Who Died and Made You King?
That's my reaction to the S&P downgrade. You really need to read this to believe it. It is not a statement about the likelihood of default, and it's not even a statement on the likelihood of "repudiation by inflation", though its negative scenario would include higher interest rates that price inflation risk into U.S. Treasuries. No, the S&P is engaged in political prediction and has a particular view on the debt ceiling debate:
Compared with previous projections, 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.
"Those darn dirty Republicans won't raise taxes, so we're downgrading your country." They are even downgrading the Federal Reserve, which caused John Mauldin to observe:
So, if the Fed, which doesn’t issue credit and can print money, can be downgraded because it holds AA+ debt, then why and how in hell can the ECB, which holds hundreds of billions of euros of the junk debt of Greece and Ireland and insolvent banks not be downgraded on Monday? And the Bank of Japan? REALLY? What are these guys smoking? Do we now downgrade GNMA? Of course. And the FDIC? What the hell will repos do on market open? The NY Fed says it won’t affect anything. Don’t ask me, I just work here. And how can you rate France AAA? And still give AA or more to Italy when the market is saying they are getting close to junk?
I feel like going Jonah on S&P. It has unilaterally expanded its purview of sovereign debt to much, much more than what it had in the past. I am not going to get caught up in S&P's past mistakes, its role in creating the need for TARP (and TARP's role in getting us to this level of government debt.) I am simply asking: When did the ratings agency decide they could use the letter grades that were for default risk and use them to define interest rate risk?
Regardless of political uncertainties, what bond do we think has both lower default risk AND lower liquidity risk (the ability to convert it to cash in any currency you want, when you want it), if not U.S. dollars?
And, given that the Italians are developing a plan for dealing with their own, much more serious, debt crisis that does NOT include tax hikes but instead cuts government employee pay, where is the S&P report that gives them a C rating?
If Standard and Poors wants to get into the economic forecasting business, that's fine. I want competition in that field. But this rating downgrade abuses a trust that perhaps we never should have given them. It will be interesting to see how markets react, but the S&P emperor really has no clothes, and we should treat this more like a well-known analyst moving a stock from "buy" to "hold" than inflating the importance of the rating panjandrums.
- Comment (15)
- · Quote
- · UnfollowFollow (1)
Comments :
Jan '11
Re: Who Died and Made You King?
I entirely agree. This strikes me as a completely self-serving move on the part of S&P to capture a position of economic authority. They want the world to come to them on bended knee.
It's a funny thing about a ratings agency; the other agencies can't follow it lock-step, because then, why would we ever need more than one agency? Strategically, other agencies can't afford to just repeat S&P's opinion. So there are two options:
While everyone agreed that the US was AAA, there didn't need to be any differentiation on the world's most important economy. But once S&P broke that, it's now open season.
Apr '11
Re: Who Died and Made You King?
So they would have downgraded the US had cut, cap & balance passed?
Jan '11
Re: Who Died and Made You King?
Who rates the ratings agencies? Also, "Going Jonah" should become a colloquialism since we havent had a postal service worker go nuts in years. These sayings need to be kept new and fresh!
May '10
Re: Who Died and Made You King?
For the umpteenth time, I want to pull my hair out over this business of equating increased tax rates and increased revenues. For Pete's sake, the Republicans have never, never, never opposed increased revenues. They have rightly and loudly opposed increased tax rates. There's a big difference, for crying out loud. The point is that government revenues spike during times of robust economic growth (hence, the top years for federal government revenue were in the '05-'06 time frame, which were after the Bush tax cuts), because low rates applied to a large tax base across a growing economy yield greater revenues. S&P's rhetorical drive-by shots at the Republicans are gratuitous political shots or simply ignorant.
May '10
Re: Who Died and Made You King?
[Duplicate post]
Edited on Aug 6, 2011 at 1:13pmJul '10
Re: Who Died and Made You King?
The W debt curve was unsustainable. The Obama debt curve is the rapid rail to ruin. Raising taxes in a broken economy is not just political suicide, it is a revenue killer. Pointing to European examples and jabbering just reduces the audience to gales of bitter laughter. As Germany reaches the limits of its resources and America is no longer there playing backstop to the whole mess, the euro and the dollar will stage an inflation competition. If Germany stays with the euro at all.
S&P's foray into dictating public policy is execrable. They cannot mind their own store but these fools feel themselves fit to take over on our behalf. Every single half-wit that reports for work to S&P should thank their creator that their worthless, pestilent, rent-seeking carcasses are still drawing a stipend at the expense of decent, industrious Americans. Given that any freshman computer science student in the country could code a superior ratings algorithm over a long weekend, they really, really need to clean up their act.
Re: Who Died and Made You King?
'Twould appear so.
Re: Who Died and Made You King?
I had a professor once who unexpectedly came to a brown-bag lunch on economic growth. He mostly taught regulation and public finance. Asked why he came, he replied "I've spent the first half of my career looking at G/Y (government spending over GDP) and thinking about G. I decided it's time to think about Y." Would that the GOP leaders had done so in the debate. Maybe they did and the media buried that too. But there's too much Debt/GDP discussion and not enough growth-of-GDP discussion to my taste.
Re: Who Died and Made You King?
King Banaian
But there's too much Debt/GDP discussion and not enough growth-of-GDP discussion to my taste. · Aug 6 at 1:48pm
Couldn't agree more! During the debt ceiling debate the GOP leadership behaved, in my judgement, bravely, honorably and intelligently, fundamentally changing the terms of the discussion. But enough--enough. They should now stop talking about the budget and start talking about growth.
Dec '10
Re: Who Died and Made You King?
Growth is being talked about, it is just not being trumpeted.
Why anyone would care about the rating from S&P, (or anyone else), is a mystery to me. I don't trust anyone when it comes to where I put money. I cashed out my minimal 401 K plan and paid the penalties, way back in 2007, because of the limitations. If I see somebody doing something right, that's where I politely ask for a chance to get in. I used to really like REITs, but I also worked for them and saw the conditions of their holdings and got the heck out!! (Kept working for them, though!)
I would rate the USA as a "C", at best, if anybody cared about my rating. All I need to look at is our inability to access our own resources and our burdens to entry placed upon entrepreneurs, to realize we are in a position that is, at best, stagnant.
I invest in chicken feed, which is spiralling up in cost as we use feed corn to fill our gas tanks. So I'm a dummy. The difference being, I at least have chickens.
What do you have?
May '10
Re: Who Died and Made You King?
Peter Robinson
King Banaian
But there's too much Debt/GDP discussion and not enough growth-of-GDP discussion to my taste.
They should now stop talking about the budget and start talking about growth.
Meaning what? Cutting the budgets of regulatory agencies like the EPA? Taking unnecessary regulatory laws off the books?
Obama and the Democrats probably have more stimulus on the mind, so Republicans must be very careful not to play into their hands by suggesting that government can help the economy by any means other than simply getting the hell out of the way.
Less government interference, regulatory predictability, fiscal predictability (no more "quantitative easing") and stopping Obamacare — if that is what you mean, I agree wholeheartedly.
Re: Who Died and Made You King?
Aaron Miller
Peter Robinson
They should now stop talking about the budget and start talking about growth.
Meaning what? Cutting the budgets of regulatory agencies like the EPA? Taking unnecessary regulatory laws off the books?
Obama and the Democrats probably have more stimulus on the mind, so Republicans must be very careful not to play into their hands by suggesting that government can help the economy by any means other than simply getting the hell out of the way.
Aaron, I agree, the point is to get government out of the way. I don't know that Obama trade policy has been better or worse than Bush, but I know neither are free enough. The argument over "patent reform" would be another. See this from Planet Money for more on that. Obama isn't for getting out of the way on patents. Republican should be.
It would be more inspiring if we got off the idea that "creating jobs" = "creating wealth". It's not, and most people know that instinctively. But we're afraid of it because of the maldistribution argument. Until we confront that, this confusion will continue.
May '10
Re: Who Died and Made You King?
King,
You are way smarter than I am on this stuff, but I see the downgrade in two ways:
1. Mauldin (I also subscribe to his services) - While I recently wrote a book saying the western world is going down the tubes because of uncontrolled and rapidly uncontrollable debt, how dare they compare us and rate us the same as people that are even more irresponsible - first, knee jerk reaction.
2. The USA is special as we are the global currency and so special rules do apply. If Argentina or Brasil in the 70s, 80s etc defaults, it is inconvenient. If the world's reserve currency. to which many currencies are based/pegged (Hong Kong, Panama, A significant part of Latin America) - it is another deal altogether.
We all know that this is the right call. It only comes as a surprise as we all thought that the three major rating agencies were so far in the Fed/Treas pocket that we can't believe they downgraded their baseline.
Dec '10
Re: Who Died and Made You King?
Maybe it's a loser argument, but I just keep thinking, this is one of the biggest problems with accumulating massive debt. Suddenly, we find ourselves at the mercy of ratings agencies and creditors. It's a threat to our freedom.
Re: Who Died and Made You King?
Steve MacDonald:
2. The USA is special as we are the global currency and so special rules do apply. If Argentina or Brasil in the 70s, 80s etc defaults, it is inconvenient. If the world's reserve currency. to which many currencies are based/pegged (Hong Kong, Panama, A significant part of Latin America) - it is another deal altogether.
But being a reserve currency means that traders in the bonds of that currency always have a market to trade in. Meaning no offense to Australians, but the world would adjust easily to the disappearance of a market for Australian debt. Let U.S. debt all of a sudden not be tradable and you have a world we do not know. So that won't happen, it will always be liquid. Then add the seigniorage rights of the Fed to print that reserve currency and you have a bond that has very low default and liquidity risk.
That's what AAA ratings mean.