17 ms·

Moody’s: Why the U.S. Is Still AAA

82 points by ekm2 15y ago

tybris 15y ago
Both S&P and Moody's make good points, but have a different assessment of the uncertainty. Compared to other nations, The U.S. has a surprisingly healthy budget. Cut out the bush tax cuts, end the wars, stabilize health care spending, and you could create a surplus in no time. Few other countries have that luxury. However, it has not only become questionable whether Washington will be able to make the necessary changes in the foreseeable future, the corruption that underlies this inability is very hard to get rid of and may cripple the government even further. I think these two different ratings appropriately reflect the uncertainty of the situation.
- itaborai83 15y ago
  http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance http://en.wikipedia.org/wiki/List_of_sovereign_states_by_cur...
  - hugh3 15y ago
    More meaningful if you look at it as a portion of GDP. http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance_as_a_percentage_of_GDP http://en.wikipedia.org/wiki/List_of_countries_by_current_ac...
    - nl 15y ago
      The current account has very little to do with the US Debt problems. The current account relates to the balance of trade[1], ie: the amount of good and services purchased from overseas vs sold overseas. The US Debt is money borrowed by the US Goverment[2], which isn't really related to trade directly at all. There is a Wikipedia article that lists the different types of deficits: http://en.wikipedia.org/wiki/Deficit http://en.wikipedia.org/wiki/Deficit. The current debate in the US is over deficit budgets, whereas a Trade Deficit is a different problem, [1] http://en.wikipedia.org/wiki/Balance_of_payments http://en.wikipedia.org/wiki/Balance_of_payments [2] http://en.wikipedia.org/wiki/United_States_public_debt http://en.wikipedia.org/wiki/United_States_public_debt
  - ArbitraryLimits 15y ago
    There's a saying that goes, "If you owe the bank $100, that's your problem. If you owe the bank $100 million dollars, that's the bank's problem." (I've seen it attributed to John D. Rockefeller, but certainly other people had the same idea before hime). s/million/trillion/g, s/bank/China/g and s/you/United States/g and you've got my take on the current situation. Lots of the rest of the world's economy is based on selling things to the United States; it's pretty much China's explicit strategy for growth. If the US goes to everyone in turn and says, "Hey remember that $50 billion I said I'd get you last week? Yeah...I can give you $10 million," there will be a lot of grumbling, and hopefully some restructuring in the long term, but they'll still take the deal. Where else are they going to go? TL;DR US has a monopsyny on monkey shaped shower curtain rings.
    - dmm 15y ago
      The US treasury is currently borrowing at the lowest rates in 70 years. To obtain the lowest rates possible, about half of the US debt is in bonds that mature in less than a year. This means huge quantities of bonds are constantly maturing and being resold. Any change in interest rates will quickly result in much higher interest payments. These rates are so low because the fed is buying the bonds and treasuries are currently the safest place to park huge amounts of cash. The rates even go negative at times because US bonds are are safe place for cash. If the treasury starts defaulting on its debts, that will change very quickly. Not only that but the status of the USD will change very quickly.
- hugh3 15y ago
  However, it has not only become questionable whether Washington will be able to make the necessary changes in the foreseeable future, the corruption that underlies this inability is very hard to get rid of and may cripple the government even further. The issue in the US is that there is a genuine ideological split between the two parties about what the US government should look like. The Democrats want a big government, which takes in a lot of taxes and provides a lot of services to everybody. The Republicans want a small government, which takes in minimalist taxes and provides minimalist services. (I'm not interested in debating the relative merits of these two ideologies today.) And this isn't just the parties' ideologues, either -- the same ideological split genuinely exists in the US public (contrast to many other countries where the "big government" types seem to have largely won the argument). Either party could easily balance the budget on its own, given unlimited power. However, because of the way the US political system just happens to work, it's very hard to do anything without getting at least some of the other guys on board. The Republicans have for many years had a "starve the beast" strategy, figuring that if you keep on cutting taxes then eventually the Democrats will have to agree to cut spending as well. In recent years the Democrats have invented the opposite "gorge the beast" strategy, in which you figure that if you keep on increasing spending then eventually you'll be able to pressure the Republicans into agreeing to tax increases. And the poor beast being starved at one and and gorged at the other starts to... wait, no, this analogy is breaking down. What's the solution? There really isn't one. The ideological split in the American public is real and it isn't going away any time soon, and folks need to stop proposing "solutions" which basically just come down to "all we need is for the other side to come over and agree with us and it'll all be rosy." That's not gonna happen. But perhaps the first step is to acknowledge that this ideological split is genuine, and real, and does actually reflect the ideological split within the US population. Perhaps we can compromise, but first we have to acknowledge precisely what it is we're compromising about. edit: Wow, I can't believe this got modded down. I guess the true believers in the "No really, it's the other guys' fault" die hard.
  - DevX101 15y ago
    I'd caution against taking the Republican's word that they want a 'small government'. History contradicts this assertion -- the last 3 republican administrations increased the budget deficit. I think Republicans want to allocate funding differently from the Democrats, but I'm not so sure they want to do any kind of 'small government'.
markyc 15y ago
it wouldn't have anything to do with buffet's stock in moody's (and him already losing billions as an effect of the recent downgrade by S&P)?
- mcphilip 15y ago
  In theory, no, but buffet being moody's largest shareholder along with his comments about S&P downgrade being in error sure is tempting fodder for conspiracy theory :)
VladRussian 15y ago
pathetic state of the industry as everybody is still forced to care about output of the [ algorithm + business process it is embedded in ] combo that produced AAA for mortgage bonds junk
- gaius 15y ago
  This is a silly critique. We all know the weather forecast isn't absolutely 100% accurate, but it's still worth having.
  - enqk 15y ago
    First the impact of a false prediction on a weather forecast is not as dangerous as that of a false prediction in default rates, second, even an erroneous weather forecast isn't too far from the observed weather.
  - rayiner 15y ago
    But how much do you trust it? Coming from the east coast I trust the forecast less than just looking out the window. It's just too inaccurate. When you look out the window and see that the US is still the healthiest big developed economy out there, what do you do? Do you trust your own eyes or the ratings agency?
  - cemerick 15y ago
    If that weather forecast said it was going to be sunny and warm, you'd be pretty pissed to encounter hailstorms and hurricanes when you arrived at the beach. Similarly, you might not trust it so much when the weatherman was bleating about thunderstorms while all you can see are high clouds and blue sky.
  - VladRussian 15y ago
    >We all know the weather forecast isn't absolutely 100% accurate forecasters who forecast "sunny" paid handsomely, while forecasters who forecast "fog" aren't paid at all - what would be accuracy of a given forecast for London from these forecasters?
netmau5 15y ago
It bums me out that a single press release can cause so much of the world's wealth to evaporate. Worldwide capital was something like $80T iirc, 2% of that would have solved every budget crisis in the world.
- sliverstorm 15y ago
  Was it real wealth if it can evaporate so? Before you immediately jump to your guns, roll the question around in your mind: was value destroyed?
  - deleted 15y ago
    [deleted]
  - hugh3 15y ago
    Indeed, no real wealth was destroyed. Well, a few cars were set on fire in London, but that was unrelated. Part of the secret to my happiness is this: I permit myself to feel happy on days when my stock portfolio goes up, but not to feel sad on days when my stock portfolio goes down. In this particular case I'd much rather be happy than consistent.
    - ars 15y ago
      Cars are not real wealth, they are negative wealth since they cost money, but don't make money. Wealth is owning things that can make money, not things that are money or that were bought with money.
      - hugh3 15y ago
        You're using a rather odd definition of "wealth" there. Cars are wealth because they are useful... and indeed can be used to make money.
      - pchristensen 15y ago
        don't make money A lot of people live farther than walking distance away from work.
hugh3 15y ago
It's natural that different ratings agencies should disagree sometimes. That's why we have different ratings agencies.
- OstiaAntica 15y ago
  In the US, ratings agencies and the bond rating system are a legacy of the New Deal-- the ratings agencies are approved by federal regulators and are protected from real competition. Contrast that with stocks, where anybody can be an analyst and issue a rating, and where there is no mechanical, legalistic system of downgrades and upgrades. The feds created the bond ratings agency oligopoly to "protect investors", but I'd argue we'd be better served by true ratings competition and more due diligence by investors.
  - shareme 15y ago
    wrong.. just ask Henry Blodget if he can be analyst.. Stock analysts are regulated by the SEC..
    - OstiaAntica 15y ago
      You don't understand the legal structures here. Of course there are rules, but there's no competitive barrier to entry to the stock analysis business. There are thousands of companies that provide stock research, but only a handful of official bond ratings companies. And there's an entire legal and regulatory structure around bonds and bond ratings, which does not exist around equities, and which connect bond ratings to the US banking, pension, and insurance systems. Here's a good overview of the debate on ratings agency reform: http://www.sec.gov/rules/concept/33-8236.htm http://www.sec.gov/rules/concept/33-8236.htm
  - hugh3 15y ago
    the ratings agencies are approved by federal regulators and are protected from real competition. I'm confused. Surely if I decided to set up my own bond rating agency nobody could stop me?
ahi 15y ago
S&P's position doesn't make any sense. If U.S. defaults what happens to the world economy and every other AAA rated debt? So long as US Treasuries shore up the balance sheet of every government and corporation, a default takes down everything. If the US can't have a AAA, then no one can.
- Havoc 15y ago
  I don't think these ratings are intended to still hold true in a global meltdown type scenario. Your point does show though how ridiculous the current situation is. A country that is up to its eyeballs in debt really should not be the measuring stick.
  - ChuckMcM 15y ago
    "I don't think these ratings are intended to still hold true in a global meltdown type scenario." That was Vlad's point. The US debt is, for the time being, 'too big to fail' in the sense that things like oil is priced in dollars. So almost by definition, the US debt is AAA and everything else is the same or less risky than that. (Talking strictly about soverign debt here, corporate debt is a different kettle of fish) "Your point does show though how ridiculous the current situation is. A country that is up to its eyeballs in debt really should not be the measuring stick." This seems to be a common misperception, which is where our 'eyeballs' are, relative to the amount of debt we are carrying as a country. Compared to the GDP and size of the economy, we're not in bad shape at all. Further, even at the anemic growth rates of 2%, if the Government cut nothing, which is to say kept the same budget this year (in terms of dollar expenditure) as they had last year (basically actually made the budgeting process 'net zero' so any new spending was matched by an equivalent cut) the country would be running a surplus in slightly more than 15 years. With 3 trillion in current revenue, 2% growth compounded over 15 years gets us to 4 trillion in annual revenue. Even running a half trillion dollar defict we 'win' by not spending any more. But it does depend on us having the discipline to do that.
    - jcitme 15y ago
      "and everything else is the same or less risky than that." Did you mean /more/ risky?
Havoc 15y ago
>basis of our decision [...] size of the U.S. economy These guys missed have missed all that drama about to big to fail.
georgieporgie 15y ago
I suspect that Warren Buffet has a glint in his eye, watching stocks dropping right now. It's a fire sale in what is fundamentally the greatest economic engine on the planet.
praptak 15y ago
This sounds a bit suspicious: "The United States has unmatched access to financing, meaning that the U.S. government can support higher debt levels than other governments." "We think it's safe to lend them money, because they can borrow lots of money."
reirob 15y ago
The question is not why Moody's thinks that U.S. still deserves AAA, but how long it will take until Moody's will have to downgrade U.S.
timedoctor 15y ago
There is one reason why the US cannot go bankrupt .... it can just print more money to pay the debts. This is very different to Greece which does not control it's own currency. This is one reason why Euro states are more under threat than the US. Also Japan has far higher debt levels than the US, and it has an significantly more aging population, negative growth in population and is in more trouble than the US. However Japan is currently a safe haven from the US? Who decided that Japan is a safe haven? If the Japanese government had to pay much higher interest rates it would be in a lot of trouble, but at least it too can print it's own money.

82 points by ekm2 15y ago

Both S&P and Moody's make good points, but have a different assessment of the uncertainty. Compared to other nations, The U.S. has a surprisingly healthy budget. Cut out the bush tax cuts, end the wars, stabilize health care spending, and you could create a surplus in no time. Few other countries have that luxury. However, it has not only become questionable whether Washington will be able to make the necessary changes in the foreseeable future, the corruption that underlies this inability is very hard to get rid of and may cripple the government even further. I think these two different ratings appropriately reflect the uncertainty of the situation.

itaborai83 15y ago
http://en.wikipedia.org/wiki/List_of_sovereign_states_by_current_account_balance http://en.wikipedia.org/wiki/List_of_sovereign_states_by_cur...
- hugh3 15y ago
  More meaningful if you look at it as a portion of GDP. http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance_as_a_percentage_of_GDP http://en.wikipedia.org/wiki/List_of_countries_by_current_ac...
  - nl 15y ago
    The current account has very little to do with the US Debt problems. The current account relates to the balance of trade[1], ie: the amount of good and services purchased from overseas vs sold overseas. The US Debt is money borrowed by the US Goverment[2], which isn't really related to trade directly at all. There is a Wikipedia article that lists the different types of deficits: http://en.wikipedia.org/wiki/Deficit http://en.wikipedia.org/wiki/Deficit. The current debate in the US is over deficit budgets, whereas a Trade Deficit is a different problem, [1] http://en.wikipedia.org/wiki/Balance_of_payments http://en.wikipedia.org/wiki/Balance_of_payments [2] http://en.wikipedia.org/wiki/United_States_public_debt http://en.wikipedia.org/wiki/United_States_public_debt
- ArbitraryLimits 15y ago
  There's a saying that goes, "If you owe the bank $100, that's your problem. If you owe the bank $100 million dollars, that's the bank's problem." (I've seen it attributed to John D. Rockefeller, but certainly other people had the same idea before hime). s/million/trillion/g, s/bank/China/g and s/you/United States/g and you've got my take on the current situation. Lots of the rest of the world's economy is based on selling things to the United States; it's pretty much China's explicit strategy for growth. If the US goes to everyone in turn and says, "Hey remember that $50 billion I said I'd get you last week? Yeah...I can give you $10 million," there will be a lot of grumbling, and hopefully some restructuring in the long term, but they'll still take the deal. Where else are they going to go? TL;DR US has a monopsyny on monkey shaped shower curtain rings.
  - dmm 15y ago
    The US treasury is currently borrowing at the lowest rates in 70 years. To obtain the lowest rates possible, about half of the US debt is in bonds that mature in less than a year. This means huge quantities of bonds are constantly maturing and being resold. Any change in interest rates will quickly result in much higher interest payments. These rates are so low because the fed is buying the bonds and treasuries are currently the safest place to park huge amounts of cash. The rates even go negative at times because US bonds are are safe place for cash. If the treasury starts defaulting on its debts, that will change very quickly. Not only that but the status of the USD will change very quickly.
hugh3 15y ago
However, it has not only become questionable whether Washington will be able to make the necessary changes in the foreseeable future, the corruption that underlies this inability is very hard to get rid of and may cripple the government even further. The issue in the US is that there is a genuine ideological split between the two parties about what the US government should look like. The Democrats want a big government, which takes in a lot of taxes and provides a lot of services to everybody. The Republicans want a small government, which takes in minimalist taxes and provides minimalist services. (I'm not interested in debating the relative merits of these two ideologies today.) And this isn't just the parties' ideologues, either -- the same ideological split genuinely exists in the US public (contrast to many other countries where the "big government" types seem to have largely won the argument). Either party could easily balance the budget on its own, given unlimited power. However, because of the way the US political system just happens to work, it's very hard to do anything without getting at least some of the other guys on board. The Republicans have for many years had a "starve the beast" strategy, figuring that if you keep on cutting taxes then eventually the Democrats will have to agree to cut spending as well. In recent years the Democrats have invented the opposite "gorge the beast" strategy, in which you figure that if you keep on increasing spending then eventually you'll be able to pressure the Republicans into agreeing to tax increases. And the poor beast being starved at one and and gorged at the other starts to... wait, no, this analogy is breaking down. What's the solution? There really isn't one. The ideological split in the American public is real and it isn't going away any time soon, and folks need to stop proposing "solutions" which basically just come down to "all we need is for the other side to come over and agree with us and it'll all be rosy." That's not gonna happen. But perhaps the first step is to acknowledge that this ideological split is genuine, and real, and does actually reflect the ideological split within the US population. Perhaps we can compromise, but first we have to acknowledge precisely what it is we're compromising about. edit: Wow, I can't believe this got modded down. I guess the true believers in the "No really, it's the other guys' fault" die hard.
- DevX101 15y ago
  I'd caution against taking the Republican's word that they want a 'small government'. History contradicts this assertion -- the last 3 republican administrations increased the budget deficit. I think Republicans want to allocate funding differently from the Democrats, but I'm not so sure they want to do any kind of 'small government'.

markyc 15y ago

it wouldn't have anything to do with buffet's stock in moody's (and him already losing billions as an effect of the recent downgrade by S&P)?

mcphilip 15y ago
In theory, no, but buffet being moody's largest shareholder along with his comments about S&P downgrade being in error sure is tempting fodder for conspiracy theory :)

VladRussian 15y ago

pathetic state of the industry as everybody is still forced to care about output of the [ algorithm + business process it is embedded in ] combo that produced AAA for mortgage bonds junk

gaius 15y ago
This is a silly critique. We all know the weather forecast isn't absolutely 100% accurate, but it's still worth having.
- enqk 15y ago
  First the impact of a false prediction on a weather forecast is not as dangerous as that of a false prediction in default rates, second, even an erroneous weather forecast isn't too far from the observed weather.
- rayiner 15y ago
  But how much do you trust it? Coming from the east coast I trust the forecast less than just looking out the window. It's just too inaccurate. When you look out the window and see that the US is still the healthiest big developed economy out there, what do you do? Do you trust your own eyes or the ratings agency?
- cemerick 15y ago
  If that weather forecast said it was going to be sunny and warm, you'd be pretty pissed to encounter hailstorms and hurricanes when you arrived at the beach. Similarly, you might not trust it so much when the weatherman was bleating about thunderstorms while all you can see are high clouds and blue sky.
- VladRussian 15y ago
  >We all know the weather forecast isn't absolutely 100% accurate forecasters who forecast "sunny" paid handsomely, while forecasters who forecast "fog" aren't paid at all - what would be accuracy of a given forecast for London from these forecasters?

netmau5 15y ago

It bums me out that a single press release can cause so much of the world's wealth to evaporate. Worldwide capital was something like $80T iirc, 2% of that would have solved every budget crisis in the world.

sliverstorm 15y ago
Was it real wealth if it can evaporate so? Before you immediately jump to your guns, roll the question around in your mind: was value destroyed?
- deleted 15y ago
  [deleted]
- hugh3 15y ago
  Indeed, no real wealth was destroyed. Well, a few cars were set on fire in London, but that was unrelated. Part of the secret to my happiness is this: I permit myself to feel happy on days when my stock portfolio goes up, but not to feel sad on days when my stock portfolio goes down. In this particular case I'd much rather be happy than consistent.
  - ars 15y ago
    Cars are not real wealth, they are negative wealth since they cost money, but don't make money. Wealth is owning things that can make money, not things that are money or that were bought with money.
    - hugh3 15y ago
      You're using a rather odd definition of "wealth" there. Cars are wealth because they are useful... and indeed can be used to make money.
    - pchristensen 15y ago
      don't make money A lot of people live farther than walking distance away from work.

hugh3 15y ago

It's natural that different ratings agencies should disagree sometimes. That's why we have different ratings agencies.

OstiaAntica 15y ago
In the US, ratings agencies and the bond rating system are a legacy of the New Deal-- the ratings agencies are approved by federal regulators and are protected from real competition. Contrast that with stocks, where anybody can be an analyst and issue a rating, and where there is no mechanical, legalistic system of downgrades and upgrades. The feds created the bond ratings agency oligopoly to "protect investors", but I'd argue we'd be better served by true ratings competition and more due diligence by investors.
- shareme 15y ago
  wrong.. just ask Henry Blodget if he can be analyst.. Stock analysts are regulated by the SEC..
  - OstiaAntica 15y ago
    You don't understand the legal structures here. Of course there are rules, but there's no competitive barrier to entry to the stock analysis business. There are thousands of companies that provide stock research, but only a handful of official bond ratings companies. And there's an entire legal and regulatory structure around bonds and bond ratings, which does not exist around equities, and which connect bond ratings to the US banking, pension, and insurance systems. Here's a good overview of the debate on ratings agency reform: http://www.sec.gov/rules/concept/33-8236.htm http://www.sec.gov/rules/concept/33-8236.htm
- hugh3 15y ago
  the ratings agencies are approved by federal regulators and are protected from real competition. I'm confused. Surely if I decided to set up my own bond rating agency nobody could stop me?

ahi 15y ago

S&P's position doesn't make any sense. If U.S. defaults what happens to the world economy and every other AAA rated debt? So long as US Treasuries shore up the balance sheet of every government and corporation, a default takes down everything. If the US can't have a AAA, then no one can.

Havoc 15y ago
I don't think these ratings are intended to still hold true in a global meltdown type scenario. Your point does show though how ridiculous the current situation is. A country that is up to its eyeballs in debt really should not be the measuring stick.
- ChuckMcM 15y ago
  "I don't think these ratings are intended to still hold true in a global meltdown type scenario." That was Vlad's point. The US debt is, for the time being, 'too big to fail' in the sense that things like oil is priced in dollars. So almost by definition, the US debt is AAA and everything else is the same or less risky than that. (Talking strictly about soverign debt here, corporate debt is a different kettle of fish) "Your point does show though how ridiculous the current situation is. A country that is up to its eyeballs in debt really should not be the measuring stick." This seems to be a common misperception, which is where our 'eyeballs' are, relative to the amount of debt we are carrying as a country. Compared to the GDP and size of the economy, we're not in bad shape at all. Further, even at the anemic growth rates of 2%, if the Government cut nothing, which is to say kept the same budget this year (in terms of dollar expenditure) as they had last year (basically actually made the budgeting process 'net zero' so any new spending was matched by an equivalent cut) the country would be running a surplus in slightly more than 15 years. With 3 trillion in current revenue, 2% growth compounded over 15 years gets us to 4 trillion in annual revenue. Even running a half trillion dollar defict we 'win' by not spending any more. But it does depend on us having the discipline to do that.
  - jcitme 15y ago
    "and everything else is the same or less risky than that." Did you mean /more/ risky?

Havoc 15y ago

>basis of our decision [...] size of the U.S. economy These guys missed have missed all that drama about to big to fail.

georgieporgie 15y ago

I suspect that Warren Buffet has a glint in his eye, watching stocks dropping right now. It's a fire sale in what is fundamentally the greatest economic engine on the planet.

praptak 15y ago

This sounds a bit suspicious: "The United States has unmatched access to financing, meaning that the U.S. government can support higher debt levels than other governments." "We think it's safe to lend them money, because they can borrow lots of money."

reirob 15y ago

The question is not why Moody's thinks that U.S. still deserves AAA, but how long it will take until Moody's will have to downgrade U.S.

timedoctor 15y ago

There is one reason why the US cannot go bankrupt .... it can just print more money to pay the debts. This is very different to Greece which does not control it's own currency. This is one reason why Euro states are more under threat than the US. Also Japan has far higher debt levels than the US, and it has an significantly more aging population, negative growth in population and is in more trouble than the US. However Japan is currently a safe haven from the US? Who decided that Japan is a safe haven? If the Japanese government had to pay much higher interest rates it would be in a lot of trouble, but at least it too can print it's own money.