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United States loses AAA credit rating from S&P

769 points by tshtf 15y ago

kenjackson 15y ago
Has the US ever not had a AAA credit rating from S&P (until now)?
- fanboy123 15y ago
  Has always had AAA rating since the start of sovereign ratings. Look out below.
  - aculver 15y ago
    .. and that was in 1918. So basically this is the first time in almost 100 years.
fanboy123 15y ago
from the press release: "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. "
- Getahobby 15y ago
  This really should be a call for both parties to start working together but it will most likely turbo charge the blame game.
  - ktsmith 15y ago
    We can expect this to not impact how the parties work against each in the least. The ratings agencies said up front what they were expecting to see in the debt deal and congress didn't come close.
  - seldo 15y ago
    Correct, and it's already begun: http://tpmdc.talkingpointsmemo.com/2011/08/gop-tries-to-shift-blame-for-sp-downgrade-of-us-creditworthiness.php http://tpmdc.talkingpointsmemo.com/2011/08/gop-tries-to-shif...
    - hugh3 15y ago
      My favourite thing about that link is how it functions both ways. It describes an example of Republicans trying to shift blame onto Democrats, and it is an example of Democrats trying to shift blame onto Republicans.
  - guildchatter 15y ago
    It's definitely going to be the blame game, especially with Obama's re-election campaign coming up. sigh
  - protomyth 15y ago
    Sadly, both parties will see this as an advantage going into the 2012 election.
- watchandwait 15y ago
  There has been a complete lack of leadership from the Congressional Democrats on this issue. They haven't produced a budget plan in nearly three years, while borrowing 40 cents of every dollar spent during that time. I'm not a partisan-- George Bush's runaway spending contributed a great deal to the current predicament. But the basic Congressional oversight and operating under a budget hasn't happened the last couple of years.
  - logjam 15y ago
    There has been a complete lack of leadership from the Congressional Democrats on this issue. They haven't produced a budget plan in nearly three years, while borrowing 40 cents of every dollar spent during that time. Uh, you are merely parroting inaccurate GOP talking points, and I think we can be a little more accurate than that here. First of all, the House and Senate easily passed Obama’s first budget on the president’s 100th day in office. That budget measure, however, did not include a single GOP vote, a harbinger of the lack of bipartisanship to come. From 2009 to January 2011, Republicans forced more than 90 “cloture” votes, which require 60 senators to agree to limit debate (ie stop a filibuster) on a measure. Pretending that there was no Democrat "budget plan" for 2010 is disingenuous at best. Ongoing Democrat "plans" were continuously on the docket: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_reports&docid=f:hr060.pdf http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=11... Democrats did not have anything like a filibuster-proof majority in the Senate, and Republican Senators were quite open with their threat to filibuster any legislation until the “Bush-tax cuts” were extended. http://www.nationaljournal.com/congress/gop-will-filibuster-all-bills-if-taxes-budget-not-addressed-20101201 http://www.nationaljournal.com/congress/gop-will-filibuster-... "We write to inform you that we will not agree to invoke cloture on the motion to proceed to any legislative item until the Senate has acted to fund the government and we have prevented the tax increase that is currently awaiting all American taxpayers,” said the letter, which was sent to Senate Majority Leader Harry Reid this morning." “The true effect of this letter is to prevent the Senate from acting on many important issues that have bipartisan support,” Reid said this morning on the Senate floor. He said the letter codifies a GOP strategy of delaying action “on critical matters, then blaming the Democrats for not addressing the needs of the American people. Very cynical, but very obvious, very transparent.” And imagine that, here we are in 2011.... Of course, filibuster has been used by both parties, but these tactics by Republicans accelerated drastically when Dems took over Congress late in Bush's presidency. As even the conservative American Enterprise Institute noted, Republican filibusters were used increasingly to obstruct legislation: http://tpmdc.talkingpointsmemo.com/2010/01/the-rise-of-cloture-how-gop-filibuster-threats-have-changed-the-senate.php#more http://tpmdc.talkingpointsmemo.com/2010/01/the-rise-of-clotu... "It is the most striking in history," American Enterprise Institute resident scholar Norm Ornstein told TPM. "What happened, Ornstein says, is that during the last two years of President George W. Bush's second term, Republicans offered "no initiatives to speak of." "The initiatives were coming from the Democrats, and the Republicans wanted to kill 'em, or slow things down. Republican filibuster threats, Ornstein said, were "like throwing molasses in the road." "Still, Ornstein largely attributes the stark rise in cloture motions in the 110th Congress to Republican delay and obstruction tactics."
cantbecool 15y ago
I wonder what would have happened if S&P dropped the rating during the trading day, and not after the markets closed. We probably would have seen another -500 point drop on the DJI.
- fanboy123 15y ago
  They wait until late friday to make big changes to give the officaldom/industry a weekend to scramble/grab parachutes. They actually didnt release today until after the SPY stopped trading.
  - cantbecool 15y ago
    I wonder if they, the parachutes, will be golden this time around.
- adaml_623 15y ago
  Or perhaps the drop happened because a lot of the big banks knew that the downgrade was coming. Is it insider trading if everyone knows?
deleted 15y ago
[deleted]
winestock 15y ago
So it begins. A quote: "The outlook on the new U.S. credit rating is negative, S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months." I.e., things are going to get a lot worse before they get worse. Time to bring this back to a hacker's perspective. Is there any way to "hack" the system so as to get government finances to within commuting distance of sanity? Or have recent events already answered that question?
- aaronbrethorst 15y ago
  Letting the Bush tax cuts expire next year, and winding down operations in Iraq and Afghanistan would go a long way to balancing the Federal budget. As far as reducing the deficit goes, I have less insight into this. Except that making the Federal government's budget revenue-neutral is a critical first step.
  - onedognight 15y ago
    > would go a long way to balancing the Federal budget > as reducing the deficit goes, I have less insight into this Balancing the budget is exactly reducing the deficit. It's the debt I suspect you have less insight into. Frankly it's an embarrassment that they could only agree lower the deficit by less than 10%. They are a long way from addressing the debt.
    - aaronbrethorst 15y ago
      Yes, you are correct. Long day and I'm confusing terms :)
  - mark_l_watson 15y ago
    +1 for that. Expiring the tax cuts and reducing foreign military expenditures is our best option. We have an obligation to keep our current military personel employed but I would rather they be spending their salaries in local businesses here. Military cuts can occur by shutting down foreign bases and drastically reducing the recruitment of new military personel. It would be funny, if it were not so serious: a lot of my conservative friends harp on the need to stay in the middle east, but refuse to pay for it with taxes.
silverlight 15y ago
If the government that produces the reserve currency can't hold up a AAA rating, what can? The idea that anything else should have a AAA rating if the US gov't doesn't seems a little ridiculous to me on face value.
- jackpirate 15y ago
  That's one of the MAJOR implications of this, if I'm not mistaken. Of course, bonds denoted in Euro's or other currencies wouldn't be affected.
- mdda 15y ago
  The implication is really the other way around. The USD was the reserve currency in part because of the credibility of the US government's financials (and also because of amount of trade, etc). But obviously, the US has taken a huge beating credibility-wise recently. After all, Sterling used to be the world's reserve currency : things change.
- cfaubell 15y ago
  There are countries who don't use debt payments as political tools. A congressional stalemate that leads to a failure to pay bondholders is entirely possible.
- Atropos 15y ago
  Some other AAA countries: Switzerland, Luxembourg, Norway, Singapore. To me it seems a little ridiculous that the US and these countries shared the same rating for such a long time. On the other hand, there are AAA countries like UK, France, Germany that do not seem to fit into the same category either. I have no real opinion if the US deserves the AAA rating, but thinking treasuries are the safest investment in the world seems a bit optimistic.
fleitz 15y ago
I wonder if the downgrade is because the US might be unwilling to pay its debts or because they feel the people may be unwilling to bailout the banks again?
- miked 15y ago
  The downgrade is because the US Gov is spending far more than it's taking in. In other words, it's for the same reason that every other person / business / government gets downgraded. It's important to realize that there's no magic here.
  - pyoung 15y ago
    You cannot compare 'person' and 'business' with government. The government has the ability to print money, whereas the other two do not. The only reason they don't print money to pay off all their debts is because it will result in massive inflation. The reason the European debt crises is so serious is because the adoption of the euro means that no individual contry can print their own money to avoid default.
    - veyron 15y ago
      "The reason the European debt crises is so serious is because the adoption of the euro means that no individual contry can print their own money to avoid default." It's more because each individual country issues bonds. The ECB can't issue debt.
      - pyoung 15y ago
        I am not sure I agree. The primary difference between pre and post EURO Europe is that, individual EURO countries no longer control their own currency. In times of economic crisis, countries can manipulate their currencies to make their economies more competitive internationally, and/or inflate their way out of a debt crisis. Despite what the media is saying, the U.S. is not in a debt crisis, we have many tools at our disposal to prevent default, including currency manipulation. The EU on the other hand has a handful of countries that are in serious jeopardy of defaulting.
eps 15y ago
One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.
- seldo 15y ago
  This is by far the biggest problem. I don't think anybody realizes how huge a sell-off that's going to be if the institutions apply their rules about AAA debt to US bonds (a big if, as others have noted). A sell-off of bonds would make it more expensive for the government to borrow money, which would further accelerate the expansion of the deficit. The deficit is the primary driver of the downgrade, so an acceleration would trigger further downgrades.
  - _delirium 15y ago
    Treasuries act as a money store for large institutions that I think would be hard for them to replace in practice. They use T-bills in particular as more or less a jumbo-sized version of an FDIC-insured bank account. Where would they move that money to? I.e., who else provides a similarly safe account where you can deposit $50 billion? Can't be to a bank account, because all the major banks have even lower ratings. There aren't enough AAA-rated corporates to move all that money. Eurozone bonds aren't looking too hot, and may also have institutional rules on proportion of the investment that can go into foreign bonds. I suppose they could buy large quantities of gold and physically store it in vaults, but many institutional investors also have rules on how much they can put into commodities. Perhaps giant suitcases of dollar bills? You can't pull money out of an instrument without putting it somewhere else!
    - bmelton 15y ago
      You could, for example, move your money to Canadian treasuries, which are AAA rated, couldn't you? I am admittedly learning much of this as I read, but it seems to me that a large concern would be the amount of money that might simply shift out of our economy to economies with better (safer) credit ratings.
fletchowns 15y ago
Didn't S&P maintain that Lehman Brothers had a favorable rating up until they collapsed? And in the subsequent congressional hearings the rating agencies simply responded that the rating is their opinion. Why do people put so much faith in these ratings when they have proven to be not very useful in evaluating the risk associated with investing in an institution?
- thematt 15y ago
  People put faith in them because not everyone can hire an army of experts to evaluate all possible investments. S&P supplies their ratings to life insurance companies, pensions funds and even municipal governments. These entities don't have the resources to employ that expertise in-house, so they rely on companies like S&P and Moody's to give them guidance.
  - grourk 15y ago
    S&P and Moody's don't exactly employ an "army of experts" either. It's a few analysts making a rather subjective judgment and voting. (Literally, a few). And the investors who are actually buying US debt don't rely on ratings agencies to give them guidance, and do in fact have expertise in-house to evaluate these things. As has been mentioned elsewhere on this thread, institutional investors don't treat US bonds like any other, subject to triggers and rules like AAA-only. It's an exceptional case that is treated differently than the others, and one rating agency's opinion is not going to make as big an impact as people seem to think. It comes down to this: where else would they put their money?
  - giardini 15y ago
    thematt says "so they rely on companies like S&P and Moody's to give them guidance." And those companies fabricate data and sell it to them. Perhaps not everyone should invest in areas where they have no possibility of understanding the risks.
    - nazgulnarsil 15y ago
      "Perhaps not everyone should invest in areas where they have no possibility of understanding the risks." You just managed to sum up the vast majority of economics problems. Humans are dumb though. Not much you can do.
credo 15y ago
This illustrates one of the risks of hostage-taking and the mistaken assumption of Republican leadership that the "hostage" (their words, not mine) wouldn't be harmed see quote from Senate minority leader below From http://www.washingtonpost.com/politics/in-debt-deal-the-triumph-of-the-old-washington/2011/08/02/gIQARSFfqI_story_1.html http://www.washingtonpost.com/politics/in-debt-deal-the-triu... But at the Capitol, behind the four doors and the three receptionists and the police guard, McConnell said he could imagine doing this again. "I think some of our members may have thought the default issue was a hostage you might take a chance at shooting," he said. "Most of us didn’t think that. What we did learn is this - it’s a hostage that’s worth ransoming. And it focuses the Congress on something that must be done." [edit]: Interesting to see all the downvotes, but my comment had a direct quote from the GOP senate leader. Can anyone explain why they downvoted it. As for temphn's point below. Has any Nobel laureate defended the "hostage taking" ? Congress already controls both spending and taxation. So they can start fixing the deficit problem by cutting down on pork, cutting tax loopholes etc. Threatening to force a default is not the answer.
- temphn 15y ago
  The question is whether you believe the issue would have become an issue even if the Republicans hadn't raised it now. Many people look at this as an intervention; if the US is addicted to oil, we are even more addicted to borrowing. I suppose it really comes down to whether you find multiplier/countercyclical spending arguments persuasive or not; Nobel Laureates come down on both sides.
  - Pewpewarrows 15y ago
    The Republicans raising the issue was good and healthy for us. The clusterfuck that emerged in the months afterwards because of them refusing to pass any bill that didn't fall neatly into their little new imaginary rules was the problem.
localhost3000 15y ago
These are the same guys who rated subprime mortgage backed bonds AAA. How the rating agencies still have any credibility is completely incomprehensible to me. I hope someone in the press has the wherewithal to make this point.
- mdda 15y ago
  So are you saying that the US shouldn't have been AAA? Or that S&P should be regulated so that its hands are tied behind its back? While the {S&P, Moodys, Fitch} sub-prime department obviously got completely ahead of itself modelling-wise, the corporate and sovereign departments have a lot of credibility : partly because they haven't been trying to assign values to 'a whole new way of doing things (this time it's different, etc)'.
- Uchikoma 15y ago
  So you think the US has had inflated ratings for years just like with subprimes? And should be even lower rated?
chailatte 15y ago
Took those lazy rating agencies a while. - 1.6 Trillion budget deficit - 14 Trillion national debt - 55 Trillion US total debt - 115 Trillion Unfunded liabilities - 17% U6 unemployment - 45.8 Million Americans on Food Stamps - 52 Million Americans without health insurance - 1/2 of mortgages are underwater - 63% labor participation rate, lowest since early 80s - -5% in Real medium household income in the last 10 years - 25% of US households have zero or negative net worth - 1 out of every 45 households was hit with foreclosure - average length of unemployment is now 40 weeks
- wtallis 15y ago
  The S&P rating is only an assessment of risk in the US Treasury bonds, not a general rating of entire US economy.
  - _delirium 15y ago
    In particular, their statement seems to claim that it's almost entirely due to their view that the U.S. might choose not to pay back its bonds, not that it couldn't; when explaining what's changed since previous assessments, their statement mainly focuses on the political will to service debt.
  - joezydeco 15y ago
    Listen to the Planet Money podcast. Lots of factors are considered, including political ones.
  - watchandwait 15y ago
    That's wrong, the GDP and expected GDP is a big part of the rating-- known as the "capacity to repay".
    - wtallis 15y ago
      Doesn't the phrase "capacity to repay" make it clear that GDP matters only to the extent that it is a risk factor?
apaprocki 15y ago
... and now all the random crap financial code out there that simply hard-codes "AAA" as the US credit rating will have problems. I bet a lot of people will be bug testing this change over the weekend. EDIT: This seems to sum it up: http://lostechies.com/johnpetersen/2011/07/16/the-impact-of-united-states-debt-crisis-on-technology/ http://lostechies.com/johnpetersen/2011/07/16/the-impact-of-...
- winestock 15y ago
  "Sorry, boss. Our positions are busted because we hard-coded AAA as the T-bill credit rating. Look on the bright side, everyone's got bigger things to worry about."
NHQ 15y ago
I am totally flabbergasted that media and governments would give one-shits-worth of consideration to what the credit ratings agencies have to say. The same agencies that gave high ratings to the sour derivatives market which eventually collapsed our economy. The ratings agencies are Wall Street shills. Lowering US Debt ratings will result in the US having to pay higher interest rates, which go into the pockets of the major financial firms. Government et al playing right into the hands of the banks.
latch 15y ago
For those who aren't sure why this matters there are two things to note. First, interest will go up. US Bonds are now considered riskier than they were before. This means investors in US Bonds will expect to collect more interest due to the greater risk they are taking. Instead of paying China and Japan 3% (for example) on $1 trilion (each), the US will now have to pay 3.5% (and climbing). Of course, the higher the interest rate, the harder it is to pay back (the quicker a new ceiling is reached), the likelier this happens again. There could be some pretty massive dumping of US bonds. A number of foreign investors can only carry AAA risk. (It's kinda unclear where they'll run to though, since I think all the other AAA countries combined don't issue as much debt as the US). So, the economy might take a pretty big hit by losing all those investors. Now, generally you need 2 of the big 3 rating agencies to trigger any of this. So it remains to be seen whether Moody or Fitch will follow. I think they both will. Also worth mentioning is that Canada recently came back from a downgrade (by S&P) mostly by tightening their spending belt. Took 10 years (1992-2002). Australia did it too, though it took 7 years longer.
- TomOfTTB 15y ago
  Again this is based on the same logic that people will treat the U.S. Government the same way they'd treat any other person and that's just not going to happen. If the U.S. falls back into recession we'll take everyone with us. Other countries know this. Banks know this. Institutional Investors know this. Increase the interest rate on the U.S. and you'll trigger an increase on the U.S. consumer while exacerbating the U.S. debt crisis (which is the whole reason for the downgrade). That would guarantee a recession and would bring every investment down. Finally everyone knows what S&P is up to. You said it yourself. They aren't happy with U.S. policy and they've been able to bully other governments into austerity in the past. So they think they can do it here. But S&P's opinion of U.S. policy isn't going to be enough to convince investors to willingly create another recession (Please note I'm in favor of austerity and think we're already headed into a recession I'm just realistic about S&P's limited power)
  - mbreese 15y ago
    Some institutions are obligated (by charter or contract) to only buy AAA rated bonds. That's why it's a big deal... Now that being said, I have no idea how this would work in practice.
geuis 15y ago
(Reference: http://www.federalbudget.com/ http://www.federalbudget.com/) Steps to recovery: 1) End all offensive military actions overseas. Finish winding down Iraq and abandon Afghanistan wholesale. These actions have cost several trillion dollars over the last 10 years. We can't get that money back, but we can stop spending more. 2) Defense spending is in the top 3 highest budget expenditures. Cut it by 1 third across the board. Maintain important overseas installations such as Japan and Taiwan. Given China's rise, its wise long-term to keep a presence in the region. Scale back deployments in Europe unless Russia still is still a threat to western Europe. 3) The most amount of money the U.S. spends is Health and Human Services. The U.S. health system is a fucking mess. Somehow we spend the most on healthcare and get some of the worst societal benefits out of any industrialized country. I don't have an answer here, but it likely involves completely tearing down the existing system to its nuts and bolts and building it back up. I'd love to hear ideas on this point from others that know more about it. 4) Social Security is the other one. My mom relies on it, so does a lot of my family. We're from meager backgrounds and traditionally have come from poorer parts of the nation. That being said, cut it. When I look at my paycheck and see that upwards of 40% of my income is being sucked out by the government and used more for things I oppose than things I support (e.g. war spending versus scientific investment) it pisses me right off. Yes, I have heard the naive argument "But taxes are there to run the things you use like roads and government services that you use every day". This is true only in part. Yup, we need an army. Yup, we need local police. Yup, we need roads. Yup, we need a justice system. But it doesn't take trillions of dollars a year to run those things. The government shouldn't interfere with business like propping up failing business models. It should work to make sure that business plays fair, i.e. anti-monopoly or collusion, etc. I'm more liberal than conservative, and definitely not one of these people that wants business to have free-reign over everything. But there are bottom lines that we have crossed and need to back off.
- Troll_Whisperer 15y ago
  Maintain important overseas installations such as Japan and Taiwan. The US hasn't had a base in Taiwan for 30 years. Maybe you're thinking of Korea?
- quandrum 15y ago
mdkess 15y ago
I am not American, and here's what I don't get: America can borrow money right now at 1.5% for five years. Why is there such a clamour to stop? I would hope that the government would be able to get better than 1.5% return with the money - if the CEO of any company chose not to take on debt at this rate they'd get fired. It seems like all of the media coverage is glossing over this.
- georgieporgie 15y ago
  There's a lot that doesn't make any sense. As you say, interest rates are low. Plenty of people are out of work. To me, that says, "perfect time to build and repair infrastructure!" Whether you believe FDR's New Deal helped or hindered recovery from the Great Depression, the simple, business-oriented financials of it would seem to indicate that right now is the time to be building roads, trains, dams, nuclear plants, etc. Instead, we cut funding to things which may pay off later in order to funnel money into which have an inevitable negative rate of return, like imprisoning people, security theater, and killing people on the other side of the globe.
  - mdkess 15y ago
    That's exactly what I thought the response would have been. Cheap money, low employment - hire lots of people to do stuff. But it seems like the public opinion is that this debt is bad, and I'm don't understand why entirely. I mean, I see a lot of comparisons to credit card debt, so is it just lack of education/understanding?
    - eazolan 15y ago
      Why do you think borrowed money is "cheap"? We're not paying it back. Any of it. At best we can cover the interest payments. Why do you think this won't blow up in our faces?
      - mdkess 15y ago
        Interest has not become a huge issue, but in any case - so what? They got the money for cheap, it has (presumably) fueled growth. Beating 1.5% over five years is not difficult - the idea is to borrow money to accelerate growth - increase prosperity of America, which would return more than 1.5%. Not all debt is bad.
pitdesi 15y ago
An answer to the question we're all wondering- "What happens now" answered well in a planet money from a couple of weeks ago: http://www.npr.org/2011/07/18/138164761/what-happens-if-u-s-bond-ratings-are-downgraded http://www.npr.org/2011/07/18/138164761/what-happens-if-u-s-... TL;DR - "I'm not sure it will have any impact. When you look at the bond market — 10-year U.S. Treasuries, for example — where is it today? In the light of all this hype about debt ceilings and possible defaults, it's at 2.93 today, so this is an extremely low interest rate in both nominal and real terms. It means that everyone in the world is willing to hold these bonds and is not the least bit worried about the possibility of a default. So, investors haven't changed their view of the creditworthiness of the United States at all, and I don't think they're likely to in the foreseeable future." -Mark Weisbrot, co-director of the Center for Economic and Policy Research
- marcamillion 15y ago
  The reason yields have been so low is because a) there is no other 'safe haven' for investors to flock to, and b) the markets generally didn't anticipate a downgrade. A downgrade, even if the markets don't raise Yields, can be catastrophic because many financial institutions (mutual funds, insurance companies, unit trusts, etc.) can only hold AAA rated securities in their portfolios - and some central banks can only hold AAA rated securities as collateral in some situations. So, legally, they will not be able to hold on to American gov't debt, even if they wanted to. The mere fact that a ton of people will be flooding the market with debt, will push up yields and that will lead to other catastrophic consequences. I expect that the Fed will buy a ton of bonds to push down yields and keep the Treasuries Interest costs low - but they will have to print a ton of money to do that....which will lead to inflation, which leads to higher yields which leads to higher interest costs, and creates a crazy cycle. You get the idea. However, that's just theory - in a perfectly balanced global economy that's not fragile. In this global economy, I suspect that there might be a concerted effort to loosen standards to prevent a mass exodus out of US Treasuries, but at least this sends a strong signal that the ratings agencies are serious.
  - puredemo 15y ago
    How does this play out with the multiple ratings firms though?
imcqueen 15y ago
I just got a NYTimes news alert that S&P is in fact holding off on downgrading the US based on the math error that was discovered. Did anyone else see that come through? Is NYT just behind a little?
- CamperBob 15y ago
  If so it might be an interesting political tactic on S&P's part. Issue a downgrade to show you're serious, but include a 'math error' that justifies an almost-immediate retraction. If a ratings agency feels that it's necessary to use scare tactics, that's scary enough in itself.
AgentConundrum 15y ago
S&P's report is here: http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8 http://www.standardandpoors.com/servlet/BlobServer?blobheade...
- marshray 15y ago
  I love to hear them tell it like it is, all matter-of-fact like that. S&P ought to run as a 3rd-party presidential candidate in 2012. It's about time somebody brought down the cluebat.
veyron 15y ago
End of the day, these are the same jokers who were rating junk assets as AAA and completely missed every problem in this financial crisis. And the fact that moody's still maintains Aaa means that there's a nonzero chance it will have no effect. I hope.
mark_l_watson 15y ago
Yeah, the US deserves a downgrade. What pisses me off is that my wife and I have savings, live within our means, and if you believe Harvard economist Kenneth Rogoff (which I do), there is going to be 5% to 10% yearly inflation for a good while that takes money from savers and basically gives it to debtors. I am actually sympathetic to some debt forgiveness - it is not the people in need that I am pissed off at. Anyway, it is a mess, and everyone who is worth less than many millions of dollars is going to feel some pain. I expected this economic collapse to happen after the 2030s - suddenly, after a few years of W. Bush's presidency I realized that the grand plan was to cause the collapse to happen much sooner.
- kragen 15y ago
  > What pisses me off is that my wife and I have savings, live within our means, and... inflation ... takes money from savers and basically gives it to debtors. Well, it takes money from lenders (or cash holders) and gives it to debtors. If you don't like that, stop being a lender or cash holder: move out of cash and bonds into, say, stocks, commodities, or real estate. If you're really confident that that inflation is going to happen, go short cash: build up a huge credit card balance at the current low interest rate, while pouring all of your earnings into non-cash holdings. (Danger: if you go short and you're wrong, you're fucked.)
- 3pt14159 15y ago
  So buy Canadian Bonds or Chilean Bonds or Gold or Silver or Apple stock.
  - beagle3 15y ago
    You can't just quit the game. You bought gold, which conserves your wealth ... and the government takes 15% to 50% of your "profit" (depending on your circumstances). Debasing by the fed together with the tax systems guarantees there's nothing you can do against it.
- rayiner 15y ago
  If you're expecting sustained inflation then don't hold debt. Take your cash and buy rental properties with the crazy-low mortgage rates we have now. If we get sustained inflation then rental rates will go up while your fixed-interest mortgage payments will stay the same. Profit.
dennisgorelik 15y ago
That's a good news and a wake up call.
Tekhne 15y ago
This downgrade may just be the first sign of real problems to come. For detailed coverage of the coming US financial storm see the documentary I.O.U.S.A. from former U.S. Comptroller General David Walker (I've seen it on Netflix streaming). http://www.iousathemovie.com http://www.iousathemovie.com
warmfuzzykitten 15y ago
The real story is that S&P thinks downgrading the US debt will provide political cover against investigations into their role in the mortgage securities debacle by the SEC and Justice. They were determined to downgrade no matter what. Their original justification is the US didn't make their $4 trillion cut target. When Treasury showed them a $2 trillion dollar error in their arithmetic, they changed the justification to political gridlock. Time for a perp walk.
logjam 15y ago
One minor elephant in the room that only a few seem to be mentioning is the 500+ point selloff on Thursday. On Thursday evening, the economist talking-heads expressed some confusion about what was driving that sell-off on that particular day. There was vague talk of problems in Europe, although there has been worse news out of the Eurozone for months without that kind of drop. On Friday, we get the S & P announcement of a decision that may impact markets. One can only imagine when this particular decision was actually made. What drove the sell-off on Thursday?
- deleted 15y ago
  [deleted]
- chailatte 15y ago
  The potential implosion of EU, caused by Italy or The rich is alerted the downgrade first, naturally.
  - logjam 15y ago
    Yep. I'm more than a bit suspicious that it's your option 2, given that it's been "Greece"..."Italy"..."Ireland"..."Greece"...Euro-disaster talk for months now without the kind of precipitous one-day decline that just happened to precede this announcement.
    - com 15y ago
      Well, just before the precipitous fall on the markets there were letters between various parties in Europe (European Commission President, European Central Bank President and the German Chancellor) which showed that they had some fundamental disagreements about what to do - vastly scale up or not - with the European sovereign bailout fund. That seems to have spooked the markets somewhat.
- ww520 15y ago
  Someone in S&P leaked the downgrade ahead of time?
SkyMarshal 15y ago
Wanted to check out Krugman's take on this: http://krugman.blogs.nytimes.com/2011/08/05/sp-and-the-usa/ http://krugman.blogs.nytimes.com/2011/08/05/sp-and-the-usa/ TLDR: 1) The 'madness of the right' holding the debt-ceiling hostage cost us the confidence of investors (and S&P). 2) The ratings agencies have shown they aren't qualified to rate anything, much less sovereign debt. 3) S&P miscalculated the downgrade by $2T before going ahead with it anyway. 4) S&P's magic number for averting a downgrade was $4T deficit reduction over the next decade. The Congressional deal failed to reach that, but according to Krugman that number is barely relevant to the US debt costs and should not effect the credit rating. The real downgrade risk is with long-term unfunded healthcare liabilities, which S&P seems to have ignored here.
bokonist 15y ago
Mindboggling. Does the S&P understand that the U.S. debt is all denominated in a currency that the U.S. government can print at will? If the U.S. government doesn't have an AAA rating, what does an AAA rating even mean? At the moment, the national "debt" is over $10 trillion dollars, while the total supply of currency is about $2 trillion, and total government profits are about negative $1.5 trillion. If we assume that the government will not use it's powers as fiat-currency-creator to back the national debt, than the proper credit rating of the U.S. is F. There is no way it could possibly pay back the debt. The debt is five times greater than the total supply of dollars. It's debt to profits ratio is way worse than many bankrupt companies. On the other hand, if we assume that the government will continue to use its power of fiat to back the debt, then the rating is AAA. It's safer in nominal terms than any other sort of debt. It is the baseline, the reference point. No other dollar-denominated debt can possibly be safer. So you have two possibilities for the U.S. "debt" - AAA or F. Rating it anything else just demonstrates extraordinary ignorance.
- deleted 15y ago
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- noagenda 15y ago
  You are correct in everything you've said. The national "debt" clock should be thought of more as a national "savings" clock...
- danenania 15y ago
  Paying back creditors in severely devalued dollars isn't exactly meeting obligations. Presumably the ratings would take this into account. That said, I agree these ratings don't have much basis in reality. As others have commented, look at how S&P and similar organizations rated subprime debt. They're part of the Wall Street club. They might nibble a bit on the hand that feeds them for political reasons, but they certainly aren't going to bite it off. It's pretty clear that a AA+ rating for US debt is as much of a joke as AAA. The token 'downgrade' gesture just adds to the absurdity.
  - bokonist 15y ago
chicagobob 15y ago
Please note that there are two other credit rating agencies, Moody’s and Fitch, and both of them have stated that they have no current plans to downgrade US debt from AAA, although one of them did place a negative outlook on the US. So, generally as long as one of the three agencies has a AAA rating the debt is usually fine for most investment / trust purposes.
- mdda 15y ago
  But now S&P has provided the others 'cover' for downgrading. Since part of the reasoning of S&P was that US politicians were willing to play chicken with events of default, I don't see that this is an easy hole for the US to dig out of. The fact that politicians in the US were openly discussing 'how bad would a default really be' sums up why the AAA rating was no longer deserved. IMHO, 80% likely that the other agencies will follow within a couple of weeks.
bubbleRefuge 15y ago
This is a non-issue and further proof of the incompetency and worthlessness of Wall Street. The ratings agencies are out of macro-economic paradigm. The US federal government can meet any and all financial USD obligations because it is an issuer of currency as opposed to a user of currency such as Euro-zone states or US states. Of coarse it is possible that politicians refuse to pass the necessary legislation to meet these obligations ( not raising or eliminating the debut ceiling). Read more at www.moslereconomics.com
alecco 15y ago
From Khan Academy last week: Government's Financial Condition http://www.youtube.com/watch?v=LOiw5aBrm4Y http://www.youtube.com/watch?v=LOiw5aBrm4Y (Khan was a Hedge fund analyst)
goatrope 15y ago
So, anyone know what happened to whoever bet 1bil that we'd lose AAA?
hooande 15y ago
I find that this graph summarizes my thoughts on the US debt in relation to the world economy: http://www.china-mike.com/wp-content/uploads/2011/04/china-world-gdp_growth-chart-forutne-2011.jpg http://www.china-mike.com/wp-content/uploads/2011/04/china-w... The United States produces so much more in terms of GDP than the next largest nations that it's a stretch to compare them. I think the fact that we produce more than 2X what the next largest single nation produces means that debt may function differently for us. The global economy is complex enough that relative position can mean more than short term profit and loss. Debt is a bad thing. But the debt ceiling we just fought over extending represents 1 year of USD GDP. In everyday terms, someone expected to make $100k per year being $100k in debt. To me that sounds more like a student loan than a national crisis. Should we make changes, cut spending and increase revenue? Sure. But we should also keep the bigger picture in mind, and look at our debt as it fits into the context of a global economy.
- Someone 15y ago
  Debt does function differently for the US; the US up till very recently were paying less interest than Germany, even though all economical indicators say Germany is doing better than the US. I do not think that is directly because of GDP, though. It is because of the size of the US bond market. If you want to buy or sell US bonds, you can easier find a seller or buyer, the larger the market. That is why people think Euro bonds (bonds issued by the EU, not by individual EU nations) would benefit even the financially stronger nations. They would create a huge market, and gain interest benefits from it.
- Uchikoma 15y ago
  You cannot compare GDP between countries, as the US for example changes GDP (via the inflation component) every few years. US GDP in general is calculated too high as inflation is calculated too low compared to other countries - e.g. Germany.
deleted 15y ago
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alecco 15y ago
(via angriers@reddit) http://en.wikipedia.org/wiki/List_of_countries_by_credit_rating http://en.wikipedia.org/wiki/List_of_countries_by_credit_rat...
BlackJack 15y ago
"Treasury officials noticed a $2 trillion error in S&P's math that delayed an announcement for several hours." - http://professional.wsj.com/article/SB10001424053111903366504576490841235575386.html?mod=WSJPRO_hpp_LEFTTopStories http://professional.wsj.com/article/SB1000142405311190336650.... Says it all.
finin 15y ago
from the S&P rationale section of their press release: "Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act."
almightygod 15y ago
I don't care about karma burn; F&$# those damn ignorant republicans
giardini 15y ago
The SEC should criminally prosecute S&P, Fitch and Moody's for their corrupt participation in the financial meltdown. It should have been done sooner (the case was already made). To do so now would look like vengeance. But if vengeance is required then vengeance should be served. Put their controlling officers in jail and shut down the companies forever. http://www.housingwire.com/2011/04/14/credit-ratings-agencies-a-key-cause-of-the-financial-crisis-senate-report http://www.housingwire.com/2011/04/14/credit-ratings-agencie... http://www.huffingtonpost.com/2011/04/13/credit-rating-agencies-triggered-crisis-report_n_848944.html http://www.huffingtonpost.com/2011/04/13/credit-rating-agenc...
d2 15y ago
So keep an eye on treasury bonds on monday morning. Rate goes up, people still believe the US is safe, regardless of S&P. Rate goes down, market sentiment mirrors S&P's rating, and that's very very bad.
niels_olson 15y ago
S&P source: http://news.ycombinator.com/item?id=2853064 http://news.ycombinator.com/item?id=2853064
yoyar 15y ago
The chickens will come home to roost. It's just as simple as that.
uladzislau 15y ago
It's not just US the whole world economy system is screwed. Look what happens in Europe. People should really make some radical improvements to the way economy and finance system work. The main things: it should be simplified and transparent. If only a few experts understand what happens how could the system be reliable and secure? Everyone also knows that the more complicated is the system the higher is the failure rate.
- davidw 15y ago
  > If only a few experts understand what happens how could the system be reliable and secure? Would you rather fly in a 747, or something from 100 years ago? The latter is far, far simpler and easily understood by non-experts.
ck2 15y ago
Regardless how you take this news, S&P just bought themselves a whole bunch of free advertising. I don't think that was their primary goal but their name is now going to be mentioned on every newscast and in every paper everywhere for weeks.
ejbadger 15y ago
S&P is the same agency that rated AAA mortgage backed securities. not exactly a brain trust over there. my guess is they took this route for publicity. again the same group that rated a bunch of debt AAA when it was junk. what is their motivation?
- Uchikoma 15y ago
  So they rated junk as AAA. Do you imply US bonds are junk because they have been rated until now AAA by the agency?
marcamillion 15y ago
WOW....talk about CAJONES! I must tip my hat to S&P. This one...just WOW. I mean, I am not a conspiracy theorist by any stretch of the imagination, but I just never imagined that they would be able to pull the trigger. All it takes is some 'investigation' by the US Treasury into S&P and that's it....game over. Not that I think the US Treasury will retaliate....but WOW. I never thought they would take this step. Good for them. Double-dip recession, here we come.
- pacomerh 15y ago
  It's Cojones. Cajones means drawers.
  - marcamillion 15y ago
    Sorry....my bad.
- marcamillion 15y ago
  Or perhaps something like this - i.e. an attempt to erode the credibility of S&P: http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SPs-2-Trillion-Mistake.aspx http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SP...
deleted 15y ago
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VicT11 15y ago
“It doesn’t make sense. In Omaha, the U.S. is still Triple-A rated and if there were a Quadruple-A I’d give the U.S. that.” -Warren Buffett
Tycho 15y ago
It seems that for the last 40 years we've been in one huge bubble - the 'American bubble.' Overconfidence in the continual growth, recovery and viability of US economics is finally coming to an end, and most of the globe is exposed.
binarysolo 15y ago
The ensuing blame game and rage depresses me: http://youropenbook.org/?q=AAA+obama&gender=any http://youropenbook.org/?q=AAA+obama&gender=any http://youropenbook.org/?q=aaa+republicans&gender=any http://youropenbook.org/?q=aaa+republicans&gender=any http://youropenbook.org/?q=aaa+democrats&gender=any http://youropenbook.org/?q=aaa+democrats&gender=any http://youropenbook.org/?q=AAA+tea+party&gender=any http://youropenbook.org/?q=AAA+tea+party&gender=any http://youropenbook.org/?q=aaa+congress&gender=any http://youropenbook.org/?q=aaa+congress&gender=any http://youropenbook.org/?q=aaa+politicians&gender=any http://youropenbook.org/?q=aaa+politicians&gender=any I have my own opinions as to who's responsible and what amger is well placed, but I think one can draw their own conclusions. Yes I know these are a limited sample set of people who have set their profiles to public. But still...
DanielBMarkham 15y ago
Some great non-hair-on-fire conversation here. Whenever I read and note that most folks are not that far apart on things, I keep wondering why the system is so broken. Here's the systemic problem, which has nothing to do with Treasury Bills, tax structures, or political parties. Phases of political maturity: 1) Apathy. Political parties are like football teams. You pick one and they're your guys. You root for them no matter what. If anything, there might be something wrong about folks who take these things too seriously. 2) Emotion. The other political party is the devil. They are out to destroy America. 3) Enlightenment. The other party is just full of people like me. There are some smart folks, but the problem is that they have all the wrong incentives and conclusions. 4) Understanding. Gee, there are those same bad conclusions and wrong incentives in my favorite party too. Ergo, parties don't matter. There are smart people everywhere. When the system fails, it's a problem of the system, not of the people or parties. The problem in the U.S. is that the majority of folks are in stage 1 or 2 when we need them to be in 4. So when deep structural conversations come along, they're still either rooting for their team or blaming the other guys, when they should be talking about principles that need to be changed for the entire system to work better, no matter what the actual goals of any party. There is another problem that helps create deadlock -- an understanding of where the money comes from. I think many folks view the economy as something the government grows so that it can harvest money in the form of taxes. (This is not a Keynesian discussion, simply a discussion about taxes in general.) Other folks view the government as something the economy grows in order to keep it functioning. These are two deeply conflicting world-views. I'm not sure you'll ever reconcile them. Some put trading first and sharing second. Many put sharing first and trading second. These two camps have come to demonize the others, sadly. (Which takes us back to the observation above) For this problem to be solved, we need to give up on arguing specific issues or philosophical positions and instead talk about fixing structures so that the budget stays balanced long-term no matter who is in power or what their priorities are. This is a meta conversation, the kind the framers had. I am very doubtful there is anyone around today in power that can handle it. Not a happy outlook. All of the people in political power got that way by playing ideological and rhetorical games and by being fiercely loyal to their party. It's the exact opposite qualifications for folks that would have a chance at actually solving anything. I think we could talk forever and reach general agreement informally on all number of things, but if the system remains broken, it's all going to be for nothing, sadly. Without an honest look at meta systemic issues, a free-for-all discussion around U.S. policy is all so much activity without results.
reubenyeah 15y ago
I understand the implications but what would it take for the USA to get AAA back from S&P?
OllieJones 15y ago
Perfect. Obama and Boehner are doing an excellent job of what they are paid to do: transferring the wealth of the USA to Wall Street plutocrats. They've given the sleazeball so-called "rating" agencies the cover they need to demand higher interest rates. No new taxes. No new jobs. I can't believe that folks who are in their 20s and 30s aren't throwing rocks at people my age (late 50s) for our generational greediness. By the way, I had a six figure federal tax bill one year, when my cofounders and I sold a startup. Maybe I'm an aberration, but I was proud to be able to chip in that much to the government that paid for ARPA back in the day.
- Morcane 15y ago
  It's no use to throw rocks at you people. I guess it's not so much the fact you 50 and 60-somethings are relatively very well off by profiting from the situation until now that makes people angry (hey, a lot of you worked hard as well for it), it's the fact a lot of you are so cavalier and casual about it, and like to dangle that fact in front of our noses all the time. In any case, I do hope you enjoy the fact you're rich, at the expense of your own children. Well played I guess. If you haven't got any children, perhaps you need to be kind to that girl changing your shit-filled diaper in the elderly home.
quattrofan 15y ago
This is the beginning of the end of the dollar as the worlds reserve currency, its bad for the rest of the world and only good for the US, its imbalanced. I am not so sure most Americans are ready for what the world will be like when it happens, because unless the need for a regular deficit is reduced and reliance for imported oil curbed, it will be very painful indeed.
jballanc 15y ago
The true shame is not loosing some arbitrary rating from some arbitrary organization, but that this action still matters even after said organization was shown, conclusively, to behave in a completely arbitrary and ultimately self-serving way.
da5e 15y ago
The debt is not the problem.
Rariel 15y ago
THer
Rariel 15y ago
THere is a simple solution to the Social Security "crisis". Right now only income up to 100,000 is subject to social security taxes. Anything over 100,000 is not taxed for social security. If we raised taxable income to 150,000 or 200,000 even we'd have plenty of money.
- Rariel 15y ago
  I'd love if some of the downvoters could explain 1) why I'm wrong or 2) what an alternative would look like?
deleted 15y ago
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daniwan 15y ago
Raise the taxes on the rich! Jesus Christ!
daniwan 15y ago
All the seemingly smart guys here, producing stupid arguments. Stop thinking how to cut children's lunch and start thinking how to get a 2nd job!

769 points by tshtf 15y ago

kenjackson 15y ago

Has the US ever not had a AAA credit rating from S&P (until now)?

fanboy123 15y ago
Has always had AAA rating since the start of sovereign ratings. Look out below.
- aculver 15y ago
  .. and that was in 1918. So basically this is the first time in almost 100 years.

fanboy123 15y ago

from the press release: "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. "

Getahobby 15y ago
This really should be a call for both parties to start working together but it will most likely turbo charge the blame game.
- ktsmith 15y ago
  We can expect this to not impact how the parties work against each in the least. The ratings agencies said up front what they were expecting to see in the debt deal and congress didn't come close.
- seldo 15y ago
  Correct, and it's already begun: http://tpmdc.talkingpointsmemo.com/2011/08/gop-tries-to-shift-blame-for-sp-downgrade-of-us-creditworthiness.php http://tpmdc.talkingpointsmemo.com/2011/08/gop-tries-to-shif...
  - hugh3 15y ago
    My favourite thing about that link is how it functions both ways. It describes an example of Republicans trying to shift blame onto Democrats, and it is an example of Democrats trying to shift blame onto Republicans.
- guildchatter 15y ago
  It's definitely going to be the blame game, especially with Obama's re-election campaign coming up. sigh
- protomyth 15y ago
  Sadly, both parties will see this as an advantage going into the 2012 election.
watchandwait 15y ago
There has been a complete lack of leadership from the Congressional Democrats on this issue. They haven't produced a budget plan in nearly three years, while borrowing 40 cents of every dollar spent during that time. I'm not a partisan-- George Bush's runaway spending contributed a great deal to the current predicament. But the basic Congressional oversight and operating under a budget hasn't happened the last couple of years.
- logjam 15y ago
  There has been a complete lack of leadership from the Congressional Democrats on this issue. They haven't produced a budget plan in nearly three years, while borrowing 40 cents of every dollar spent during that time. Uh, you are merely parroting inaccurate GOP talking points, and I think we can be a little more accurate than that here. First of all, the House and Senate easily passed Obama’s first budget on the president’s 100th day in office. That budget measure, however, did not include a single GOP vote, a harbinger of the lack of bipartisanship to come. From 2009 to January 2011, Republicans forced more than 90 “cloture” votes, which require 60 senators to agree to limit debate (ie stop a filibuster) on a measure. Pretending that there was no Democrat "budget plan" for 2010 is disingenuous at best. Ongoing Democrat "plans" were continuously on the docket: http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_reports&docid=f:hr060.pdf http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=11... Democrats did not have anything like a filibuster-proof majority in the Senate, and Republican Senators were quite open with their threat to filibuster any legislation until the “Bush-tax cuts” were extended. http://www.nationaljournal.com/congress/gop-will-filibuster-all-bills-if-taxes-budget-not-addressed-20101201 http://www.nationaljournal.com/congress/gop-will-filibuster-... "We write to inform you that we will not agree to invoke cloture on the motion to proceed to any legislative item until the Senate has acted to fund the government and we have prevented the tax increase that is currently awaiting all American taxpayers,” said the letter, which was sent to Senate Majority Leader Harry Reid this morning." “The true effect of this letter is to prevent the Senate from acting on many important issues that have bipartisan support,” Reid said this morning on the Senate floor. He said the letter codifies a GOP strategy of delaying action “on critical matters, then blaming the Democrats for not addressing the needs of the American people. Very cynical, but very obvious, very transparent.” And imagine that, here we are in 2011.... Of course, filibuster has been used by both parties, but these tactics by Republicans accelerated drastically when Dems took over Congress late in Bush's presidency. As even the conservative American Enterprise Institute noted, Republican filibusters were used increasingly to obstruct legislation: http://tpmdc.talkingpointsmemo.com/2010/01/the-rise-of-cloture-how-gop-filibuster-threats-have-changed-the-senate.php#more http://tpmdc.talkingpointsmemo.com/2010/01/the-rise-of-clotu... "It is the most striking in history," American Enterprise Institute resident scholar Norm Ornstein told TPM. "What happened, Ornstein says, is that during the last two years of President George W. Bush's second term, Republicans offered "no initiatives to speak of." "The initiatives were coming from the Democrats, and the Republicans wanted to kill 'em, or slow things down. Republican filibuster threats, Ornstein said, were "like throwing molasses in the road." "Still, Ornstein largely attributes the stark rise in cloture motions in the 110th Congress to Republican delay and obstruction tactics."

cantbecool 15y ago

I wonder what would have happened if S&P dropped the rating during the trading day, and not after the markets closed. We probably would have seen another -500 point drop on the DJI.

fanboy123 15y ago
They wait until late friday to make big changes to give the officaldom/industry a weekend to scramble/grab parachutes. They actually didnt release today until after the SPY stopped trading.
- cantbecool 15y ago
  I wonder if they, the parachutes, will be golden this time around.
adaml_623 15y ago
Or perhaps the drop happened because a lot of the big banks knew that the downgrade was coming. Is it insider trading if everyone knows?

deleted 15y ago

[deleted]

winestock 15y ago

So it begins. A quote: "The outlook on the new U.S. credit rating is negative, S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months." I.e., things are going to get a lot worse before they get worse. Time to bring this back to a hacker's perspective. Is there any way to "hack" the system so as to get government finances to within commuting distance of sanity? Or have recent events already answered that question?

aaronbrethorst 15y ago
Letting the Bush tax cuts expire next year, and winding down operations in Iraq and Afghanistan would go a long way to balancing the Federal budget. As far as reducing the deficit goes, I have less insight into this. Except that making the Federal government's budget revenue-neutral is a critical first step.
- onedognight 15y ago
  > would go a long way to balancing the Federal budget > as reducing the deficit goes, I have less insight into this Balancing the budget is exactly reducing the deficit. It's the debt I suspect you have less insight into. Frankly it's an embarrassment that they could only agree lower the deficit by less than 10%. They are a long way from addressing the debt.
  - aaronbrethorst 15y ago
    Yes, you are correct. Long day and I'm confusing terms :)
- mark_l_watson 15y ago
  +1 for that. Expiring the tax cuts and reducing foreign military expenditures is our best option. We have an obligation to keep our current military personel employed but I would rather they be spending their salaries in local businesses here. Military cuts can occur by shutting down foreign bases and drastically reducing the recruitment of new military personel. It would be funny, if it were not so serious: a lot of my conservative friends harp on the need to stay in the middle east, but refuse to pay for it with taxes.

silverlight 15y ago

If the government that produces the reserve currency can't hold up a AAA rating, what can? The idea that anything else should have a AAA rating if the US gov't doesn't seems a little ridiculous to me on face value.

jackpirate 15y ago
That's one of the MAJOR implications of this, if I'm not mistaken. Of course, bonds denoted in Euro's or other currencies wouldn't be affected.
mdda 15y ago
The implication is really the other way around. The USD was the reserve currency in part because of the credibility of the US government's financials (and also because of amount of trade, etc). But obviously, the US has taken a huge beating credibility-wise recently. After all, Sterling used to be the world's reserve currency : things change.
cfaubell 15y ago
There are countries who don't use debt payments as political tools. A congressional stalemate that leads to a failure to pay bondholders is entirely possible.
Atropos 15y ago
Some other AAA countries: Switzerland, Luxembourg, Norway, Singapore. To me it seems a little ridiculous that the US and these countries shared the same rating for such a long time. On the other hand, there are AAA countries like UK, France, Germany that do not seem to fit into the same category either. I have no real opinion if the US deserves the AAA rating, but thinking treasuries are the safest investment in the world seems a bit optimistic.

fleitz 15y ago

I wonder if the downgrade is because the US might be unwilling to pay its debts or because they feel the people may be unwilling to bailout the banks again?

miked 15y ago
The downgrade is because the US Gov is spending far more than it's taking in. In other words, it's for the same reason that every other person / business / government gets downgraded. It's important to realize that there's no magic here.
- pyoung 15y ago
  You cannot compare 'person' and 'business' with government. The government has the ability to print money, whereas the other two do not. The only reason they don't print money to pay off all their debts is because it will result in massive inflation. The reason the European debt crises is so serious is because the adoption of the euro means that no individual contry can print their own money to avoid default.
  - veyron 15y ago
    "The reason the European debt crises is so serious is because the adoption of the euro means that no individual contry can print their own money to avoid default." It's more because each individual country issues bonds. The ECB can't issue debt.
    - pyoung 15y ago
      I am not sure I agree. The primary difference between pre and post EURO Europe is that, individual EURO countries no longer control their own currency. In times of economic crisis, countries can manipulate their currencies to make their economies more competitive internationally, and/or inflate their way out of a debt crisis. Despite what the media is saying, the U.S. is not in a debt crisis, we have many tools at our disposal to prevent default, including currency manipulation. The EU on the other hand has a handful of countries that are in serious jeopardy of defaulting.

eps 15y ago

One thing to keep in mind is that many institutional investors, including those in Europe, are required to invest exclusively into triple-A instruments. This downgrade means a major sell-off of US bonds and whatnots currently held by such investors, and that could have an interesting avalanche effect.

seldo 15y ago
This is by far the biggest problem. I don't think anybody realizes how huge a sell-off that's going to be if the institutions apply their rules about AAA debt to US bonds (a big if, as others have noted). A sell-off of bonds would make it more expensive for the government to borrow money, which would further accelerate the expansion of the deficit. The deficit is the primary driver of the downgrade, so an acceleration would trigger further downgrades.
- _delirium 15y ago
  Treasuries act as a money store for large institutions that I think would be hard for them to replace in practice. They use T-bills in particular as more or less a jumbo-sized version of an FDIC-insured bank account. Where would they move that money to? I.e., who else provides a similarly safe account where you can deposit $50 billion? Can't be to a bank account, because all the major banks have even lower ratings. There aren't enough AAA-rated corporates to move all that money. Eurozone bonds aren't looking too hot, and may also have institutional rules on proportion of the investment that can go into foreign bonds. I suppose they could buy large quantities of gold and physically store it in vaults, but many institutional investors also have rules on how much they can put into commodities. Perhaps giant suitcases of dollar bills? You can't pull money out of an instrument without putting it somewhere else!
  - bmelton 15y ago
    You could, for example, move your money to Canadian treasuries, which are AAA rated, couldn't you? I am admittedly learning much of this as I read, but it seems to me that a large concern would be the amount of money that might simply shift out of our economy to economies with better (safer) credit ratings.

fletchowns 15y ago

Didn't S&P maintain that Lehman Brothers had a favorable rating up until they collapsed? And in the subsequent congressional hearings the rating agencies simply responded that the rating is their opinion. Why do people put so much faith in these ratings when they have proven to be not very useful in evaluating the risk associated with investing in an institution?

thematt 15y ago
People put faith in them because not everyone can hire an army of experts to evaluate all possible investments. S&P supplies their ratings to life insurance companies, pensions funds and even municipal governments. These entities don't have the resources to employ that expertise in-house, so they rely on companies like S&P and Moody's to give them guidance.
- grourk 15y ago
  S&P and Moody's don't exactly employ an "army of experts" either. It's a few analysts making a rather subjective judgment and voting. (Literally, a few). And the investors who are actually buying US debt don't rely on ratings agencies to give them guidance, and do in fact have expertise in-house to evaluate these things. As has been mentioned elsewhere on this thread, institutional investors don't treat US bonds like any other, subject to triggers and rules like AAA-only. It's an exceptional case that is treated differently than the others, and one rating agency's opinion is not going to make as big an impact as people seem to think. It comes down to this: where else would they put their money?
- giardini 15y ago
  thematt says "so they rely on companies like S&P and Moody's to give them guidance." And those companies fabricate data and sell it to them. Perhaps not everyone should invest in areas where they have no possibility of understanding the risks.
  - nazgulnarsil 15y ago
    "Perhaps not everyone should invest in areas where they have no possibility of understanding the risks." You just managed to sum up the vast majority of economics problems. Humans are dumb though. Not much you can do.

credo 15y ago

This illustrates one of the risks of hostage-taking and the mistaken assumption of Republican leadership that the "hostage" (their words, not mine) wouldn't be harmed see quote from Senate minority leader below From http://www.washingtonpost.com/politics/in-debt-deal-the-triumph-of-the-old-washington/2011/08/02/gIQARSFfqI_story_1.html http://www.washingtonpost.com/politics/in-debt-deal-the-triu... But at the Capitol, behind the four doors and the three receptionists and the police guard, McConnell said he could imagine doing this again. "I think some of our members may have thought the default issue was a hostage you might take a chance at shooting," he said. "Most of us didn’t think that. What we did learn is this - it’s a hostage that’s worth ransoming. And it focuses the Congress on something that must be done." [edit]: Interesting to see all the downvotes, but my comment had a direct quote from the GOP senate leader. Can anyone explain why they downvoted it. As for temphn's point below. Has any Nobel laureate defended the "hostage taking" ? Congress already controls both spending and taxation. So they can start fixing the deficit problem by cutting down on pork, cutting tax loopholes etc. Threatening to force a default is not the answer.

temphn 15y ago
The question is whether you believe the issue would have become an issue even if the Republicans hadn't raised it now. Many people look at this as an intervention; if the US is addicted to oil, we are even more addicted to borrowing. I suppose it really comes down to whether you find multiplier/countercyclical spending arguments persuasive or not; Nobel Laureates come down on both sides.
- Pewpewarrows 15y ago
  The Republicans raising the issue was good and healthy for us. The clusterfuck that emerged in the months afterwards because of them refusing to pass any bill that didn't fall neatly into their little new imaginary rules was the problem.

localhost3000 15y ago

These are the same guys who rated subprime mortgage backed bonds AAA. How the rating agencies still have any credibility is completely incomprehensible to me. I hope someone in the press has the wherewithal to make this point.

mdda 15y ago
So are you saying that the US shouldn't have been AAA? Or that S&P should be regulated so that its hands are tied behind its back? While the {S&P, Moodys, Fitch} sub-prime department obviously got completely ahead of itself modelling-wise, the corporate and sovereign departments have a lot of credibility : partly because they haven't been trying to assign values to 'a whole new way of doing things (this time it's different, etc)'.
Uchikoma 15y ago
So you think the US has had inflated ratings for years just like with subprimes? And should be even lower rated?

chailatte 15y ago

Took those lazy rating agencies a while. - 1.6 Trillion budget deficit - 14 Trillion national debt - 55 Trillion US total debt - 115 Trillion Unfunded liabilities - 17% U6 unemployment - 45.8 Million Americans on Food Stamps - 52 Million Americans without health insurance - 1/2 of mortgages are underwater - 63% labor participation rate, lowest since early 80s - -5% in Real medium household income in the last 10 years - 25% of US households have zero or negative net worth - 1 out of every 45 households was hit with foreclosure - average length of unemployment is now 40 weeks

wtallis 15y ago
The S&P rating is only an assessment of risk in the US Treasury bonds, not a general rating of entire US economy.
- _delirium 15y ago
  In particular, their statement seems to claim that it's almost entirely due to their view that the U.S. might choose not to pay back its bonds, not that it couldn't; when explaining what's changed since previous assessments, their statement mainly focuses on the political will to service debt.
- joezydeco 15y ago
  Listen to the Planet Money podcast. Lots of factors are considered, including political ones.
- watchandwait 15y ago
  That's wrong, the GDP and expected GDP is a big part of the rating-- known as the "capacity to repay".
  - wtallis 15y ago
    Doesn't the phrase "capacity to repay" make it clear that GDP matters only to the extent that it is a risk factor?

apaprocki 15y ago

... and now all the random crap financial code out there that simply hard-codes "AAA" as the US credit rating will have problems. I bet a lot of people will be bug testing this change over the weekend. EDIT: This seems to sum it up: http://lostechies.com/johnpetersen/2011/07/16/the-impact-of-united-states-debt-crisis-on-technology/ http://lostechies.com/johnpetersen/2011/07/16/the-impact-of-...

winestock 15y ago
"Sorry, boss. Our positions are busted because we hard-coded AAA as the T-bill credit rating. Look on the bright side, everyone's got bigger things to worry about."

NHQ 15y ago

I am totally flabbergasted that media and governments would give one-shits-worth of consideration to what the credit ratings agencies have to say. The same agencies that gave high ratings to the sour derivatives market which eventually collapsed our economy. The ratings agencies are Wall Street shills. Lowering US Debt ratings will result in the US having to pay higher interest rates, which go into the pockets of the major financial firms. Government et al playing right into the hands of the banks.

latch 15y ago

For those who aren't sure why this matters there are two things to note. First, interest will go up. US Bonds are now considered riskier than they were before. This means investors in US Bonds will expect to collect more interest due to the greater risk they are taking. Instead of paying China and Japan 3% (for example) on $1 trilion (each), the US will now have to pay 3.5% (and climbing). Of course, the higher the interest rate, the harder it is to pay back (the quicker a new ceiling is reached), the likelier this happens again. There could be some pretty massive dumping of US bonds. A number of foreign investors can only carry AAA risk. (It's kinda unclear where they'll run to though, since I think all the other AAA countries combined don't issue as much debt as the US). So, the economy might take a pretty big hit by losing all those investors. Now, generally you need 2 of the big 3 rating agencies to trigger any of this. So it remains to be seen whether Moody or Fitch will follow. I think they both will. Also worth mentioning is that Canada recently came back from a downgrade (by S&P) mostly by tightening their spending belt. Took 10 years (1992-2002). Australia did it too, though it took 7 years longer.

TomOfTTB 15y ago
Again this is based on the same logic that people will treat the U.S. Government the same way they'd treat any other person and that's just not going to happen. If the U.S. falls back into recession we'll take everyone with us. Other countries know this. Banks know this. Institutional Investors know this. Increase the interest rate on the U.S. and you'll trigger an increase on the U.S. consumer while exacerbating the U.S. debt crisis (which is the whole reason for the downgrade). That would guarantee a recession and would bring every investment down. Finally everyone knows what S&P is up to. You said it yourself. They aren't happy with U.S. policy and they've been able to bully other governments into austerity in the past. So they think they can do it here. But S&P's opinion of U.S. policy isn't going to be enough to convince investors to willingly create another recession (Please note I'm in favor of austerity and think we're already headed into a recession I'm just realistic about S&P's limited power)
- mbreese 15y ago
  Some institutions are obligated (by charter or contract) to only buy AAA rated bonds. That's why it's a big deal... Now that being said, I have no idea how this would work in practice.

geuis 15y ago

(Reference: http://www.federalbudget.com/ http://www.federalbudget.com/) Steps to recovery: 1) End all offensive military actions overseas. Finish winding down Iraq and abandon Afghanistan wholesale. These actions have cost several trillion dollars over the last 10 years. We can't get that money back, but we can stop spending more. 2) Defense spending is in the top 3 highest budget expenditures. Cut it by 1 third across the board. Maintain important overseas installations such as Japan and Taiwan. Given China's rise, its wise long-term to keep a presence in the region. Scale back deployments in Europe unless Russia still is still a threat to western Europe. 3) The most amount of money the U.S. spends is Health and Human Services. The U.S. health system is a fucking mess. Somehow we spend the most on healthcare and get some of the worst societal benefits out of any industrialized country. I don't have an answer here, but it likely involves completely tearing down the existing system to its nuts and bolts and building it back up. I'd love to hear ideas on this point from others that know more about it. 4) Social Security is the other one. My mom relies on it, so does a lot of my family. We're from meager backgrounds and traditionally have come from poorer parts of the nation. That being said, cut it. When I look at my paycheck and see that upwards of 40% of my income is being sucked out by the government and used more for things I oppose than things I support (e.g. war spending versus scientific investment) it pisses me right off. Yes, I have heard the naive argument "But taxes are there to run the things you use like roads and government services that you use every day". This is true only in part. Yup, we need an army. Yup, we need local police. Yup, we need roads. Yup, we need a justice system. But it doesn't take trillions of dollars a year to run those things. The government shouldn't interfere with business like propping up failing business models. It should work to make sure that business plays fair, i.e. anti-monopoly or collusion, etc. I'm more liberal than conservative, and definitely not one of these people that wants business to have free-reign over everything. But there are bottom lines that we have crossed and need to back off.

Troll_Whisperer 15y ago
Maintain important overseas installations such as Japan and Taiwan. The US hasn't had a base in Taiwan for 30 years. Maybe you're thinking of Korea?
quandrum 15y ago

mdkess 15y ago

I am not American, and here's what I don't get: America can borrow money right now at 1.5% for five years. Why is there such a clamour to stop? I would hope that the government would be able to get better than 1.5% return with the money - if the CEO of any company chose not to take on debt at this rate they'd get fired. It seems like all of the media coverage is glossing over this.

georgieporgie 15y ago
There's a lot that doesn't make any sense. As you say, interest rates are low. Plenty of people are out of work. To me, that says, "perfect time to build and repair infrastructure!" Whether you believe FDR's New Deal helped or hindered recovery from the Great Depression, the simple, business-oriented financials of it would seem to indicate that right now is the time to be building roads, trains, dams, nuclear plants, etc. Instead, we cut funding to things which may pay off later in order to funnel money into which have an inevitable negative rate of return, like imprisoning people, security theater, and killing people on the other side of the globe.
- mdkess 15y ago
  That's exactly what I thought the response would have been. Cheap money, low employment - hire lots of people to do stuff. But it seems like the public opinion is that this debt is bad, and I'm don't understand why entirely. I mean, I see a lot of comparisons to credit card debt, so is it just lack of education/understanding?
  - eazolan 15y ago
    Why do you think borrowed money is "cheap"? We're not paying it back. Any of it. At best we can cover the interest payments. Why do you think this won't blow up in our faces?
    - mdkess 15y ago
      Interest has not become a huge issue, but in any case - so what? They got the money for cheap, it has (presumably) fueled growth. Beating 1.5% over five years is not difficult - the idea is to borrow money to accelerate growth - increase prosperity of America, which would return more than 1.5%. Not all debt is bad.

pitdesi 15y ago

An answer to the question we're all wondering- "What happens now" answered well in a planet money from a couple of weeks ago: http://www.npr.org/2011/07/18/138164761/what-happens-if-u-s-bond-ratings-are-downgraded http://www.npr.org/2011/07/18/138164761/what-happens-if-u-s-... TL;DR - "I'm not sure it will have any impact. When you look at the bond market — 10-year U.S. Treasuries, for example — where is it today? In the light of all this hype about debt ceilings and possible defaults, it's at 2.93 today, so this is an extremely low interest rate in both nominal and real terms. It means that everyone in the world is willing to hold these bonds and is not the least bit worried about the possibility of a default. So, investors haven't changed their view of the creditworthiness of the United States at all, and I don't think they're likely to in the foreseeable future." -Mark Weisbrot, co-director of the Center for Economic and Policy Research

marcamillion 15y ago
The reason yields have been so low is because a) there is no other 'safe haven' for investors to flock to, and b) the markets generally didn't anticipate a downgrade. A downgrade, even if the markets don't raise Yields, can be catastrophic because many financial institutions (mutual funds, insurance companies, unit trusts, etc.) can only hold AAA rated securities in their portfolios - and some central banks can only hold AAA rated securities as collateral in some situations. So, legally, they will not be able to hold on to American gov't debt, even if they wanted to. The mere fact that a ton of people will be flooding the market with debt, will push up yields and that will lead to other catastrophic consequences. I expect that the Fed will buy a ton of bonds to push down yields and keep the Treasuries Interest costs low - but they will have to print a ton of money to do that....which will lead to inflation, which leads to higher yields which leads to higher interest costs, and creates a crazy cycle. You get the idea. However, that's just theory - in a perfectly balanced global economy that's not fragile. In this global economy, I suspect that there might be a concerted effort to loosen standards to prevent a mass exodus out of US Treasuries, but at least this sends a strong signal that the ratings agencies are serious.
- puredemo 15y ago
  How does this play out with the multiple ratings firms though?

imcqueen 15y ago

I just got a NYTimes news alert that S&P is in fact holding off on downgrading the US based on the math error that was discovered. Did anyone else see that come through? Is NYT just behind a little?

CamperBob 15y ago
If so it might be an interesting political tactic on S&P's part. Issue a downgrade to show you're serious, but include a 'math error' that justifies an almost-immediate retraction. If a ratings agency feels that it's necessary to use scare tactics, that's scary enough in itself.

AgentConundrum 15y ago

S&P's report is here: http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8 http://www.standardandpoors.com/servlet/BlobServer?blobheade...

marshray 15y ago
I love to hear them tell it like it is, all matter-of-fact like that. S&P ought to run as a 3rd-party presidential candidate in 2012. It's about time somebody brought down the cluebat.

veyron 15y ago

End of the day, these are the same jokers who were rating junk assets as AAA and completely missed every problem in this financial crisis. And the fact that moody's still maintains Aaa means that there's a nonzero chance it will have no effect. I hope.

mark_l_watson 15y ago

Yeah, the US deserves a downgrade. What pisses me off is that my wife and I have savings, live within our means, and if you believe Harvard economist Kenneth Rogoff (which I do), there is going to be 5% to 10% yearly inflation for a good while that takes money from savers and basically gives it to debtors. I am actually sympathetic to some debt forgiveness - it is not the people in need that I am pissed off at. Anyway, it is a mess, and everyone who is worth less than many millions of dollars is going to feel some pain. I expected this economic collapse to happen after the 2030s - suddenly, after a few years of W. Bush's presidency I realized that the grand plan was to cause the collapse to happen much sooner.

kragen 15y ago
> What pisses me off is that my wife and I have savings, live within our means, and... inflation ... takes money from savers and basically gives it to debtors. Well, it takes money from lenders (or cash holders) and gives it to debtors. If you don't like that, stop being a lender or cash holder: move out of cash and bonds into, say, stocks, commodities, or real estate. If you're really confident that that inflation is going to happen, go short cash: build up a huge credit card balance at the current low interest rate, while pouring all of your earnings into non-cash holdings. (Danger: if you go short and you're wrong, you're fucked.)
3pt14159 15y ago
So buy Canadian Bonds or Chilean Bonds or Gold or Silver or Apple stock.
- beagle3 15y ago
  You can't just quit the game. You bought gold, which conserves your wealth ... and the government takes 15% to 50% of your "profit" (depending on your circumstances). Debasing by the fed together with the tax systems guarantees there's nothing you can do against it.
rayiner 15y ago
If you're expecting sustained inflation then don't hold debt. Take your cash and buy rental properties with the crazy-low mortgage rates we have now. If we get sustained inflation then rental rates will go up while your fixed-interest mortgage payments will stay the same. Profit.

dennisgorelik 15y ago

That's a good news and a wake up call.

Tekhne 15y ago

This downgrade may just be the first sign of real problems to come. For detailed coverage of the coming US financial storm see the documentary I.O.U.S.A. from former U.S. Comptroller General David Walker (I've seen it on Netflix streaming). http://www.iousathemovie.com http://www.iousathemovie.com

warmfuzzykitten 15y ago

The real story is that S&P thinks downgrading the US debt will provide political cover against investigations into their role in the mortgage securities debacle by the SEC and Justice. They were determined to downgrade no matter what. Their original justification is the US didn't make their $4 trillion cut target. When Treasury showed them a $2 trillion dollar error in their arithmetic, they changed the justification to political gridlock. Time for a perp walk.

logjam 15y ago

One minor elephant in the room that only a few seem to be mentioning is the 500+ point selloff on Thursday. On Thursday evening, the economist talking-heads expressed some confusion about what was driving that sell-off on that particular day. There was vague talk of problems in Europe, although there has been worse news out of the Eurozone for months without that kind of drop. On Friday, we get the S & P announcement of a decision that may impact markets. One can only imagine when this particular decision was actually made. What drove the sell-off on Thursday?

deleted 15y ago
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chailatte 15y ago
The potential implosion of EU, caused by Italy or The rich is alerted the downgrade first, naturally.
- logjam 15y ago
  Yep. I'm more than a bit suspicious that it's your option 2, given that it's been "Greece"..."Italy"..."Ireland"..."Greece"...Euro-disaster talk for months now without the kind of precipitous one-day decline that just happened to precede this announcement.
  - com 15y ago
    Well, just before the precipitous fall on the markets there were letters between various parties in Europe (European Commission President, European Central Bank President and the German Chancellor) which showed that they had some fundamental disagreements about what to do - vastly scale up or not - with the European sovereign bailout fund. That seems to have spooked the markets somewhat.
ww520 15y ago
Someone in S&P leaked the downgrade ahead of time?

SkyMarshal 15y ago

Wanted to check out Krugman's take on this: http://krugman.blogs.nytimes.com/2011/08/05/sp-and-the-usa/ http://krugman.blogs.nytimes.com/2011/08/05/sp-and-the-usa/ TLDR: 1) The 'madness of the right' holding the debt-ceiling hostage cost us the confidence of investors (and S&P). 2) The ratings agencies have shown they aren't qualified to rate anything, much less sovereign debt. 3) S&P miscalculated the downgrade by $2T before going ahead with it anyway. 4) S&P's magic number for averting a downgrade was $4T deficit reduction over the next decade. The Congressional deal failed to reach that, but according to Krugman that number is barely relevant to the US debt costs and should not effect the credit rating. The real downgrade risk is with long-term unfunded healthcare liabilities, which S&P seems to have ignored here.

bokonist 15y ago

Mindboggling. Does the S&P understand that the U.S. debt is all denominated in a currency that the U.S. government can print at will? If the U.S. government doesn't have an AAA rating, what does an AAA rating even mean? At the moment, the national "debt" is over $10 trillion dollars, while the total supply of currency is about $2 trillion, and total government profits are about negative $1.5 trillion. If we assume that the government will not use it's powers as fiat-currency-creator to back the national debt, than the proper credit rating of the U.S. is F. There is no way it could possibly pay back the debt. The debt is five times greater than the total supply of dollars. It's debt to profits ratio is way worse than many bankrupt companies. On the other hand, if we assume that the government will continue to use its power of fiat to back the debt, then the rating is AAA. It's safer in nominal terms than any other sort of debt. It is the baseline, the reference point. No other dollar-denominated debt can possibly be safer. So you have two possibilities for the U.S. "debt" - AAA or F. Rating it anything else just demonstrates extraordinary ignorance.

deleted 15y ago
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noagenda 15y ago
You are correct in everything you've said. The national "debt" clock should be thought of more as a national "savings" clock...
danenania 15y ago
Paying back creditors in severely devalued dollars isn't exactly meeting obligations. Presumably the ratings would take this into account. That said, I agree these ratings don't have much basis in reality. As others have commented, look at how S&P and similar organizations rated subprime debt. They're part of the Wall Street club. They might nibble a bit on the hand that feeds them for political reasons, but they certainly aren't going to bite it off. It's pretty clear that a AA+ rating for US debt is as much of a joke as AAA. The token 'downgrade' gesture just adds to the absurdity.
- bokonist 15y ago

chicagobob 15y ago

Please note that there are two other credit rating agencies, Moody’s and Fitch, and both of them have stated that they have no current plans to downgrade US debt from AAA, although one of them did place a negative outlook on the US. So, generally as long as one of the three agencies has a AAA rating the debt is usually fine for most investment / trust purposes.

mdda 15y ago
But now S&P has provided the others 'cover' for downgrading. Since part of the reasoning of S&P was that US politicians were willing to play chicken with events of default, I don't see that this is an easy hole for the US to dig out of. The fact that politicians in the US were openly discussing 'how bad would a default really be' sums up why the AAA rating was no longer deserved. IMHO, 80% likely that the other agencies will follow within a couple of weeks.

bubbleRefuge 15y ago

This is a non-issue and further proof of the incompetency and worthlessness of Wall Street. The ratings agencies are out of macro-economic paradigm. The US federal government can meet any and all financial USD obligations because it is an issuer of currency as opposed to a user of currency such as Euro-zone states or US states. Of coarse it is possible that politicians refuse to pass the necessary legislation to meet these obligations ( not raising or eliminating the debut ceiling). Read more at www.moslereconomics.com

alecco 15y ago

From Khan Academy last week: Government's Financial Condition http://www.youtube.com/watch?v=LOiw5aBrm4Y http://www.youtube.com/watch?v=LOiw5aBrm4Y (Khan was a Hedge fund analyst)

goatrope 15y ago

So, anyone know what happened to whoever bet 1bil that we'd lose AAA?

hooande 15y ago

I find that this graph summarizes my thoughts on the US debt in relation to the world economy: http://www.china-mike.com/wp-content/uploads/2011/04/china-world-gdp_growth-chart-forutne-2011.jpg http://www.china-mike.com/wp-content/uploads/2011/04/china-w... The United States produces so much more in terms of GDP than the next largest nations that it's a stretch to compare them. I think the fact that we produce more than 2X what the next largest single nation produces means that debt may function differently for us. The global economy is complex enough that relative position can mean more than short term profit and loss. Debt is a bad thing. But the debt ceiling we just fought over extending represents 1 year of USD GDP. In everyday terms, someone expected to make $100k per year being $100k in debt. To me that sounds more like a student loan than a national crisis. Should we make changes, cut spending and increase revenue? Sure. But we should also keep the bigger picture in mind, and look at our debt as it fits into the context of a global economy.

Someone 15y ago
Debt does function differently for the US; the US up till very recently were paying less interest than Germany, even though all economical indicators say Germany is doing better than the US. I do not think that is directly because of GDP, though. It is because of the size of the US bond market. If you want to buy or sell US bonds, you can easier find a seller or buyer, the larger the market. That is why people think Euro bonds (bonds issued by the EU, not by individual EU nations) would benefit even the financially stronger nations. They would create a huge market, and gain interest benefits from it.
Uchikoma 15y ago
You cannot compare GDP between countries, as the US for example changes GDP (via the inflation component) every few years. US GDP in general is calculated too high as inflation is calculated too low compared to other countries - e.g. Germany.

deleted 15y ago

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alecco 15y ago

(via angriers@reddit) http://en.wikipedia.org/wiki/List_of_countries_by_credit_rating http://en.wikipedia.org/wiki/List_of_countries_by_credit_rat...

BlackJack 15y ago

"Treasury officials noticed a $2 trillion error in S&P's math that delayed an announcement for several hours." - http://professional.wsj.com/article/SB10001424053111903366504576490841235575386.html?mod=WSJPRO_hpp_LEFTTopStories http://professional.wsj.com/article/SB1000142405311190336650.... Says it all.

finin 15y ago

from the S&P rationale section of their press release: "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."

almightygod 15y ago

I don't care about karma burn; F&$# those damn ignorant republicans

giardini 15y ago

The SEC should criminally prosecute S&P, Fitch and Moody's for their corrupt participation in the financial meltdown. It should have been done sooner (the case was already made). To do so now would look like vengeance. But if vengeance is required then vengeance should be served. Put their controlling officers in jail and shut down the companies forever. http://www.housingwire.com/2011/04/14/credit-ratings-agencies-a-key-cause-of-the-financial-crisis-senate-report http://www.housingwire.com/2011/04/14/credit-ratings-agencie... http://www.huffingtonpost.com/2011/04/13/credit-rating-agencies-triggered-crisis-report_n_848944.html http://www.huffingtonpost.com/2011/04/13/credit-rating-agenc...

d2 15y ago

So keep an eye on treasury bonds on monday morning. Rate goes up, people still believe the US is safe, regardless of S&P. Rate goes down, market sentiment mirrors S&P's rating, and that's very very bad.

niels_olson 15y ago

S&P source: http://news.ycombinator.com/item?id=2853064 http://news.ycombinator.com/item?id=2853064

yoyar 15y ago

The chickens will come home to roost. It's just as simple as that.

uladzislau 15y ago

It's not just US the whole world economy system is screwed. Look what happens in Europe. People should really make some radical improvements to the way economy and finance system work. The main things: it should be simplified and transparent. If only a few experts understand what happens how could the system be reliable and secure? Everyone also knows that the more complicated is the system the higher is the failure rate.

davidw 15y ago
> If only a few experts understand what happens how could the system be reliable and secure? Would you rather fly in a 747, or something from 100 years ago? The latter is far, far simpler and easily understood by non-experts.

ck2 15y ago

Regardless how you take this news, S&P just bought themselves a whole bunch of free advertising. I don't think that was their primary goal but their name is now going to be mentioned on every newscast and in every paper everywhere for weeks.

ejbadger 15y ago

S&P is the same agency that rated AAA mortgage backed securities. not exactly a brain trust over there. my guess is they took this route for publicity. again the same group that rated a bunch of debt AAA when it was junk. what is their motivation?

Uchikoma 15y ago
So they rated junk as AAA. Do you imply US bonds are junk because they have been rated until now AAA by the agency?

marcamillion 15y ago

WOW....talk about CAJONES! I must tip my hat to S&P. This one...just WOW. I mean, I am not a conspiracy theorist by any stretch of the imagination, but I just never imagined that they would be able to pull the trigger. All it takes is some 'investigation' by the US Treasury into S&P and that's it....game over. Not that I think the US Treasury will retaliate....but WOW. I never thought they would take this step. Good for them. Double-dip recession, here we come.

pacomerh 15y ago
It's Cojones. Cajones means drawers.
- marcamillion 15y ago
  Sorry....my bad.
marcamillion 15y ago
Or perhaps something like this - i.e. an attempt to erode the credibility of S&P: http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SPs-2-Trillion-Mistake.aspx http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SP...

deleted 15y ago

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VicT11 15y ago

“It doesn’t make sense. In Omaha, the U.S. is still Triple-A rated and if there were a Quadruple-A I’d give the U.S. that.” -Warren Buffett

Tycho 15y ago

It seems that for the last 40 years we've been in one huge bubble - the 'American bubble.' Overconfidence in the continual growth, recovery and viability of US economics is finally coming to an end, and most of the globe is exposed.

binarysolo 15y ago

The ensuing blame game and rage depresses me: http://youropenbook.org/?q=AAA+obama&gender=any http://youropenbook.org/?q=AAA+obama&gender=any http://youropenbook.org/?q=aaa+republicans&gender=any http://youropenbook.org/?q=aaa+republicans&gender=any http://youropenbook.org/?q=aaa+democrats&gender=any http://youropenbook.org/?q=aaa+democrats&gender=any http://youropenbook.org/?q=AAA+tea+party&gender=any http://youropenbook.org/?q=AAA+tea+party&gender=any http://youropenbook.org/?q=aaa+congress&gender=any http://youropenbook.org/?q=aaa+congress&gender=any http://youropenbook.org/?q=aaa+politicians&gender=any http://youropenbook.org/?q=aaa+politicians&gender=any I have my own opinions as to who's responsible and what amger is well placed, but I think one can draw their own conclusions. Yes I know these are a limited sample set of people who have set their profiles to public. But still...

DanielBMarkham 15y ago

Some great non-hair-on-fire conversation here. Whenever I read and note that most folks are not that far apart on things, I keep wondering why the system is so broken. Here's the systemic problem, which has nothing to do with Treasury Bills, tax structures, or political parties. Phases of political maturity: 1) Apathy. Political parties are like football teams. You pick one and they're your guys. You root for them no matter what. If anything, there might be something wrong about folks who take these things too seriously. 2) Emotion. The other political party is the devil. They are out to destroy America. 3) Enlightenment. The other party is just full of people like me. There are some smart folks, but the problem is that they have all the wrong incentives and conclusions. 4) Understanding. Gee, there are those same bad conclusions and wrong incentives in my favorite party too. Ergo, parties don't matter. There are smart people everywhere. When the system fails, it's a problem of the system, not of the people or parties. The problem in the U.S. is that the majority of folks are in stage 1 or 2 when we need them to be in 4. So when deep structural conversations come along, they're still either rooting for their team or blaming the other guys, when they should be talking about principles that need to be changed for the entire system to work better, no matter what the actual goals of any party. There is another problem that helps create deadlock -- an understanding of where the money comes from. I think many folks view the economy as something the government grows so that it can harvest money in the form of taxes. (This is not a Keynesian discussion, simply a discussion about taxes in general.) Other folks view the government as something the economy grows in order to keep it functioning. These are two deeply conflicting world-views. I'm not sure you'll ever reconcile them. Some put trading first and sharing second. Many put sharing first and trading second. These two camps have come to demonize the others, sadly. (Which takes us back to the observation above) For this problem to be solved, we need to give up on arguing specific issues or philosophical positions and instead talk about fixing structures so that the budget stays balanced long-term no matter who is in power or what their priorities are. This is a meta conversation, the kind the framers had. I am very doubtful there is anyone around today in power that can handle it. Not a happy outlook. All of the people in political power got that way by playing ideological and rhetorical games and by being fiercely loyal to their party. It's the exact opposite qualifications for folks that would have a chance at actually solving anything. I think we could talk forever and reach general agreement informally on all number of things, but if the system remains broken, it's all going to be for nothing, sadly. Without an honest look at meta systemic issues, a free-for-all discussion around U.S. policy is all so much activity without results.

reubenyeah 15y ago

I understand the implications but what would it take for the USA to get AAA back from S&P?

OllieJones 15y ago

Perfect. Obama and Boehner are doing an excellent job of what they are paid to do: transferring the wealth of the USA to Wall Street plutocrats. They've given the sleazeball so-called "rating" agencies the cover they need to demand higher interest rates. No new taxes. No new jobs. I can't believe that folks who are in their 20s and 30s aren't throwing rocks at people my age (late 50s) for our generational greediness. By the way, I had a six figure federal tax bill one year, when my cofounders and I sold a startup. Maybe I'm an aberration, but I was proud to be able to chip in that much to the government that paid for ARPA back in the day.

Morcane 15y ago
It's no use to throw rocks at you people. I guess it's not so much the fact you 50 and 60-somethings are relatively very well off by profiting from the situation until now that makes people angry (hey, a lot of you worked hard as well for it), it's the fact a lot of you are so cavalier and casual about it, and like to dangle that fact in front of our noses all the time. In any case, I do hope you enjoy the fact you're rich, at the expense of your own children. Well played I guess. If you haven't got any children, perhaps you need to be kind to that girl changing your shit-filled diaper in the elderly home.

quattrofan 15y ago

This is the beginning of the end of the dollar as the worlds reserve currency, its bad for the rest of the world and only good for the US, its imbalanced. I am not so sure most Americans are ready for what the world will be like when it happens, because unless the need for a regular deficit is reduced and reliance for imported oil curbed, it will be very painful indeed.

jballanc 15y ago

The true shame is not loosing some arbitrary rating from some arbitrary organization, but that this action still matters even after said organization was shown, conclusively, to behave in a completely arbitrary and ultimately self-serving way.

da5e 15y ago

The debt is not the problem.

Rariel 15y ago

THer

Rariel 15y ago

THere is a simple solution to the Social Security "crisis". Right now only income up to 100,000 is subject to social security taxes. Anything over 100,000 is not taxed for social security. If we raised taxable income to 150,000 or 200,000 even we'd have plenty of money.

Rariel 15y ago
I'd love if some of the downvoters could explain 1) why I'm wrong or 2) what an alternative would look like?

deleted 15y ago

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daniwan 15y ago

Raise the taxes on the rich! Jesus Christ!

daniwan 15y ago

All the seemingly smart guys here, producing stupid arguments. Stop thinking how to cut children's lunch and start thinking how to get a 2nd job!