6 ms·

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.

by 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.
  - TomOfTTB 15y ago
    I'm sorry but that's bull. Anything can be changed. Contracts can be revised and even charters can be updated by a Board of Directors. If you hold a significant amount of U.S. Bonds you aren't going to ditch them on S&P's say so. You're going to call a meeting of the Board of Directors or Trustees or whoever and decide based on your own judgement. The whole point of a rating agency is to provide you with research that you couldn't get based on your available resources. But every economist in the world is a resource on the U.S. Government's viability. You can turn on CNBC and get 24 hour coverage of it. So the U.S. is a special case and the ratings agencies don't mean all that much in regards to it.
    - DasIch 15y ago
      You are assuming that enough people have an actual interest in letting the U.S. remain in the position it is now or that a recession in the U.S. will affect the rest of the world enough to matter. While that may have been true a couple of years or may be even months ago, I'd say that this is anything but certain. There are a lot of people and government through out the world who would like to see the U.S. weakened.
    - deleted 15y ago
      [deleted]
    - spdy 15y ago
      There is a lot of hope in your post. Investors will just move money to another country and there are enough who have much better grow rates. (China / India). Or entities who will bet on the downfall of the U.S and there will be countries who have a high interest in this. On Monday you can short every major company the downfall will be significant. This will be very interesting to watch the next world recession is on our doorsteps. Money does not care who you are or what you do.
mdda 15y ago
But the most important aspect is on the banking industry, where there are huge positions that look like (X-X0). X0 may rise, which is a problem, but the bigger issue is that the overall size of this type of bet can be enormous, because it's overall AAA. Suddenly, a fundamental assumption underlying a lot of these trades has been shattered, and will force people to unwind losing positions... And the banking system wasn't a picture of health before.
Alex3917 15y ago
This also triggers the automatic review of the debt rating for various states and hundreds of small towns across America. A lot of cities across the US are going to lose their ability to borrow cheap money because of this, not just the federal government.
usaar333 15y ago
I doubt it will be that significant. Japan has been at AA- from all rating agencies forever (and has vastly higher debt) and pays lower rates than the US. Besides, as you pointed out there are so few large countries with AAA from all agencies. Besides, there's no new information released today, other than what some analysts at S&P think.
- jrockway 15y ago
  Exactly. The big banks do their own research, so what S&P thinks is largely irrelevant. We have an entire division devoted only to US treasuries.
  - ams6110 15y ago
    Beyond that, I'm not sure why any of these agencies has any real credibility anymore, since they were giving AAA ratings to the "toxic" CDOs up until they collapsed.
- watchandwait 15y ago
  Japan is a nation of savers and has a massive domestic pool of savings. Also, Japan will drop below investment grade within the next ten years as those savers retire. America, on the other hand, needs to borrow internationally.
  - chailatte 15y ago
    Japan's famous savings rate, just like its famous work ethic, is nothing but a myth anymore. It stands now at 2% in 2009. (and its famous work ethic...no more. 30% of its working population is part-time. look up 'freeter') http://belfercenter.ksg.harvard.edu/publication/20397/japans_savings_crisis.html http://belfercenter.ksg.harvard.edu/publication/20397/japans...
ohyes 15y ago
Don't think it this really matters. The US still has the strongest economy of pretty much anyone (even with recession). There isn't going to be a massive dumping of US bonds. The AAA credit rating is helpful, but is only used by certain investors, and those big enough to make a real difference have their own assessors of risk. I think the cutoff for the smaller guys to be legal to invest in is something like AA-. We aren't in danger of that. We'll probably be like AA+ or something. Hopefully the US will quit spending so much on military and raise taxes on the ultra-rich to even things out, but who knows.
- darksaga 15y ago
  Even if you tax the hell out of the rich, it still leaves this country TRILLIONS in debt. It's a fact - you don't tax your way out of a recession and you sure as hell don't tax people to create jobs. It simply doesn't work. And yeah, great idea. Let's cut military funding while we're fighting a war on terror in three countries. Apparently you don't remember Clinton's military cuts which removed almost 300,000 people from the federal payroll. When you make military cuts, you're not just removing tanks and guns. You're also sending a lot of people to the unemployment line.
  - usaar333 15y ago
    Trillions in debt is perfectly fine for an economy as large as America's. It's tens of trillions where you have a problem long-term. I agree that you should just run the short-term deficits. That said, if we have to cut short-term deficits (which I don't think is a wise strategy), it is significantly better to tax the rich than cut benefit programs. Finally on military, I'd feel it'd be a better use of resources to transfer the 300,000 people to infrastructure projects. The ROI on the investment is much better than the wars where we have ground-troops.
    - IbJacked 15y ago
      >> Trillions in debt is perfectly fine for an economy as large as America's. No it's not. Wouldn't it be much better to not have to constantly pay billions to simply pay the debt's interest? We aren't even reducing the principal, which is why we have to keep raising the debt ceiling. That's like saying it's perfectly fine to maintain a large credit card debt because you have a high income. Just because you can handle it, doesn't make it wise.
bubbleRefuge 15y ago
Federal interest rates will not go up because interest rates are controlled endogenously. They will go wherever the fed wants them to go.
pmorici 15y ago
It's interesting the Treasury Department Issued this statement after the downgrade news basically saying, for all practical purposes we still consider the debt to be AAA regardless of what S&P thinks. http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-ia-2011-104.html http://www.occ.treas.gov/news-issuances/news-releases/2011/n...

by latch 15y ago

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.
- TomOfTTB 15y ago
  I'm sorry but that's bull. Anything can be changed. Contracts can be revised and even charters can be updated by a Board of Directors. If you hold a significant amount of U.S. Bonds you aren't going to ditch them on S&P's say so. You're going to call a meeting of the Board of Directors or Trustees or whoever and decide based on your own judgement. The whole point of a rating agency is to provide you with research that you couldn't get based on your available resources. But every economist in the world is a resource on the U.S. Government's viability. You can turn on CNBC and get 24 hour coverage of it. So the U.S. is a special case and the ratings agencies don't mean all that much in regards to it.
  - DasIch 15y ago
    You are assuming that enough people have an actual interest in letting the U.S. remain in the position it is now or that a recession in the U.S. will affect the rest of the world enough to matter. While that may have been true a couple of years or may be even months ago, I'd say that this is anything but certain. There are a lot of people and government through out the world who would like to see the U.S. weakened.
  - deleted 15y ago
    [deleted]
  - spdy 15y ago
    There is a lot of hope in your post. Investors will just move money to another country and there are enough who have much better grow rates. (China / India). Or entities who will bet on the downfall of the U.S and there will be countries who have a high interest in this. On Monday you can short every major company the downfall will be significant. This will be very interesting to watch the next world recession is on our doorsteps. Money does not care who you are or what you do.

mdda 15y ago

But the most important aspect is on the banking industry, where there are huge positions that look like (X-X0). X0 may rise, which is a problem, but the bigger issue is that the overall size of this type of bet can be enormous, because it's overall AAA. Suddenly, a fundamental assumption underlying a lot of these trades has been shattered, and will force people to unwind losing positions... And the banking system wasn't a picture of health before.

Alex3917 15y ago

This also triggers the automatic review of the debt rating for various states and hundreds of small towns across America. A lot of cities across the US are going to lose their ability to borrow cheap money because of this, not just the federal government.

usaar333 15y ago

I doubt it will be that significant. Japan has been at AA- from all rating agencies forever (and has vastly higher debt) and pays lower rates than the US. Besides, as you pointed out there are so few large countries with AAA from all agencies. Besides, there's no new information released today, other than what some analysts at S&P think.

jrockway 15y ago
Exactly. The big banks do their own research, so what S&P thinks is largely irrelevant. We have an entire division devoted only to US treasuries.
- ams6110 15y ago
  Beyond that, I'm not sure why any of these agencies has any real credibility anymore, since they were giving AAA ratings to the "toxic" CDOs up until they collapsed.
watchandwait 15y ago
Japan is a nation of savers and has a massive domestic pool of savings. Also, Japan will drop below investment grade within the next ten years as those savers retire. America, on the other hand, needs to borrow internationally.
- chailatte 15y ago
  Japan's famous savings rate, just like its famous work ethic, is nothing but a myth anymore. It stands now at 2% in 2009. (and its famous work ethic...no more. 30% of its working population is part-time. look up 'freeter') http://belfercenter.ksg.harvard.edu/publication/20397/japans_savings_crisis.html http://belfercenter.ksg.harvard.edu/publication/20397/japans...

ohyes 15y ago

Don't think it this really matters. The US still has the strongest economy of pretty much anyone (even with recession). There isn't going to be a massive dumping of US bonds. The AAA credit rating is helpful, but is only used by certain investors, and those big enough to make a real difference have their own assessors of risk. I think the cutoff for the smaller guys to be legal to invest in is something like AA-. We aren't in danger of that. We'll probably be like AA+ or something. Hopefully the US will quit spending so much on military and raise taxes on the ultra-rich to even things out, but who knows.

darksaga 15y ago
Even if you tax the hell out of the rich, it still leaves this country TRILLIONS in debt. It's a fact - you don't tax your way out of a recession and you sure as hell don't tax people to create jobs. It simply doesn't work. And yeah, great idea. Let's cut military funding while we're fighting a war on terror in three countries. Apparently you don't remember Clinton's military cuts which removed almost 300,000 people from the federal payroll. When you make military cuts, you're not just removing tanks and guns. You're also sending a lot of people to the unemployment line.
- usaar333 15y ago
  Trillions in debt is perfectly fine for an economy as large as America's. It's tens of trillions where you have a problem long-term. I agree that you should just run the short-term deficits. That said, if we have to cut short-term deficits (which I don't think is a wise strategy), it is significantly better to tax the rich than cut benefit programs. Finally on military, I'd feel it'd be a better use of resources to transfer the 300,000 people to infrastructure projects. The ROI on the investment is much better than the wars where we have ground-troops.
  - IbJacked 15y ago
    >> Trillions in debt is perfectly fine for an economy as large as America's. No it's not. Wouldn't it be much better to not have to constantly pay billions to simply pay the debt's interest? We aren't even reducing the principal, which is why we have to keep raising the debt ceiling. That's like saying it's perfectly fine to maintain a large credit card debt because you have a high income. Just because you can handle it, doesn't make it wise.

bubbleRefuge 15y ago

Federal interest rates will not go up because interest rates are controlled endogenously. They will go wherever the fed wants them to go.

pmorici 15y ago

It's interesting the Treasury Department Issued this statement after the downgrade news basically saying, for all practical purposes we still consider the debt to be AAA regardless of what S&P thinks. http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-ia-2011-104.html http://www.occ.treas.gov/news-issuances/news-releases/2011/n...