The Ratings Dust-Up
As George noted earlier, Standard and Poors put US debt on a watch list earlier today, saying that the battle over the deficit appears to be protracted. I was busy most of the day, but caught this news item wherein the US is now getting lessons on fiscal discipline from the Swedes. The teacher of these lessons is the finance minister of the ruling Moderate Party. "When we need to learn about fiscal discipline from Swedish moderates," I thought, ... and then got called to another meeting and set that aside.
I came home tonight, fired up the laptop and found that Austan Goolsbee, head of Obama's Council of Economic Advisers, thinks S&P is wrong (as opposed to Congress, as George's post noted.)
In an interview with CNBC, Austan Goolsbee, chairman of the Council of Economic Advisers, characterized the S&P move as a "political judgement."
"What the S&P is doing is making a political judgement and it's one we don't agree with, and it appeared to me that Moody's and some others don't agree with that judgement," Goolsbee said.
The U.S. Treasury also voiced disagreement with the S&P revision.
"...We believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation," Treasury Assistant Secretary Mary Miller said in a statement.
Now it is true that the S&P is making a political judgment. The warning has little to do with our ability to pay off the debt -- a country that can print the reserve currency of the world at the snap of its fingers does not have a solvency problem in the short run. The resulting inflation will be unpleasant, but much of that will be exported elsewhere to the world. The real economic danger is losing that reserve currency status, and right now, to paraphrase a famous man, the dollar is the worst reserve currency in the world ... except for all the others. I do not see that shift away from a dollar world trade system happening suddenly.
Still, it's a bit odd that Goolsbee would decide to challenge the report rather than say something pleasing and bland, such as "We agree with the rating agency that long-run deficit control is of the utmost importance for the next two years, and we will work with Republicans to create a plan that balances the budget in a way that supports the growth of the economy while protecting [insert laundry list of transfer recipients here.]" Wouldn't have raised an eyebrow. And the effect on markets would probably be short-lived. A similar warning on UK debt in 2009 moved interest rates up 50 basis points (0.5%) overnight but that effect disappeared within a few weeks. And that was without the UK doing anything -- it was a year before David Cameron and George Osborne.
So the real risk we face is that Congressional Republicans and the Obama White House will get themselves in such a battle over the debt limit, the 2012 and 2013 budgets that some disruption in paying the debt will occur. For those of us who have worried the Republicans have been too weak in its arguments for spending restraint, the S&P outlook should make us happier -- they foresee a big struggle ahead. The next thing to watch for is for negative outlooks from the other two agencies, Fitch and Moody's, who so far do not show any signs of changing the T-bond's AAA rating. Without them, this will be barely a one-week story.
- Comment (20)
- · Quote
- · UnfollowFollow (1)
Comments:
May '10
Re: The Ratings Dust-Up
I'm waiting for some on the Left to say that S&P is unpatriotic for issuing this report. "Playing chicken", in the same way that the debt ceiling debate is framed. I doubt that'll have much traction with voters, but sort of waiting to see it.
Because Goolsbee's use of the words "political judgment" though not saying so, was designed to give your average citizen the impression of "politically motivated."
At any rate, S&P can hardly be blamed for thinking there won't be a serious deal on deficit reduction in the next two years, which is their stated time horizon.
May '10
Re: The Ratings Dust-Up
King, someone posted a link to a website a few days ago to a guy that wrote a book on the economy (I will not re-link because I am not shilling for the guy...). He is not an economist but a business man and his theory is that both the Keynesians and the Austrian/Chicago schools have it all wrong. He says that since we no longer back money with a commodity we can print all we want without inflation and only the states need taxes because they can't print money. He says the Feds don't have to tax, just print. After all it's not like they're buying back the promise of gold.
Is this guy looney tunes?
Jul '10
Re: The Ratings Dust-Up
I got the distinct impression that S&P didn't see the Republicans as Up to the Task of Reigning in the Obama Red Ink Machine. Therefore they see Real Fiscal issues ahead with the over-borrowing necessary to maintain the Obama levels of spending.
I see this as no different as when a person with a 793 credit rating is turned down for a new credit card because they owe $30,000.00 on their existing cards. It's not thier history of making payments the lender is looking at, it's the future. (You know the one Obama is winning... W.T.F.)
Anyway, I find the timing of the announcement intriguing in that it comes shortly after the budget deal in which Republicans showed once again that if they were in the land of Oz they'd be singing "If I Only Had A Spine." (did I say IF?)
Re: The Ratings Dust-Up
EJHill: King, someone posted a link to a website a few days ago to a guy that wrote a book on the economy ... He says that since we no longer back money with a commodity we can print all we want without inflation and only the states need taxes because they can't print money. He says the Feds don't have to tax, just print. After all it's not like they're buying back the promise of gold.
Is this guy looney tunes?
If money trades for goods and you have many more pieces of money but no more goods, then you need more pieces to trade for each of the goods, ergo inflation. Sorry, I don't see how this person is right.
Apr '11
Re: The Ratings Dust-Up
That was my biggest take away from Goolsbee's comments as well - is he insane??? I mean, at least pretend to understand the seriousness of S&P's move in public while you continue to undermine and downplay it behind the scenes. The administration really doesn't lose anything to give this some lip service, but they don't even do that? And the Republicans are the stupid party?!? (thanks Pat Cadell ;) ) It used to be that you could be entitled to your own opinions but not your own facts. Well, the MSM changed that so that you could actually be entitled to your own facts, provided they came from the left. However, soon enough, both opinions and "facts" will fall prey to the biggest, meanest, most uncompromising guy in the room: mathematics.
May '10
Re: The Ratings Dust-Up
King - I am not sure I present this gentleman's case as well as he can so I will quote:
"All money is debt and all financial debt is money. In addition to being state-sponsored, legal tender, there are four criteria for modern money: Money must be defined in a standard unit of currency. Money has no intrinsic value. The demand for money is determined by its risk (danger of default or devaluation, i.e., inflation) and its reward (interest rates). Money must be owned by an entity other than the entity that created it.
"The above criteria describe many forms of money including currency, bank accounts, T-securities, corporate bonds, and money markets. There is no form of money that is not debt. Therefore, a growing economy requires a growing supply of debt/money."
And he adds, "The Federal 'deficit' is a statement of the net amount of money the federal government has created in one year."
To him, the debt is not debt since there's no gold behind it.
Jul '10
Re: The Ratings Dust-Up
EJHill: King - I am not sure I present this gentleman's case as well as he can so I will quote:
"All money is debt and all financial debt is money. In addition to being state-sponsored, legal tender, there are four criteria for modern money: Money must be defined in a standard unit of currency. Money has no intrinsic value. The demand for money is determined by its risk (danger of default or devaluation, i.e., inflation) and its reward (interest rates). Money must be owned by an entity other than the entity that created it.
"The above criteria describe many forms of money including currency, bank accounts, T-securities, corporate bonds, and money markets. There is no form of money that is not debt. Therefore, a growing economy requires a growing supply of debt/money."
And he adds, "The Federal 'deficit' is a statement of the net amount of money the federal government has created in one year."
To him, the debt is not debt since there's no gold behind it. · Apr 18 at 7:34pm
I think the example of Zimbabwe in recent years definitively disproves his idea.
May '10
Re: The Ratings Dust-Up
Except he is right about one thing. There is nothing behind US currency other than faith. Zimbabwe just can't print money because no one has faith that their government will still be around tomorrow. And when we talk about the S&P rating, well, isn't that a faith call, too?
Jul '10
Re: The Ratings Dust-Up
EJHill:
He says the Feds don't have to tax, just print. After all it's not like they're buying back the promise of gold.
Is this guy looney tunes?
Money is, essentilly, a scorecard of service to one's fellow man.
In its purest form it is the storage device of the collective individual's life energies.
In an isolated village, where society structures tasks for each member of the tribe, there is no need for money.
It is when you have interacting tasks, producing goods and services for each other that a Medium of Exchange (and storage) becomes necessary.
There are periods of history where Specific Comodities (i.e. Gold) become a standard against which that Medium of Exchange will be measured, however, the Medium of Exchange is still, essentially, the stored life energy of all who produce in society.
In light of this basic understanding, I would not insult Looney Tunes, by comparing this mans position to them.
Looney Tunes are Humor and therefore entertaining.
This guy is Stupid! (The difference between Stupidity and Ignorance being that Ignorance can be overcome.)
And Dangerous!
Jun '10
Re: The Ratings Dust-Up
S&P are the same frauds who gave a AAA rating to all of the CDO's that helped create this mess. We cannot default on our debt. Treasuries will always be paid. Inflation is not an issue until we have full employment and reach productive capacity where we all compete for goods and services. Does anyone see that on any horizon?
Jun '10
Re: The Ratings Dust-Up
Although rising commodity prices caused by spikes in oil prices don't help.
Jul '10
Re: The Ratings Dust-Up
Robert Kelly:
Inflation is not an issue until we have full employment and reach productive capacity where we all compete for goods and services. Does anyone see that on any horizon?
Wrongo Du Maxami!
Inflation has nothing to do with employment levels. And in our current state of affairs it is already happening. BHO and company just took the main indicators out of the Equation so they can say it's not happening.
Inflation is the ability of a Government (and only government can do this) to say there is more money than there actually is accounted for in the supply. When that happens (regardless of people working or not) the value of the Dollar (in our case) goes down at a rate faster than the econmic growth of the system.
Hence you have an inflated dollar supply, which goods and services holding a steady value, require more of to be obtained.
May '10
Re: The Ratings Dust-Up
I've worked with sports statistics my entire professional career. I know they can be manipulated. When it comes to economics there are so many numbers, charts, graphs and historical tidbits thrown around it's like trying to focus on a single piece of pollen in a tornado.
I tend to dismiss historical "trends" since they are not really trends but just snapshots of man's reactions at any given moment in time. Sure taxes were high in the 50's and 60's and our economy was booming. That's because the rest of the world was in shambles. Selling it as a political talking point is mixing cause and effect, or as the late Michael Crichton called it, "Wet streets cause rain" theories.
It gives me headaches.
Jul '10
Re: The Ratings Dust-Up
EJHill
Except he is right about one thing. There is nothing behind US currency other than faith. Zimbabwe just can't print money because no one has faith that their government will still be around tomorrow. And when we talk about the S&P rating, well, isn't that a faith call, too? · Apr 18 at 8:12pm
The US is a fiat currency, but to claim we can print money at will makes me think he either doesn't know what inflation is, or is deliberately trying to confuse the issue by misusing the term. Inflation is when the money supply grows faster than goods and services in an economy. Printing money as means in itself by default causes inflation. There's no getting around that without redefining inflation. There is a long list of countries who tried to print their way out of ruin and experienced hyperinflation as a result with Zimbabwe as just the latest. I'm hard pressed to come up with a single example of a country printing money by the reams which was not in dire financial straits.
Jun '10
Re: The Ratings Dust-Up
Hyperinflation occurs when you destroy your means of production and/or have a fixed or pegged currency. Weimar had huge war reparations it could not pay. Zimbabwe destroyed their productive capacity. Argentina'c currency was pegged to the dollar. Japan is the prime example of deficit spending with no inflation. We are headed in that direction because we think we can go broke like Greece. It's all politics.
Jul '10
Re: The Ratings Dust-Up
Hyperinflation is always marked by rapid increases in the money supply and the velocity of money. It's a easily recognizable monetary effect. Destroying means of production can exacerbate it, and perhaps trigger the crisis in confidence that leads to the velocity spiking, but once hyperinflation has been established, it has been followed by a rapid increase in the money supply in every instance. The idea of printing wheelbarrows full of money has never been associated with a healthy, growing economy. It has always been a sign of collapse spiraling out of control. Japan 's deflation is largely structural due to bad business decisions and demographics. They didn't come close to triggering hyperinflation and never sustained enough inflationary practices to even break out of their deflationary spiral and low velocity of money.
Jun '10
Re: The Ratings Dust-Up
Velocity of money. All the tarp money is sitting in the savings of Wall St. Well out of circulation. Main St. Is still quite a bit short.
Aug '10
Re: The Ratings Dust-Up
Sweden had its wake up call in the 1990's. US Lefties still imagine Sweden as some sort of socialist utopia, but they've been backing away from that for some time now. But one can still catch a whiff of Huxley's 'Brave new World' soft totalitarianism in practice there.
Too bad that as Sweden wised up about economics, they went suicidally stupid regarding immigration. It's a tragic shame.
May '10
Re: The Ratings Dust-Up
Printing money is consistent with Obama's goal of "spreading the wealth," since it diminishes both the debt of the debtors and the savings of the savers, inching the "have-nots" and the "haves" closer together.
It's a win-win for those with Obama's notion of justice.
Mar '11
Re: The Ratings Dust-Up
Money is broken and the government does not seem to care. In fact, it would seem that they intend to break it further. Money is power and they want a monopoly on it, but they are willing to cede some to their crony capitalist buddies and certain special interests.
I am not a cynic except in the political realm - there it knows no bounds. This is looking more like a cultural war than anything else, with very real consequences. The gloves are coming off and the truth will win, but not soon enough.