market

by Mike Masnick


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

Companies:
s&p



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
    Richard (profile), 8 Aug 2011 @ 5:33am

    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.

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