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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.

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.
    - radicaldreamer 15y ago
      Well, you might be surprised. Japan's market rallied 3% the day after their downgrade.
      - mbreese 15y ago
        That's probably because the market thought they hit rock bottom. Markets like uncertainty less than bad news, so they are much happier knowing about the downgrade.
        joelhaus 15y ago
        p.s. To your earlier point, the '40 ACT details investment requirements for Money Market Funds [can't think of them now, but you are right, there are numerous statutory requirements related to the grade of security certain bodies may invest in]: http://taft.law.uc.edu/CCL/InvCoRls/rule2a-7.html http://taft.law.uc.edu/CCL/InvCoRls/rule2a-7.html
- scott_s 15y ago
  Ratings are a factor in financial-industry regulations and in internal policies at financial institutions. But almost all of these regulations and policies treat a AAA rating the same as a AA rating. So a downgrade from AAA to AA would trigger little or no forced selling, Arora said. An official at Vanguard, the big mutual fund company, told me this week that "a downgrade from AAA would not trigger any events inside our funds." From Planet Money's blog, http://www.npr.org/blogs/money/2011/07/27/138738198/3-reasons-a-downgrade-might-not-be-a-big-deal-and-1-big-reason-it-might http://www.npr.org/blogs/money/2011/07/27/138738198/3-reason... The full podcast, "Would a downgrade matter?", is an excellent listen: http://www.npr.org/blogs/money/2011/07/28/138721364/the-tuesday-podcast-would-a-downgrade-matter http://www.npr.org/blogs/money/2011/07/28/138721364/the-tues...
- prostoalex 15y ago
  People mention that a lot, but what specific institutions have that requirement? And haven't they developed some more coherent requirements ever since subprime mortgage bonds proved the system could be gamed?
  - meow 15y ago
    One example that comes to my mind is that Indian IPOs can be subscribed by foreign institutional investors using AAA bonds (they just show this as backing instead of paying the full price in cash before getting any shares allocated). I think now investors can only use the bonds of others countries.
- BrentRitterbeck 15y ago
  Now that being said, I have no idea how this would work in practice. That's the problem. No one else knows either. Monday is not going to be a good day.
  - eazolan 15y ago
    Flux happens.
jpdoctor 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. It's not a matter of how "people" treat it. Many funds are prohibited from holding anything other than AAA. Those folks will now be selling bonds. For those that haven't looked at the math of bonds: When the price of a bond goes down (as it does when there are many sellers), the yield goes up. That yield is what the US Govt will be paying on future issued bonds, more or less. Good luck to us all. We're gonna need it.
- pyoung 15y ago
  It's a little more complicated than that. Treasury bonds are actively traded on secondary markets. The 'price goes down, yield goes up' generally refers to secondary markets. The concern for the U.S. govt isn't the secondary market. It is the primary market where they auction off bonds to raise money to fund operations. In the primary market, the U.S. treasury issues a certain number of bonds in order to raise a specified amount of money. Investors bid on the bonds, and the best bid (i.e. lowest interest rate) wins. With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.
  - noagenda 15y ago
    US government doesnt sell bonds to fund operations, it is never revenue constrained (because the US dollar is a non-commodity backed, floating exchange rate, fiat currency). It sells bonds to remove dollars from the system.
    - jpdoctor 15y ago
      > US government doesnt sell bonds to fund operations Yes it does. > It sells bonds to remove dollars from the system. No. The Fed is in charge of the money supply, and when they sell bonds, dollars are removed from the system. The US Govt selling bonds actually increases various measures of the money supply.
  - jpdoctor 15y ago

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.
  - radicaldreamer 15y ago
    Well, you might be surprised. Japan's market rallied 3% the day after their downgrade.
    - mbreese 15y ago
      That's probably because the market thought they hit rock bottom. Markets like uncertainty less than bad news, so they are much happier knowing about the downgrade.
      - joelhaus 15y ago
        p.s. To your earlier point, the '40 ACT details investment requirements for Money Market Funds [can't think of them now, but you are right, there are numerous statutory requirements related to the grade of security certain bodies may invest in]: http://taft.law.uc.edu/CCL/InvCoRls/rule2a-7.html http://taft.law.uc.edu/CCL/InvCoRls/rule2a-7.html
scott_s 15y ago
Ratings are a factor in financial-industry regulations and in internal policies at financial institutions. But almost all of these regulations and policies treat a AAA rating the same as a AA rating. So a downgrade from AAA to AA would trigger little or no forced selling, Arora said. An official at Vanguard, the big mutual fund company, told me this week that "a downgrade from AAA would not trigger any events inside our funds." From Planet Money's blog, http://www.npr.org/blogs/money/2011/07/27/138738198/3-reasons-a-downgrade-might-not-be-a-big-deal-and-1-big-reason-it-might http://www.npr.org/blogs/money/2011/07/27/138738198/3-reason... The full podcast, "Would a downgrade matter?", is an excellent listen: http://www.npr.org/blogs/money/2011/07/28/138721364/the-tuesday-podcast-would-a-downgrade-matter http://www.npr.org/blogs/money/2011/07/28/138721364/the-tues...
prostoalex 15y ago
People mention that a lot, but what specific institutions have that requirement? And haven't they developed some more coherent requirements ever since subprime mortgage bonds proved the system could be gamed?
- meow 15y ago
  One example that comes to my mind is that Indian IPOs can be subscribed by foreign institutional investors using AAA bonds (they just show this as backing instead of paying the full price in cash before getting any shares allocated). I think now investors can only use the bonds of others countries.
BrentRitterbeck 15y ago
Now that being said, I have no idea how this would work in practice. That's the problem. No one else knows either. Monday is not going to be a good day.
- eazolan 15y ago
  Flux happens.

jpdoctor 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. It's not a matter of how "people" treat it. Many funds are prohibited from holding anything other than AAA. Those folks will now be selling bonds. For those that haven't looked at the math of bonds: When the price of a bond goes down (as it does when there are many sellers), the yield goes up. That yield is what the US Govt will be paying on future issued bonds, more or less. Good luck to us all. We're gonna need it.

pyoung 15y ago
It's a little more complicated than that. Treasury bonds are actively traded on secondary markets. The 'price goes down, yield goes up' generally refers to secondary markets. The concern for the U.S. govt isn't the secondary market. It is the primary market where they auction off bonds to raise money to fund operations. In the primary market, the U.S. treasury issues a certain number of bonds in order to raise a specified amount of money. Investors bid on the bonds, and the best bid (i.e. lowest interest rate) wins. With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.
- noagenda 15y ago
  US government doesnt sell bonds to fund operations, it is never revenue constrained (because the US dollar is a non-commodity backed, floating exchange rate, fiat currency). It sells bonds to remove dollars from the system.
  - jpdoctor 15y ago
    > US government doesnt sell bonds to fund operations Yes it does. > It sells bonds to remove dollars from the system. No. The Fed is in charge of the money supply, and when they sell bonds, dollars are removed from the system. The US Govt selling bonds actually increases various measures of the money supply.
- jpdoctor 15y ago