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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 t

by 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.
  - _delirium 15y ago
    Perhaps; it depends on whether investors have rules about percentage of foreign holdings (many do). You'd also need to find countries with AAA ratings that still have big enough outstanding debts that the markets are sufficiently liquid even for large transactions. For example, Canada has $550 billion in total outstanding bonds, so you couldn't easily move $50 billion there, since that'd require buying up 10% of the entire market. Even moving $5 billion there is buying up 1%, which the liquidity may or may not support.
  - rmrm 15y ago
    I think at least one of the issues is that other AAA countries/entities simply don't produce enough debt. It' not just that we're AAA, it's that we produce so much AAA paper. The AAA bond market gets so much smaller is the issue. That's my understanding, but I'm no expert. I think that is largely why this won't have that much of an effect, there isn't a replacement for that much money that is AAA. The "cure" (crowding into what is left) would be more painful to the bond market than the "disease" (us).
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  - giardini 15y ago
    Everybody's missing the point here. The credit rating agencies (S&P, Moody's and Fitch) don't know what they are doing! They enabled the financial meltdown. Their ratings are not useful. Their numbers are bad. They are either corrupt, inaccurate or both. It would be nice and easy to believe that, since S&P puts a "AAA" beside a company's name, that the company is solid. We now know that is false. Pay attention to Nicholas Taleb's writings: the financial models commonly in use don't work - don't trust them. Use more conservative measures. Avoid markets where you cannot quantify risk.

by seldo 15y ago

_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.
- _delirium 15y ago
  Perhaps; it depends on whether investors have rules about percentage of foreign holdings (many do). You'd also need to find countries with AAA ratings that still have big enough outstanding debts that the markets are sufficiently liquid even for large transactions. For example, Canada has $550 billion in total outstanding bonds, so you couldn't easily move $50 billion there, since that'd require buying up 10% of the entire market. Even moving $5 billion there is buying up 1%, which the liquidity may or may not support.
- rmrm 15y ago
  I think at least one of the issues is that other AAA countries/entities simply don't produce enough debt. It' not just that we're AAA, it's that we produce so much AAA paper. The AAA bond market gets so much smaller is the issue. That's my understanding, but I'm no expert. I think that is largely why this won't have that much of an effect, there isn't a replacement for that much money that is AAA. The "cure" (crowding into what is left) would be more painful to the bond market than the "disease" (us).
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- giardini 15y ago
  Everybody's missing the point here. The credit rating agencies (S&P, Moody's and Fitch) don't know what they are doing! They enabled the financial meltdown. Their ratings are not useful. Their numbers are bad. They are either corrupt, inaccurate or both. It would be nice and easy to believe that, since S&P puts a "AAA" beside a company's name, that the company is solid. We now know that is false. Pay attention to Nicholas Taleb's writings: the financial models commonly in use don't work - don't trust them. Use more conservative measures. Avoid markets where you cannot quantify risk.