‘Course, A Simpleton Such as Myself Likely Misses The Significant Differences

by Don Boudreaux on August 9, 2011

in Budget Issues, Country Problems, Current Affairs, Debt and Deficits, Other People's Money

Here’s a letter to the Washington Post:

Eugene Robinson blames the S&P’s downgrading of Uncle Sam’s credit on the protracted refusal (until the very end) by Uncle Sam – a licentious borrower – to borrow even more (“A downgrade’s GOP fingerprints,” August 9).  Mr. Robinson scolds, “If you threaten not to pay your bills, people will – and should – take you seriously.”

Why is the first remotely serious effort in ages to oblige government not to borrow beyond a certain limit portrayed as fiscal imprudence?

Asked differently, why would creditors be spooked by a debtor’s ‘threat’ to honor his vow to keep his debt from growing?  Creditors, it seems, would applaud the keeping of such a vow.

The downgrade is far more plausibly a consequence of Uncle Sam breaking that vow – and doing so in a way that reveals his cowardly refusal, at the end of the day, to address his addiction to spending greater and greater sums of money now and passing the bills on to taxpayers later.

Sincerely,
Donald J. Boudreaux

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vidyohs August 9, 2011 at 9:26 pm

Why?

Well it sure as hell isn’t reason. It sure as hell isn’t education, or learned people. It sure as hell isn’t plain common sense.

We have two choices to believe about those who will think that credit can be a lifelong income. #1. they are more stupid than a box of rocks. #2. the want to deliberately crash the nation and expose us to the dangers that entails.

Chris_Y August 9, 2011 at 10:52 pm

+1

Chucklehead August 9, 2011 at 11:23 pm

#3 They want to deliberately crash the nation and use the crisis as a excuse to grab more power, limit liberties and private wealth. To despots, total control of a poor nation beats partial control of a rich one.

Richard Stands August 9, 2011 at 11:29 pm

Never let a crisis go to waste.

Krishnan August 10, 2011 at 8:28 am

Re: vidyohs – I pick #2 “deliberately crash” the nation … (certainly a sinister view – but given the realities of the past few years, fits well)

Economiser August 10, 2011 at 10:35 am

I think most fit in a third group: those who blindly accept Keynesian theory because it’s all they know.

Keynesianism presents a compelling story. It feeds into deep-seated human desires to be able to control the world around us and to rely on a leader to save the day. I constantly, constantly see mainstream media references to “stimulus spending” as the accepted method of recovering from a recession. I don’t think those authors are stupid or wish ill on our nation. They just accept the standard explanation because, well, they’ve probably never really questioned it.

The ancients accepted the theory that rain dances can end a drought. It sounds good, it probably appeared to work from time to time, so most didn’t question it. Unlike Keynesianism, at least a rain dance can’t hurt…

vidyohs August 10, 2011 at 11:44 am

No sir, it is clear that “your” third group are actually of the first group. More stupid than a box of rocks.

muirgeo August 9, 2011 at 9:37 pm

Don,

Send a letter to your credit card company telling them you are
refraining from paying the amount due so as to force
yourself to not use their credit card anymore. Check your credit rating before and after and let us know what happens.

Methinks1776 August 9, 2011 at 10:07 pm

Why is the first remotely serious effort in ages to oblige government not to borrow beyond a certain limit portrayed as fiscal imprudence?

Because enough voters are too ignorant to understand the issue.

I am also endlessly frustrated by pundits who poo-poo the “absolutists” who will not “compromise” with the profligate spenders. the problem is that our government spends (and thus, borrows) too much. The problem as the pundits frame it is that the politicians can’t come to an agreement about how much more profligate spending they will undertake fast and quietly enough.

Methinks1776 August 9, 2011 at 10:08 pm

That was not meant to be a reply to the village idiot.

Invisible Backhand August 9, 2011 at 10:30 pm

But you pulled it off.

Methinks1776 August 9, 2011 at 10:45 pm

You are almost as clever as my shoe.

tdp August 9, 2011 at 11:16 pm

Irritable Bowels, the only person you “backhand” with your comments is yourself.

Also, your name suggests you grossly misunderstand Adam Smith’s writing. I recommend both The Theory of Moral Sentiments and The Wealth of Nations, as well as the complete works of Frederic Bastiat. Also, getting a brain.

Krishnan August 10, 2011 at 8:35 am

Re: methinks1776 – Imagine if Congress legislated the teaching of arithmetic – the kids would learn that an increase in debt means a reduction in debt. After all if 100 is supposed to become 110 (or whatever some Congressman thinks) and gets reduced to 105, an increase from 100 to 105 is a cut.

I am thinking of using Congressional Math in my Tax Returns next year – “My income should have increased 15% – but it did not. So, I will take 15% off my taxable income since I had a cut and calculated my taxes accordingly” (yea, I can imagine the consequences)

Pom-Pom August 10, 2011 at 12:27 pm

I’m telling my boss that I demand a “cut” in pay. He’ll be overjoyed until finding out that I am using the government definition of “cut.”

SweetLiberty August 9, 2011 at 10:19 pm

More accurately, send a letter to your credit card company that, while you are aware that your credit limit is maxed out and you don’t have the means to pay them now or in the foreseeable future, they shouldn’t worry because you will be opening up a new credit account with their sister company and increase your spending! Sure, this will dig you even deeper into the hole, but if things get really tight you will gladly Xerox copies of the money in your wallet and send that in to them in lieu of a minimum payment. They may spend the copies, but at a fraction of what the originals were worth. I’m sure that will make them feel a whole lot better.

Seth August 9, 2011 at 10:42 pm

Nice one, I was going to write…

Call your credit card company, ask them to raise your credit limit because you will need to borrow more from them to pay them back AND to keep paying for you and your friends to stay in the penthouse suite and fly private jets. But reassure them that you plan to sell your private vineyard, so all is good.

If they are stupid enough to raise your credit limit, THEN actually borrow against it and do exactly what you told them, except publicly announce that you’d really like to keep the vineyard.

Check credit limit before and after.

Dan J August 10, 2011 at 12:07 am

Ding……ding……ding….. We have a winner!

Chucklehead August 9, 2011 at 11:02 pm

No, tell them that even though your bill is only 10% of your income, you choose not to pay them. Default on treasury interest payments would of been a choice, not a necessity.

morganovich August 10, 2011 at 9:21 am

chuck-

that’s an interesting point, isn’t it? for all the blame the “tea party” is getting, they never to my knowledge said they were going to miss debt payments.

the threats of default all came from the white house and the congressional democrats trying to invent a hobgoblin with which to terrify the public.

i’m not convinced that this claim was the underlying source of the problem, but to the extent it was, i think the democrats so busily blaming the right are the ones who did it.

Dan J August 10, 2011 at 11:00 pm

Would love to do what judges are doing….. Declaring that they are not being paid in accordance with constitutional law. The money has been inflated and they ae not getting their proper pay.

tdp August 9, 2011 at 11:21 pm

How is refusing to raise the debt ceiling “refraining from paying the amount due”? Refusing to raise means that the government is actually GOING TO START PAYING the amount due. Raising the debt ceiling is the same as saying: “Oh, I’m not going to actually start paying off the debt, I’ll just raise the amount of debt I allow myself to have. Don’t worry, you can keep giving me your money only to see it disappear into a black hole. I know you were worried I wouldn’t let you.” I’m sure your mortgage lender and credit card company would LOVE to hear that.

Dave August 9, 2011 at 11:25 pm

The credit card company has no control over your credit rating. All it can do is report your payment history. Saying you might not pay your bill is not the same as not paying your bill. #failedanalogy

PrometheeFeu August 9, 2011 at 11:58 pm

Last I checked, only Obama and the democrats proposed not paying the debt. The Republicans were saying things closer to: Don’t send out the social security checks.

Randy August 10, 2011 at 7:23 am

These analogies are good, but not needed. The real situation is insane enough to make the point all on its own.

GP Hanner August 10, 2011 at 11:53 am

That is not what opposition to the debt ceiling implied. In spite of the hoo-ha from L’il Timmy, et al, government could really continue. It’s just that there is strong opposition to cutting/killing programs that really are not business of the federal government.

John Kannarr August 10, 2011 at 7:38 pm

The purpose of getting the budget under control was never to refrain from paying what was already owed. (That unfortunate result is more likely to result from the fact that we are already more in debt than we can ever cover in the future from revenues – unless the money supply is inflated and totally debauched.) So your analogy is just another straw man.

Invisible Backhand August 9, 2011 at 9:42 pm

You just make up your own favorite motive – “The downgrade is far more plausibly a consequence of Uncle Sam breaking that vow” when S&P has already given at two sets of motives, according to the article you are talking about. I don’t understand, is it S&P cowardly for not giving for what you assume is their still hidden real reason or is Uncle Sam cowardly for not…what?
———————————————————————–
“Initially, S&P pinned the downgrade on the sheer size and weight of the mounting federal debt. Treasury officials noticed that S&P had made an error in its calculations, overstating the debt burden by a whopping $2 trillion. This discovery negated the ratings firm’s rationale — so it simply invented another.

Instead of basing its argument on economics, S&P made an ill-advised foray into political analysis. In its “revised base case scenario,” the firm assumed that all the Bush tax cuts will remain in place past their scheduled expiration at the end of next year.”

Methinks1776 August 9, 2011 at 10:13 pm

There was no $2 Trillion mistake, unless you live in a fantasy world.

http://blogs.forbes.com/timworstall/2011/08/08/us-aaa-downgrade-sps-not-2-trillion-math-error/

From your previous posts, I do realize you live in a fantasy world. That’s one reason you believe, as do the fools in The Swamp, that the tax increases at the end of next year are going to yield the revenue you think it will.

Invisible Backhand August 9, 2011 at 10:25 pm

The ad hominem snarkery from a guy with a funny name has made the scales fall from my eyes, how could I be so naive as the believe that the acting assistant secretary for economic policy was more credible?

http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SPs-2-Trillion-Mistake.aspx

Methinks1776 August 9, 2011 at 10:37 pm

Because you have a severe allergy to logic and a love of authority.

tdp August 9, 2011 at 11:07 pm

Ignorant Bozo thinks he is superior to everybody here and that he and his privileged class of “betters” should run the country into the ground by taking everyone’s money for themselves to spend while pretending to help our country’s poor benighted stupid citizens. Don’t question your leftist overlords, Methinks1776, you’ll hurt your poor little brain and, even worse, you might wind up with your own money in your pocket and a government that allows the free market to operate and gets itself out of debt.

Methinks1776 August 9, 2011 at 11:38 pm

tdp, are you implying that simplistic top down solutions cannot fix complex problems? But…but…but…I thought it was all like taking morphine from a patient who won’t need it all and giving it to one with none. Everybody wins! Are you saying the income you worked and sacrificed for is not like morphine prescribed to you by a doctor with the stroke of a pen? What a novel idea.

Invisible Backhand August 10, 2011 at 1:39 am

treasury.gov, bitch. You lose.

Methinks1776 August 10, 2011 at 7:54 am

As usual, you’re wrong, Invisible Brain. I’ve long ago hedged my losses to the Treasury. I have no doubt you’ll continue to be a loser.

J. W. August 10, 2011 at 2:44 pm

“treasury.gov, bitch. You lose.”

I too trust everything the government tells me.

Dan J August 10, 2011 at 11:02 pm

Treasury dept is wrong…. S&P is correct.

Richard Stands August 9, 2011 at 11:42 pm

P.S. Methinks is not a guy, and she has a long history of insightful posts which have earned the respect of many here. Certainly mine.

I regret the snark-infested waters, but that can happen when one chooses to enter making a splash, chum.

Invisible Backhand August 10, 2011 at 1:41 am

I see what you did there. Slightly amusing. Care to have a go at the issue?

Richard Stands August 10, 2011 at 2:40 am

I’m not an economist, and rational ignorance limits my knowledge in depth. The limited information I have suggests:

1. S&P was part of the captured regulatory apparatus that failed everyone during the sub-prime debacle, so their evaluation remains fairly unimportant to me. In this case, they’re probably right that Uncle Sam might someday default (though more likely via inflation). The difference between ratings of “Extremely strong capacity to meet financial commitments” and “Very strong capacity to meet financial commitments” seems entirely subjective, but I’d agree that borrowing and spending at nearly Greek percentages doesn’t really match my view of the former definition.

2. When people owe me money, I am more convinced of their ability to repay me when they have the will to curb spending and pay some of it down than when they heedlessly and reliably accumulate more debt. Of course, no one I’ve ever loaned money to can legally take the funds from other people at gunpoint.

3. Given the diffuse costs and concentrated benefits which incentivize political spending, I had no confidence whatever that politicians would ever actually curb spending. Every nickel doled out builds its constituency. For the most part, my skepticism was justified after viewing Senator Wimpy: “I’ll gladly slow the increase of spending into years I cannot control, for more borrowing today.” The only action that has given me any confidence that Washington might actually buck the trend has been the frothing lunatics from the Tea Party. Watching them (temporarily) stand against rubber-stamping and rubber-checking the federal government into the approaching bridge abutment was (temporarily) satisfying. If asked my own subjective view of whether that showed a “very strong” or “extremely strong” capacity to meet financial commitments (long term), I’d laugh. But while the Tea Party held up the headlong rush, I’d have upgraded from “hopeless” to “pathetically weak”. After the “grand compromise” (more laughter), I’d downgrade them as well.

SweetLiberty August 10, 2011 at 9:18 am

My nomination for quote of the day… Senator Wimpy: “I’ll gladly slow the increase of spending into years I cannot control, for more borrowing today.”

morganovich August 10, 2011 at 12:38 pm

invisible-

you are just getting suckered in by federal government “mathiness”.

methinks has the right of this.

unlike you, she look at numbers that use an actual accounting standard.

the feds are trying to make S+P use their nonsesne not even quite cash accounting (accounting the IRS will throw you in jail if you try to use).

rather than heaping abuse on her, you ought to become conversant in the issue yourself.

that fact that you are quoting the treasury proves right there that you do not even understand what it is.

it’s easy to be loud and ignorant.

try being quiet until you can manage to be informed.

PrometheeFeu August 10, 2011 at 12:04 am

Why would we trust that guy? His boss is going to run for reelection trying desperately to fend off attacks that he is not responsible for the downgrade. You might as well trust the White House’s evaluation of the effects of the stimulus package.

Invisible Backhand August 10, 2011 at 1:45 am

Because it’s the gosh darned Department of the Treasury of the United States of America? While you are a whackadoodle commenting on a blog? Do I even need to flip a coin here, incomprehensible nickname prometheeFeu?

Methinks1776 August 10, 2011 at 6:37 am

If the commenters here are merely “whackadoodles commenting on blogs”, then why are you wasting your time with them? Go find yourself someone worthy of your tiny intellect.

You may not be intelligent enough to click on links or knowledgeable enough to know who John Taylor is, but the link I provided was John Taylor refuting the $2 Trillion “error”. I was confused why you thought John Taylor was an odd name, but now I realize you merely weren’t smart enough to read the article. See, I can quote authority too.

If you just swallow everything fed to you but government clowns simply because they are government clowns with no attempt to try to understand the logic (which, we have already determined, is a concept entirely foreign to you), please go ahead. Nobody is stopping you.

But you continue to make a fool of yourself by coming round this blog begging for interaction from the commenters and then berating them for being exactly what you are – just a commenter on a blog. Although, the other commenters here besides you and Muirdiot usually have a pretty good grasp on basic logic. I doubt you can figure out how to tie your shoes and cross the street without a chaperone.

I realize all this is probably too much basic common sense for you, but I hold out hope even for someone as hopeless as you.

Dan J August 10, 2011 at 11:05 pm

Facebook is calling for Mr. Backwards.

Greg Webb August 11, 2011 at 12:32 am

Hmmm…should one trust the United States Department of the Treasury? Let’s see….the current Secretary of the Treasury is Timothy Geithner, a tax evader unless you believe that he was too stupid to understand the written notices that he had to pay federal income taxes on his World Bank salary. So, the Treasury is run by either a criminal or an idiot. That’s one good reason not to believe the Treasury Deapartment.

The prior Secretary of he Treasury was Hank Paulson who played the bum’s rush on Congress to get $750 billion to save the world by buying up distressed mortgage securities that were later used to bail out failing investment banks, insurance companies, and automobile manufacturers. So, he is liar, fool, or con man, or perhaps all three. That’s another good reason not to believe the Treasury Deparrment.

Need any more reasons?

Methinks1776 August 9, 2011 at 10:35 pm

I’ve never understood the point of ratings on the sovereign debt of the largest economies. There is nothing the market doesn’t know about the U.S. and the entities that trade Treasurys are large institutions that have their own internal ratings system and don’t rely on the rating agencies.

Note the downgrade was an equity market (and media), not a credit market event. Credit did not freeze up and Treasurys continued to rally as capital fled Europe.

The main effect of the downgrade was to underscore for people that when Europe is finished falling apart under the weight of its governments’ spending, it’ll be our turn – and that does not bode well for asset prices.

tdp August 9, 2011 at 11:03 pm

I’ve never understood why anyone thought it would be a good idea for the government to spend more than it has.

Methinks1776 August 9, 2011 at 11:33 pm

If you’re the one they’re spending on, you’d find it less difficult to understand :)

Chucklehead August 9, 2011 at 11:17 pm

“The main effect of the downgrade was to underscore for people that when Europe is finished falling apart under the weight of its governments’ spending, it’ll be our turn” Sad, but true.
“and that does not bode well for asset prices.” Some assets will loose value, but others will gain relative strength. It will be the old “diamonds and bottle of water” analogy on a grander scale.

vikingvista August 9, 2011 at 11:18 pm

Of course you are right that companies don’t do billion dollar transactions based upon mere faith in ratings agencies. Ironically, part of the reason for the sudden change in response to the already widely known state of Federal debt, is that companies could find themselves having problems with regulatory compliance. It isn’t that S&P revealed something about Treasuries that others did not know. It’s that the S&P ratings themselves lack predictability but must be used to report to the regulators. The Feds not only mandate whose ratings you must use, but what those ratings must be. But as usual, nobody is talking about this regulatory failure.

Methinks1776 August 9, 2011 at 11:31 pm

companies don’t do billion dollar transactions based upon mere faith in ratings agencies.

I wish that were true. That’s exactly what they do. They just don’t rely on credit ratings for the sovereign debt of countries with very large economies about which everything is known to the market. Ratings agencies (if they were not an SEC protected oligopoly and were allowed to compete) are useful to inform investors on entities and countries about which relatively little information is publicly known.

I’m not sure what you mean by “regulatory failure”. The regulators already said it would treat Treasury holdings as AAA securities regardless of the S&P rating.

vikingvista August 9, 2011 at 11:55 pm

“I wish that were true. That’s exactly what they do.”

My sample is admittedly small, but that is not what I’ve heard from corporate investors. At best they serve as early screening, or of confirmation of what internal analysis shows. At best. The reality is that they are used for regulatory purposes. Otherwise they’d fire their teams of analysts, look up the S&P ratings in Yahoo Finance, and save a few months of work.

“The regulators already said it would treat Treasury holdings as AAA securities regardless of the S&P rating.”

Treasuries ONLY. How is S&P going to treat municipal and private AAA and AA+ ratings? The gold standard has been lowered. All dollar-denominated high ratings must suffer. Companies will find that their holdings no longer meet regulatory requirements, unless they only hold Treasuries. Hell, that is probably one reason why Treasury demand grew after the S&P announcement.

Methinks1776 August 10, 2011 at 6:45 am

Viking,

Ratings are not the only thing investors look at, but nobody questions the assumptions the rating agencies use and ratings are part of the overall analysis of an investment. That’s how it was completely missed that rating agencies were using a probability of zero for a national housing price decline.

For accepting counterparties, ratings are pretty much all that’s used. That, in part, is a regulatory requirement, but only in part.

Treasuries ONLY. How is S&P going to treat municipal and private AAA and AA+ ratings?

Not only Treasurys. Munis rallied as well. It was all part of the “flight to quality”. In relative terms, government paper is safer than non investment grade debt (which sold off pretty heavily) and equities. Treasurys rally every single time there’s a sell-off in equities. This rally in Treasurys had nothing to do with regulatory requirements. Note that Treasurys sold off as the SPUs surged over 5% yesterday and rallied for the entirety of this sell-off, including the period before the downgrade.

Economiser August 10, 2011 at 9:59 am

The risk we were worried about wasn’t regulatory treatment of Treasuries but private contracts’ treatment of Treasuries. If, for example, you had a lending agreement that stipulated that eligible collateral must be AAA-rated, and you routinely use Treasuries as your collateral, you could be required to post additional collateral.

Of course, most contracts are never so tight as to trigger a default from one rating agency’s reduction from AAA to AA+.

Methinks1776 August 10, 2011 at 4:33 pm

If, for example, you had a lending agreement that stipulated that eligible collateral must be AAA-rated, and you routinely use Treasuries as your collateral, you could be required to post additional collateral.

EXACTLY one of the things we immediately worried about Friday night. A lot of firms post Treasurys as collateral. Would the clearing firms (for instance) continue to accept Treasurys as collateral?

But, if not Treasurys, then what? What reasonable form that the institutions would care to deal with (i.e. one with a liquid market) would the additional capital take? There’s nothing to replace Treasurys. As long as the firms could meet their own capital requirements with Treasurys, then we sort of assumed that they would continue to accept the as collateral with no additional requirements. Mercifully, that’s what happened.

The other thing we worried about was portfolios that might be limited by their OA to hold only AAA rated securities. Mutual funds, for instance. But, I don’t know how specific their OAs are. We thought it was possible that the language read something like “AAA rated bonds and U.S. Treasurys”, but we had no clue. That’s your area of expertise, Economiser. Any colour?

vikingvista August 11, 2011 at 2:18 am

“nobody questions the assumptions the rating agencies use and ratings are part of the overall analysis of an investment. That’s how it was completely missed that rating agencies were using a probability of zero for a national housing price decline.”

You make it sound as though all an investor had to do was scratch the surface of the ratings (by all 3 ratings agencies, BTW), and it would’ve been immediately apparent that they were grossly overrating MBS’s.

But if that is the lesson to be learned, then nothing has been learned. There is no doubt now that the raters all made a big mistake. But it is a wrong to think that mistake was an infectious affliction borne only by those who inhaled the air inside the rating agency’s buildings. Others did look, and came to the same conclusion as S&P. Not because they were mere S&P parrots, but because the conventional wisdom of the profession at the time led almost all to the same conclusion. And no matter what anyone does, such gross mistakes WILL happen again. Bubbles exist, and exist because they can only be widely recognized after the fact. It is unreasonable to place culpability upon those who did not correctly distinguish sustainable boom from transient bubble.

Mistaken predictions are the RESULT of a bubble, not the cause.

vikingvista August 11, 2011 at 2:54 am

Economiser,

Good point about private contracts. But what do you think the whole ratings landscape would look like were it not for government regulators’ imposition of certain ratings standards? Do you think a single ratings agency’s decision would have such a large immediate systemic impact?

Methinks1776 August 11, 2011 at 8:06 am

Viking,

I simply stated one fact, I don’t attribute the whole bubble to it because I generally agree with what you’re saying. Nobody wants to scratch the surface. I mean, people hadn’t a clue what was in CDOs and they bought them hand over fist. People do a lot of things I consider imprudent.

However, as with all bubbles, some things were obvious. My husband was structuring hedges for some of the ABS that were created during that period and he just couldn’t believe how horrible the instruments were. It was obvious how bad they were, yet they were all massively bid – particularly by yield hungry foreign entities. Worse, the guys structuring the ABS totally believed their own BS (as you point out). We found that astonishing. People don’t want to know. They don’t want to think.

We solved that problem by avoiding buying property (easy to do living in NYC). The hottest real estate markets have historically grown 8% per year. Suddenly, prices increased 30% per year. What changed? Is there a housing shortage? What happens when everyone and their dog has multiple residences? It was obvious to us and plenty of other people that house prices cannot increase 30% annually forever. There was no reason for it.

vikingvista August 14, 2011 at 11:03 pm

Methinks,

Am I too argumentative? It’s only because it’s more useful to argue with someone smarter than me, than the usual dimwitted troll we get. And I so rarely find the opportunity to argue with you.

Seth August 9, 2011 at 11:45 pm

Nice. I agree. Few doubt the might of the American government to extract by force more wealth from the wealthiest folks of all time.

The rating reflects that the wealthiest folks of all time are indeed running out of money to be extracted.

PrometheeFeu August 10, 2011 at 12:09 am

I think it’s about signaling that they are a “serious” rating agency. Another way to put it would be: How can you call yourself a debt-rating agency and not rate the most used debt in the world?

Kirby August 10, 2011 at 8:31 am

I would have downgraded the fed to CC a while ago on the grounds that it is a ponzi scheme.

Methinks1776 August 11, 2011 at 9:22 am

Only CC?

Mesa Econoguy August 9, 2011 at 11:04 pm

Don, this is leftist opposite land, where down is up, and up is up, too.

These people (the left) are completely delusional, and fairly psychotic.

tdp August 9, 2011 at 11:13 pm

The GOP will continue to get its ass kicked in all political maneuvering until it presents a complete plan for debt reduction and elimination, long term economic growth, and a more efficient government that performs its necessary and enumerated functions (as described in the document in the toiler paper holder in the White House master bathroom) without wasting money or interfering in peoples’ lives.

It must also take special care to publicize the disastrous effects of the Democrats’ policies on the very people they claim to help. The Democrats’ only effective weapon is their ad hominem-class warfare combination that implies the rich are stealing from the poor and actively keeping them down.

Greg Webb August 10, 2011 at 12:32 am

Nicely, and accurately, written.

Mesa Econoguy August 10, 2011 at 7:01 pm

Absolutely true, and they have an undeliverable message (the Tea Part folks) because it doesn’t involve giving free shit away, at other peoples’ expense.

Which is why I have guns.

Chucklehead August 9, 2011 at 11:06 pm

So paying back treasuries with a debased currency is the functional equivalent to bond holders taking a hair cut (getting 85 cents on the dollar.) Why were treasuries not downgraded when QE1 or QE2 was announced. Is it because we are the tallest midget,or the best horse in the glue factory?

PrometheeFeu August 10, 2011 at 12:10 am

Your credit rating is your risk of technical default. Printing money is not technical default.

Greg Webb August 10, 2011 at 12:30 am

I know. Wouldn’t it be nice if we could all just print money to repay our debts? Oh, wait! That would be theft.

Chucklehead August 10, 2011 at 1:37 am

Quantitative easing is the functional equivalent to counterfeiting. Better you than Benanke. You aren’t as greedy.

Greg Webb August 10, 2011 at 10:08 am

And, counterfeiting is the functional equivalent of theft. We just call it quantitative easing to ease the conscience of the government officials stealing the value of our money.

steve August 9, 2011 at 11:18 pm

Because the GOP had already voted for a bill that required the debt ceiling be raised. When it came time to raise it, they balked. If you were a creditor, how would you look at that?

Steve

Methinks1776 August 9, 2011 at 11:41 pm

The same way I would look at a person who owed me money and decided not borrow more even though he had considered doing so the day before.

vikingvista August 9, 2011 at 11:43 pm

“If you were a creditor, how would you look at that?”

That even a Tea Party infiltrated Republican party cannot be trusted to cut spending.

Greg Webb August 10, 2011 at 12:28 am

Initially, a credit analyst would view it as a positive sign that the borrower was accepting economic reality and voluntarily stopping the first problem, which is additional borrowing. The credit analyst, however, would immediately stop further lending by his bank to that borrower once the analyst realized that the borrower refused after all to accept economic reality and intended to borrow new funds to rollover the existing debt, pay interest, and continuing living beyond his means to repay.

vikingvista August 10, 2011 at 12:42 am

The ratings of government debt are different than private debt. Private debt ratings are a prediction of an entity’s ability to earn enough income to pay off its debt. Public debt ratings are a prediction of the willingness and ability of a government to loot its citizens. That’s one reason S&P criticized Obama’s “failure” to restore Clinton’s tax increases.

Methinks1776 August 10, 2011 at 6:56 am

That’s not my understanding of the S&P’s objection. As I understand it, they objected to the lack of revenue. S&P didn’t specify where the revenue must come from. The U.S. could easily sell off its land holdings to raise revenue instead of attempting to rob the population.

I also think that’s gimme to the current administration’s obsession with extracting tribute, which Obama euphemistically refers to as “raising revenue”. They’re hoping if they don’t seem partisan, Obama won’t burn down their houses. Fools.

Economiser August 10, 2011 at 10:03 am

Don’t we still have a few hundred billion dollars sitting in the TARP accounts? The government has plenty of saleable assets other than Yellowstone.

vikingvista August 11, 2011 at 1:29 am

“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.”

“Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration
is advocating.”

“On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high
earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.”

–Standard & Poors

Methinks1776 August 11, 2011 at 1:31 pm

I stand correct, Viking. My respect for the rating agencies has not increased.

Greg Webb August 10, 2011 at 10:14 am

Vik, yes, there are some differences, but the fundamental analysis of any entity’s repayment capacity is essentially the same. The federal government does not currently have sufficient cash inflow to cover all of its obligations if those obligations were properly set up on reasonable repayment programs given the purpose and collateral securing those loans. That makes the debt substandard or below investment grade. There does not have to be any actual loss to the owner of such debt.

vikingvista August 11, 2011 at 2:02 am

I wasn’t arguing, just expounding. A company with a 7:1 debt to income ratio would not be investment grade. Give that company the ability to loot to whatever extent necessary, and the same ratio becomes investment grade.

Jim August 9, 2011 at 11:23 pm

Italy raided Moody’s and S&P offices after their downgrades. In USA, there is now a Senate investigation. It appears denial is preferable to changing one’s surreal world view.

I am surprised they haven’t downgraded the largest banks as well, whose balance sheets look not much better than junk at the moment. Bank of America may be on the verge of implosion.

Meanwhile Citibank continued to send foreclosure messages to a friend 2 months after he sold his house and paid them in full. He also paid Citi’s foreclosure legal fees of $1,000; all they did was send him a letter since he paid off the mortgage before it went to court. Pretty good work for getting out of the miscellaneous “M” file. The whole institution is out of control.

muirgeo August 9, 2011 at 11:35 pm

So apparently it is OK to hold the full faith and credit of the USA and it’s people hostage along with ALL of our investments but if we ask those who have accumulated massive amounts of wealth from government spending and rent to pay a little more in taxes for the government money THEY ALREADY received in various ways… THEN we are holding a gun to some ones head.

Don’t forget it was these Tea Party Retards who voted for Republicans who spent the hell out of the budget subsidizing Wall Street, fighting Mooslims extremist, passing unpaid Medicare part D while cutting taxes massively for the wealthy and then killing receipts even more massively by driving the economy into a ditch…. NOW when there is a Black man as POTUS it’s time to sabotage spending and receipts.

They are criminals and terrorist exicuting OBL’s plan to destroy the economy of the United States. The Muslim terrorist are just laughing and probably now prepared to help fund the Tea Party Dumbasses.

ArrowSmith August 9, 2011 at 11:43 pm

How does it feel to be a 29%er?

Methinks1776 August 9, 2011 at 11:51 pm

Ah, yes. When you sort of realize that you can’t possibly defend your original idiocy, it’s time to become completely unhinged and break out the badly punctuated, misspelled, incoherent rant.

Idiot, the people who are clever enough to figure out how to get the government to shower them with favours are clever enough to figure out how to increase wealth transfers to offset taxes. The people who are clever enough to make a lot of money honestly are clever enough to keep it out of the hands of the monkey in The Swamp. As Leona Helmsley said, “Taxes are for the little people”.

Methinks1776 August 9, 2011 at 11:53 pm

“MonkeyS in The Swamp”.

Greg Webb August 10, 2011 at 12:16 am

Ah, the race card…the last straw of those desperate to hold on to power…feel it slip away…

Kirby August 10, 2011 at 8:36 am

have accumulated massive amounts of wealth from government spending

Ah, the glory of complete f***ing ignorance

? August 11, 2011 at 12:53 am

But Muir,

Those Tea Party folks did it through your favorite mechanism democracy. Let me guess anytime the majority votes against your will they are “Retards”?

muirgeo August 10, 2011 at 12:03 am

It’s comforting to the security of my position and understanding of libertarianism to see it siding with the Theocratic Creationist Climate Change Denying, Science Hating Fact Weary Dishonest Math Hating Intellectualism-is-a-crime Alternate Reality Anti-democratic History Rewriting War Mongering Gun Toting Bigoted Keep your Government Hands off my Medicare Death Panel Tea Party Hostage Taking Terrorist… yeah…. I’m glad I’m not siding with them on ANYTHING!

Dan J August 10, 2011 at 12:09 am

FDR was filthy adulterer and put the ‘GREAT’ in Great Depression.

Greg Webb August 10, 2011 at 12:11 am

Perhaps…but libertarians also like hiking, traveling internationally, and drinking adult beverages…

PrometheeFeu August 10, 2011 at 12:13 am

Did you know that Hitler breath air? Perhaps your should reconsider your consumption of air.

brotio August 10, 2011 at 12:54 am

lmao!

brotio August 10, 2011 at 3:23 am

I should point out, though, that Yasafi doesn’t breathe the same sort of air that humans breathe.

Yasafi is a helium-breather, and his head would float away due to lack of substance if it weren’t held down by the ample posterior it’s jammed into.

Invisible Backhand August 10, 2011 at 12:21 am

Tribalism at its finest, they should study select philosophic works by Theodore Geisel. The one about the star bellied sneetches would be appropriate, methinks.

Greg Webb August 10, 2011 at 12:08 am

Eugene Robinson’s article is the typical despicable and disingenuous political trick intended to divert the public’s attention from the real issue of reckless and out-of-control spending by the federal government.

The threat not to raise the debt limit is not even a technical default under the normal terms of a loan agreement. So, to a credit analyst, Mr. Robinson’s argument is illogical and incoherent nonsense.

The federal government’s insufficient cash flow to meet reasonable repayment programs for for its outstanding debt given the purpose and collateral securing those loans is, however, cause for concern. Such loans merit, at best, a Substandard Classification under the Uniform Loan Classification Standards issued by the federal bank regulatory agencies. Thus, Standard and Poor’s downgrade of the federal government’s debt rating is a step in the right direction, but is still inappropriately considered investment-grade debt.

Dan J August 10, 2011 at 12:15 am

I am shocked he didn’t allude to the debt issue as racist. Most of his columns are of ‘ race hustling’.

Greg Webb August 10, 2011 at 12:19 am

Dan J, that just means he knows that power is slipping away from the statists currently in office…Which is a good thing!

vikingvista August 10, 2011 at 12:21 am

If the Feds want their AAA rating back, all they have to do is prove their political will to make substantial cuts in entitlement and defense spending in order to ensure long term principle and interest payments on their debt.

S&P’s correct recognition that they lack such will is why some call the downgrade a political decision.

Invisible Backhand August 10, 2011 at 12:24 am

Did you know that, thanks to the downgrade, now all of the AAA rated countries have socialist health care?

vikingvista August 10, 2011 at 12:46 am

That was true even before the downgrade.

But even if you weren’t mistaken, what causal mechanism would you propose to explain it?

Invisible Backhand August 10, 2011 at 1:34 am

Your first sentence is an unfounded assertion, I’m going to ignore it.

Causal mechanism? Since the list of AAA rated countries tilts heavily towards Europe, I’m guessing it was World War Two. So many people with so many injuries forced them to streamline medical care.

Chucklehead August 10, 2011 at 1:40 am

“So many people with so many injuries forced them to streamline medical care.” So who is making unfounded assertions now?

vikingvista August 10, 2011 at 2:24 am

If you want people to ignore unfounded assertions, you are going to find it very lonely here. How about instead you stop avoiding what you don’t want to hear?

Jim August 10, 2011 at 1:14 am

Western Europe will lose their AAA ratings like dominoes. So I’m not sure of your point here.

Invisible Backhand August 10, 2011 at 1:36 am

That for this brief shining moment, I am right and you are wrong? Isn’t that what blog commenting is?

Methinks1776 August 10, 2011 at 6:49 am

That adequately describes every comment you’ve smeared onto this blog, Invisible Brain.

Kevin H August 10, 2011 at 1:40 am

So with all the issues facing the US, the Isle of Man and Hong Kong are now safer bets than the US? Please. There is no evidence that the markets could care less what S&P have to say on the matter.

Methinks1776 August 10, 2011 at 7:05 am

Maybe you missed the 17% equity market sell off just before the well telegraphed downgrade, culminating in a 7% sell off in S&P futures the day after the downgrade and, ken H? The

The S&P provided no insight on the United States to the bond market. But, it did weigh heavily on riskier assets – including non AAA rated corporate debt. It served to underscore the gravity of the problem of profligate government spending in the United States and forced people to stop ignoring the eventual consequences of this profligacy.

Kevin H August 10, 2011 at 9:03 pm

And the money that poured out of equities flowed into US Treasuries driving up yields. A more likely interpretation is that the markets are afraid that the downgrade will result in knee-jerk government cuts which will add to slack economic demand.

Methinks1776 August 10, 2011 at 9:38 pm

Um….when money flows into bonds, yields are driven DOWN.

Your random explanation is adorable, but sell-offs in relatively risky assets are almost always accompanied by rallies in Treasurys. It’s called “flight to quality”. So, unless you think that every Treasury rally reflects investor fear of the dangers inherent in ending profligate spending by the clowns in D.C, you’re going to have to come up with more evidence than feeble assertion that there’s a different reason this time.

richard August 10, 2011 at 4:54 am

Don,

I think the market is reacting to the fact that Mr Obama has clearly demonstrated to the whole world that -whatever the cost- he will not present any significant savings. He will refuse categorically to reduce the budget.

After all, the requests from the GOP were quite modest and the reactions from the Democrats, including Mr Obama, were like a bunch of children crying for their toys.

And that -an irresponsible leader in times of crisis- is something the market will not tolerate.

Martin Brock August 10, 2011 at 7:31 am

Mr. Robinson scolds, “If you threaten not to pay your bills, people will – and should – take you seriously.”

Right. I want the Federal government to threaten not to pay its bills until people wise up and stop buying entitlement to its tax revenue altogether. Since I advocate default, any downgrade is encouraging.

Randy August 10, 2011 at 7:32 am

So, the Fed has saved the day… by promising to hand out free money to the politically connected for as long as they possibly can…

ettubloge August 10, 2011 at 7:33 am

The credit card analogies are all good but have missed a significant point.

This profligate borrower’s personal antics are known to the creditor (ie the rating agency). The creditor understands the borrower’s source of income better than the borrower and has taken that into account.

This borrower reminds me of a trust fund baby that went to all the right schools and knows nothing. The trust fund beneficiary’s source of income, say his uncle, is suffering business problems ironically mostly due to the borrower’s impediments. That sounds strange since what trust fund baby would undermine the uncle’s ability to make money upon which he depends?

The trust fund baby can actually put a gun to uncle’s head to force him to hire his lazy, incompetent friends, use erratic suppliers, overpay his employees, move his plant, sue him, regulate him and run him out of business.

Analogies to the current fiscal mess are strained because nothing else in reality comes close to matching it.

Martin Brock August 10, 2011 at 5:32 pm

In reality, the trust fund baby will always consume everything it can persuade his uncle to surrender, including his uncle’s credit. He knows nothing about his uncle’s business, so he’ll believe any theory the business consistent with his desire to consume more. He’ll even believe that pilling more and more debt onto the business, without any corresponding increase in the business’ productive capital, is good for it, and he’ll find no shortage of academic economists to confirm his theory, as long as he’s supporting their academies.

Prole August 10, 2011 at 8:09 am

I recently tried to refinance my home and discovered my credit ain’t what it used to be.
I’ve a couple credit cards with running balances (though I haven’t added to the balances in a couple years) and the credit card companies recently lowered my limits.
This had the effect of increasing the balance to potential debt ratio, which lowered my credit score.

If they were to increase my credit limit, then presumably my credit score would improve.

Kirby August 10, 2011 at 8:39 am

Theres a Catch-22
“no, we can’t raise your credit limit, because your rating isn’t good enough”

Prole August 10, 2011 at 8:46 am

My point was that as Uncle Sam approaches his debt limit his rating is unchanged, and when his limit is increased his rating drops.

Exact opposite.

Dan J August 11, 2011 at 2:55 am

A system set to rate millions of different people individually using a one size fits all computer generated model and contrasted with one that has individuals spending time and effort to crunch numbers and rate it based soley on it’s ability to pay. Not to mention, the impact of you defaulting compared to a trillion dollar bureaucracy.

Prole August 10, 2011 at 8:51 am

But my experience is the exact opposite of what happens to Uncle Sam.

As his debt approaches his limit his rating remains unchanged while mine would have dropped.

When given new credit, decreasing the percentage of debt to potential debt, his rating drops while mine would have gone up.

Stormy Dragon August 10, 2011 at 10:17 am

The downgrade is far more plausibly a consequence of Uncle Sam breaking that vow – and doing so in a way that reveals his cowardly refusal, at the end of the day, to address his addiction to spending greater and greater sums of money now and passing the bills on to taxpayers later.

A question: Government revenue is currently only covering 58% of spending, so absent some sort of increase in the debt ceiling, our only choices run along a curve from an immediate 42% cut in spending to an immediate 67% increase in taxes. Could you specify what portion of that line constitutes a result you would consider non-cowardly?

Methinks1776 August 10, 2011 at 4:43 pm

Stormy, there is nothing more cowardly than creating messes that other people must clean up. That is the very nature of politics, so all politicians are cowards. Note the promises they made and the money they confiscated and frittered away and the lack of will to admit that they screwed up and people aren’t getting the promised free candy.

Imagine how motivated you would be to work if your taxes were raised 67%. I’ve never found a single person (either liberal or conservative or anything else) who would be willing to work the same amount. So, raising taxes will not yield enough revenue to pay for this stuff. Moral arguments aside (I think it is immoral to promise Jack something that I plan to later force you to pay for, but that’s tangental), it just doesn’t work in practice.

So, you have to start hacking and slashing at pet projects, redundant departments, useless and duplicate government programs and the military budget. Maybe, I dunno, make Europe pay for its won defense and stop frittering away wealth in weird Middle Eastern conflicts and stop paying Monsanto and Conagra to grow and not grow things. There are plenty of places to cut immediately. The amount the government spends on useless crap is astonishing. Just stopping payments to political cronies would yield massive savings. Well, I think I just stumbled into the answer – cutting subsidies to political cronies would be the least cowardly action. That takes massive balls.

ettubloge August 11, 2011 at 7:24 am

Very good commentary. How do they not get that it is the SPENDING that is the whole problem? Taxation is a cost that makes working more unattractive. Incentives, risk, capital, savings, and all of the moral values they impart.

tdp August 11, 2011 at 11:34 pm

John Stossel did a show where he managed to give Uncle Sam a $237 billion surplus without raising taxes. Maybe we should let him run the country for a while.

Ron Paul and Gary Johnson both have the balls to slash government spending, but neither has much chance in the primaries thanks to Bachmann, Palin, Gingrich, Romney, and Santorum. Pawlenty and Huntsman would be tolerable but wouldn’t have the cojones to make deep enough cuts.

Daniel August 10, 2011 at 1:20 pm

Don,

You’re right. Felix Salmon tells me that this is why Moody’s has not downgraded us yet. http://blogs.reuters.com/felix-salmon/2011/08/09/the-difference-between-sp-and-moodys/

Ryan Vann August 11, 2011 at 2:05 am

“And the money that poured out of equities flowed into US Treasuries driving up yields”

Hahahahha. Can’t even get basic financial fundamentals right.

Wukgfjng August 12, 2011 at 1:06 am
Nemoknada August 13, 2011 at 2:21 pm

“Why is the first remotely serious effort in ages to oblige government not to borrow beyond a certain limit portrayed as fiscal imprudence?”

It is not so portrayed. It is portrayed as a reason to be unsure that we will choose to honor our savers’ claims. If we have the political will to renege on our obligations, we are not a AAA credit, no matter how able we are to meet them. After all, we PRINT our own money; there can be no doubt about our ABILITY to pay. But if we don’t reduce the deficit, we may CHOOSE not to pay, and that’s a rating-killer, by yiminee.. “Remotely serious efforts” don’t get you a AAA rating. As Yoda says, there is no try, there is only do and not do.

Greg Webb August 14, 2011 at 9:26 pm

Don, another excellent letter!

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