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S&P Negative Watch Smackdown Wrap

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One of the few upsides of the patently silly negative watch announcement for US Treasury bonds was that it elicited colorful and instructive commentary (see our view, along with Mark Thoma’s and Barry Ritholtz’s at the New York Times’ Room for Debate). Some sightings:

Dean Baker:

Reporters should be given 40 lashes when they tell us that some specific event explains a movement in stock prices. The reality is that the reporter does not know what caused a movement in stock prices, all they can do is speculate….

It is a bit hard to believe that investors sold off U.S. stocks because they became fearful in the wake of the S&P report, but then suddenly wanted to buy dollars and also were willing to hold Treasury bonds at a lower yield. Unless we think that investors in stock are a totally distinct group from the people who trade currencies and invest in bonds, the NYT’s explanation of the plunge in stock prices makes no sense.

A more plausible explanation is that bad earnings reports, most importantly from Bank of America on Friday and from Citigroup on Monday, made investors more pessimistic about the near-term prospect for profits.

It is also worth noting that S&P has a horrible track record for judging credit worthiness. It rated hundreds of billions of dollars of subprime backed securities as investment grade. It also gave Lehman, Bear Stearns, and Enron top ratings right up until their collapse. Furthermore, no one was publicly fired for these extraordinary failures. Investors are aware that S&P’s judgement does not mean very much.

From Dave Lindorff:

At least one economist burst out laughing on hearing about the S&P announcement. “They did what?” exclaimed James Galbraith, a professor of economics at the University of Texas in Austin, who formerly served as executive director of the Congressional Joint Economic Committee. “This is remarkable! It certainly will confirm the suspicions of those who have questioned S&P’s competence after its performance on the mortgage debacle.”

From Marshall Auerback:

In November 1998, the day after the Japanese government announced a large-scale fiscal stimulus to its ailing economy, Moody’s Investors Service began the first of a series of downgradings of the Japanese government’s yen-denominated bonds, by taking the Aaa (triple A) rating away. The next major Moody’s downgrade occurred on September 8, 2000. Then, in December 2001, Moody’s further downgraded the Japan government’s yen-denominated bond rating to Aa3 from Aa2. On May 31, 2002, Moody’s Investors Service cut Japan’s long-term credit rating by a further two grades to A2, or below that given to Botswana, Chile and Hungary. Well, over a decade later and this has had no discernable impact on Japan’s ability to borrow at the rate the Bank of Japan sets, NOT the ratings agencies or the “bond market vigilantes”.

And in case you are still worried that China will quit buying our bonds and interest rates will therefore shoot to the moon, Michael Pettis dispatched that issue last week:

I don’t think a decline in the amount of capital recycled by China, whether through the PBoC or through other institutions, will likely lead to higher US interest rates at all….

The reason I say this is because if we accept this argument, then it seems to me that we are also saying that one way for the US to reduce interest rates is to allow its current account deficit to explode to significantly higher levels. Why? Remember that foreigners don’t fund fiscal deficits. They fund current account deficits, and they do so automatically. As long as the US runs a current account deficit, in other words, it will receive exactly the same amount of net capital inflows as the size of its current account deficit. So if the US current-account deficit doubles, for example, net foreign inflows will double too.

Will that cause US interest rates to decline? Yes, if US borrowing, especially US government borrowing, stays the same. But will it? Probably not. If the US current account surplus rises because of a surge in US investment, then I would argue that the increase in the amount of savings the US imports is matched by an equivalent increase in the need for savings, and so the impact on US rates is likely to be minimal. Of course if soaring US investment (and with it soaring jobs) cause Americans to feel richer and so increase their consumption, interest rates might even rise.

What if the rise in the US current account deficit is caused not by an increase in US investment but rather by a reduction in foreign (e.g. Chinese) consumption, as might have happened in the past decade? In that case the diverting of demand from the US to China should cause a rise in US unemployment and a reduction in US growth. Washington would try to counteract the diverted demand and rising unemployment with an increase in the fiscal deficit, just as it is doing now, or the Fed might try to counteract it by keeping rates low and encouraging a surge in consumer financing, as happened before 2007. Either way US debt levels would surge.

In that case what would happen to US interest rates? If the increase in the fiscal deficit or consumer borrowing was large enough, rates are as likely to rise as to fall. And remember that rising unemployment should reduce the household savings rate, which would counteract to some extent the increased amount of global savings the US is importing through its current account deficit.

I guess this is just a long way of saying that an increase in the US current account deficit can be contractionary for the economy, and if it results in declining interest rates, we should be clear about why. It is not because the US is lucky enough to have eager foreigners lending it money. It is because a rising current account surplus can slow the economy and weak growth is likely to be associated with low interest rates…

And the reverse is true. If China’s current account surplus declines, there are, very broadly, two ways this can affect the US. On the one hand the surplus can simply be transferred to another country. For example if China’s current account surplus declines because it decides to stockpile larger amounts of commodities at higher prices, it will simply shift the need to recycle its current account surplus to a commodity exporter – say Brazil.

In that case the total US current account deficit is unchanged, and by definition the net capital the US imports is also unchanged. Brazil will do what China was doing – buy US government bonds directly or indirectly.

On the other hand a rise in Chinese consumption could cause both the Chinese current account surplus and the US current account deficit to decline. In that case of course China would buy fewer US dollar assets and so fewer US government bonds…

But in that case the reduction in the US current account deficit would be expansionary for the economy in a way similar to an increase in the fiscal deficit. Both are expansionary. So the impact on the current account would probably be offset by a reduction in fiscal spending

.

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60 comments

  1. Brick

    Dean Baker is right it was sloppy reporting about US stocks in my opinion. As to whether it is a laughing matter I am not so sure and comparing events to Japan might not be wise where personal saving is in a different league to the US. Michael Pettis I suspect is right about China although I think it will try to diversify and perhaps the thing to think about here is not just the trade surplus with the US but the trade deficits with other countries. In a way those treasuries bought by China get passed on to the likes of Australia and Brazil who might be more likely to convert those into real US assets.

    This however is not where the risks to Treasuries lies in my view. Foreign buyers are only part of the equation. Pension funds will most likely have diversified into Canadian, Norwegian and Australian treasuries. Banks will have used some of the liqudidity provided by the Fed to pick up Capital and small profits from treasuries and households will have invested in treasuries as part of the flight to safety. All of this needs to be balanced out against the risk off trade which happens at the end of QE2 and the fact that your really make no money holding US treasuries. There is a risk that the market has adapted to QE so that the balance will not work out as expected with those making big bets one way on the wrong outcome seeing big losses. You end up with volatile yields and a premium added for that volatility. This then feeds through to the economy, making it more difficult to obtain the growth needed to contain the deficit. Throw in that the maturity curve of US treasuries is skewed to the short end more than any other country and there must be some risk.Not that any of this is really relevant to what S&P is saying.

    Ultimately what the S&P seems to be saying is that they think there is a risk that the US will either:
    Print and devalue so that treasury holders have a risk of losing value.
    Voluntarily impose haircuts on treasury debt posing a risk to treasury holders.
    Its not about full default or the deficit it is an accessment about the potential risks facing US treasury bond holders compared to other sovereign bonds. Its S&P saying that it is not totally convinced that the US will not print money if US economy forecasts don’t work out and the politicians don’t address growth and deficits.

  2. Middle Seaman

    Whom are we kidding, S&P is nothing short of a criminal enterprise.

    “Credit-rating agencies, Moody’s and Standard and Poor’s, gave top ratings to high-risk securities that they were dependent upon, which was a conflict of interest.”

    I do suspect a political motivation behind this outrageous announcement.

  3. Bruce

    Dont Chartalists believe that the US has no need to issue bonds?

    So why care about the rating on them?

    1. Philip Pilkington

      I think because ratings have effects on political arguments. The Chartalist attitude would be to laugh — as Galbraith did. But any astute political economist knows that these ratings are going to be taken up by deficit hawks to push for increased austerity and economic contraction.

      The placebo effects of the ratings-agencies, I guess.

      1. moopheus

        Yes, anyone who’s been paying attention knows that the ratings agencies have no real credibility left. And yet they remain in business. What is the point of ratings agencies whose ratings can’t be trusted? Someone is paying for their services, so they must be useful to someone for something. So presumably the answer lies in being good pr, as political tools, to confuse the unwary and the uninformed.

  4. Philip Pilkington

    Oh, this should focus attention on the fact that the so-called ‘market’ is a disastrously bad mechanism for allocating resources in the financial markets — just as open to manipulation as any government agency — but if we can be sure of anything we can be sure that it won’t. Attention is easily dissipated when the stakes are career-sustaining ideological claptrap.

    1. bookit

      “Attention is easily dissipated when the stakes are career-sustaining ideological claptrap.”

      True. Sort of like the Soviet Union.

    1. Yves Smith Post author

      Brad hardly has a monopoly on a word. I’ve used “smackdown wrap” in titles before (I can even remember “Geithner Plan Smackdown Wrap” for Timmie’s widely deplored first speech in office. That was a good two years ago.)

  5. Chick In Lit

    “It is also worth noting that S&P has a horrible track record for judging credit worthiness. It rated hundreds of billions of dollars of subprime backed securities as investment grade. It also gave Lehman, Bear Stearns, and Enron top ratings right up until their collapse. Furthermore, no one was publicly fired for these extraordinary failures. Investors are aware that S&P’s judgement does not mean very much.”

    This is sort of a bizarre argument–one could argue that S&P is far too optimistic on those it covers, and that a negative watch is therefore problematic.

    I wonder how Moody’s will react? Will Congress amend their laws so that insurers can hold bonds not highly rated by S&P?

    1. Philip Pilkington

      “This is sort of a bizarre argument–one could argue that S&P is far too optimistic on those it covers, and that a negative watch is therefore problematic.”

      Not at all. You’ve just arbitrarily made the assumption that they’re too optimistic because they were once optimistic. That doesn’t follow.

      The argument is that they are simply incompetent. An incompetent businessman could wipe himself out on dot-com shares (optimism) and then fail to take out a solid investment due to pessimism or political bias (pessimism). The fact is that he’s not innately optimistic or pessimistic — far more likely that he’s just a herd-creature with limited skills; that, or an ideological hack.

      1. philhubb

        “You’ve just arbitrarily made the assumption that they’re too optimistic because they were once optimistic. That doesn’t follow.”

        ***

        The One: To judge me based on my past actions is foolish. The future does not follow the past. You must judge me on my future.

        The Other: But I cannot see your future I can only see your past.

        The One: Then you are not qualified to judge at all. The only one who is qualified to judge is the one who can see the future. Therefore no one.
        Hooray I am judgment proof!

        Have a nice day Mr Plinkington.

    2. lambert strether

      It’s not about judgment or the negative or the positive. It’s about fraud, accounting control fraud, since that’s what the ratings agencies are in business to facilitate. So, follow the money….

    3. doom

      Nobody’s arguing for a consistent optimistic or pessimistic bias. They know which side their bread is buttered on. Corrupt elite demands that worthless mortgage securities be overvalued? OK. Corrupt elite demands propaganda so economic rights can be withdrawn? OK.

  6. Cynthia

    If the Obama Administration is really upset with S&P for downgraded our nation’s debt, then they should go after this rating agency for deliberately keeping the mortgage market artificially inflated by continuing to give mortgage-backed securities a AAA rating when they should have been rating them as junk. But the Obama Administration won’t do this because if they did, then they would also have to go after Goldman Sachs for lying to their investors about how mortgage-backed securities were a safe and secure investment.

    And we know that Goldman was lying about this because there is no other way to explain how they made enormous profits by making side bets that the mortgage market would collapse. But with a presidential election just around the corner, the Obama Administration can’t afford to expose the fact that their largest campaign donor should be put behind bars. And Obama is too consumed by greed to ever turn down any of the lucrative deals that awaits him when he leaves public office, courtesy of Goldman Sachs.

    In order for Obama to maximize his own personal wealth, he knows, as any aider and abettor of financial crimes would know, that he must protect Goldman at all costs.

  7. Steve Roberts

    When S&P lowered their outlook on the UK debt 2 years ago they made it pretty clear they would do the same thing when the US when the debt to GDP hit 100%. That’s when people started arguing more vocally that debt to GDP didn’t matter, only external debt to GDP. I suspect S&P will actually lower the rating to AA when it hits 120% around 2015 or 2017.

  8. philhubb

    “exclaimed James Galbraith…“This is remarkable! It certainly will confirm the suspicions of those who have questioned S&P’s competence after its performance on the mortgage debacle.”

    ***

    As opposed to Moody’s competence, right?
    Which remains, I suppose, under a merely unconfirmed suspicion of incompetence?
    An ad hominem directed at an agency, in this case S&P, is still an ad hominem.

    And yes S&P rated tranches of junk mbs as AAA. But they were financially compensated for participating in that fraud. Thus, investors weren’t misled through any ‘incompetence’ as Mr Galbraith asserts. Investors were misled intentionally by S&P in exchange for a fat fee paid by the creators of the the mbs.

    Perhaps next time the Treasury Department will get with the program and provide some incentive for S&P to turn a blind eye. After all, the S&P is a professional organization and professionals don’t lie for free. They demand compensation.

    1. Philip Pilkington

      You complain that what Galbraith said was an ad hominem on S&P (it wasn’t — and anyway, S&P aren’t a ‘homo’) and then you accuse them of being extremely corrupt — thus calling into question their motives as a company. (I.e. they sell a product — ratings — and you call into question their ability to do this).

      To try and untangle that argument would take somewhat too long. But I might suggest that you come to grips with, well, irony.

      1. philhubb

        It was an ad hominem, but it was a false ad hominem.
        The S&P isn’t an incompetent organization, as Galbraith insists. It is instead a corrupt organization.

        You see, Mr Galbraith and I are both employing ad hominem. But my ad hominem is correct and damns the agency, while his is incorrect and only results in his ridiculing the agency.

        He and others would like to excuse the offenders by asserting that they were incompetent. But mere ridicule is no substitute for the criminal prosecution these actors deserve.

        As long as the narrators of the crisis insist on referring to these crimes as cases of incompetence, no one is going to prison. And thus, they’ll do it again.

        1. Philip Pilkington

          If I were your employer and I fired you for incompetence and you turned around and claimed that this was an ad hominem attack — I can assure you, if you didn’t leave the premises I’d soon call the men with the big nets…

          1. philhubb

            And if I were guilty of defrauding the company but you only fired me for incompetence, I would consider myself very lucky to have had such an incompetent boss.

            My point is/was that everyone who calls the S&P incompetent is playing the apologist for acts that were much worse, whether they realize it or not.
            Incompetence as a defense removes mens rea. And without mens rea, there will be no prosecution.

  9. Mickey Marzick in Akron, Ohio

    Just one more reminder from Wall Street to Washington, CAPITAL to government, economics to politics, that the economic dog wags the political tail in this country.

    Put your fiscal house in order and do it preferably without any tax increases. But just do it! However, if the Bush tax cuts are the bargaining chip to be traded in return for the “reform” of Social Security and Medicare/Medicaid no big deal. Four trillion over 10 years is chump change in the grand scheme of things. The real prizes lay elsewhere, both financially/economically and symbolically.

    Besides, not extending the tax cuts is a win-win for the wealthy. In the first place, it will foster the illusion of “shared sacrifice” at the same time that it sacrifices the middle/working classes who are much more dependent on these two social programs than the wealthy, continuing their race to the bottom. Secondly, it gives both the democratic and republican factions of the ruling party something with which to placate their respective followers. Democrats can trumpet that they really socked it to the wealthy – a take back. Republicans can argue that emasculating Social Security and Medicare are fiscally responsible and a step in the RIGHT direction. It effectively trumps the “left” from bolting and neuters the Tea Party. The one party system remains intact in the best of all possible worlds. The looting will continue. Stay tuned to C-SPAN…

    “Trickle down austerity” is much more preferable [Martin Wolf] to one big bang that catapaults the economy into the black hole of global depression. Financial and economic collapse are to be avoided at all costs. Satiated & Plump is just sending a message to the already austerity-inclined to do the RIGHT thing. The market dropping 140 points is political effect/theater intended to remind the employed in Washington what their employers on Wall Street want.

    1. RHS

      I think anyone who thinks the Japan downgrades are not reasonable is more than a little biased. Japan has a Debt to GDP ratio of 200% and that just going to go higher thanks to a dwindling population. At some point the bubble in Japanese treasuries is going burst. It might take a few more years for the market to catch up and when it does I am sure everybody will be complaining as why the ratings were so high.

      Can’t argue with RMBS, the rating agencies certain blew that one.

      1. philhubb

        “Can’t argue with RMBS, the rating agencies certain blew that one.”

        ***

        S&P got paid to lie…repeatedly.
        If I tell a lie in exchange for money, I’m not ‘blowing it’ I’m receiving quid pro quo.
        Of course getting people to refer to my fraud as an act of mere incompetence, now that’s a solid coup.

        1. psychohistorian

          Please continue to beat that drum!!!

          Louder!!!

          I agree that the bankster perps should go to jail as should those now who are covering for them by claiming their incompetence. There needs to be a flood of prosecutions up and down the food chain of puppets for the rich.

  10. Francois T

    Upon hearing about the S&P “downgrade”, I decided to listen strictly to how the establishment media (that includes NPR) would report this. I don’t know what got to me…hope I guess.

    Alas, my hope rapidly converted into a repeat burst of irrepressible laughter tainted with this feeling of dejection that only event-driven cynicism can achieve. The mendacity and bagwanization of the “press reports” were enough to make you feel you were hearing Zimbabwe National TV extolling the infinite virtues of the Great Leader. Nary a word about the colossal criminality during the real estate bubble, nothing of the infamous Japan bonds downgrade, and above all else, let’s not mention the whitewashing of the Administration and Treasury in the face of blatant misconduct and most likely criminal fraud perpetrated against investors by the rating agencies.

    Wouldn’t these facts have provided a much needed context to this piece of news? Of course, but that was not to be; we’re talking about the US establishment media here. The job of the establishment media is to dutifully stenograph what the establishment wants to convey to the masses, no critic accepted, no embarrassing questions even allowed. It’s the perfect deal; access to the powerful is preserved, jobs in “journalism” are preserved, and the elites get to control the message, which keeps the “little people” pretty much in check.

    No! Instead of contextual reporting, I was served a hefty dose of insufferable political posturing by the likes of Joe “I am Sleaze” Lieberman, or some drone from the Peterson Institute, (but not ONE progressive politician) about the “extreme importance” of heeding the call for more “fiscal responsibility”, a.k.a. cut entitlements, preserve military spending and no new taxes.

      1. Francois T

        If (bwahahaha!) I’m cynical, it would be because they’ve giving me every reason to be so.

        1. philhubb

          There’s no shame in being cynical when the situation calls for it. And the situation we’re in certainly calls for cynicism. In fact current events call for much more cynicism than even most cynics care to admit!

          Be a cynic and be proud, Francois.
          You are right to be cynical. Remember that.

    1. Psychoanalystus

      Well… what do you expect? All the talking heads are multimillionaires. They are part of the oligarchy.

      Psychoanalystus

  11. RHS

    I am surprised there such anger over this issue. Shows how the punditry doesn’t understand ratings. All that a U.S. downgrade from AAA to AA+ says is that there is slightly higher chance of default in the future relative to other AAA credits. Does anyone believe that U.S. fiscal outlook is on par as say Germany? And S&P did not even do that, they just said there a one and three chance of a downgrade if there is no budget deal which would cause them to go ahead with the downgrade. Does any really think the chances of a budget deal are lower than one and three? I would argue the opposite. And does anyone believe if a budget deal is not reached that the U.S. credit outlook would be unchanged? The baseline belief of the market is that the U.S. would tackle its long term debt problem sooner or later. Well now it later it appears they have not.

    You can lament the irony of rating agency downgrading the U.S. outlook for a crisis it had a role in but I don’t think you can argue that their opinion of the U.S. debt is wrong. Those that look to the bond market to tell them these things will be even more disappointed then they are with the rating agencies. After all the bond market treated Greece as if it was an AAA credit for years prior to its crisis. The simple fact of the matter is that you don’t go from AAA to junk over night, it’s a gradual process. If you wait until the U.S. lost its reserve currency position and started issuing foreign currency debt then you waited far too long. This is just the start of a gradual process related to the credit deterioration caused by our long term debt problem. Heaping scorn on agencies maybe easy but you will be doing it for them doing their job now when they did not do it with RMBS.

    Oh one more thing, anyone who thinks a rating agency has political agenda should take a time out. These analysts avoid politics like the plague, especially the sovereign analysts. That is why the U.S. S&P analyst is a Canadian and the announcement was made by David Beers in England. The only politics being played here are by politicized pundits who must find red meat to sustain their media constituencies.

    1. Philip Pilkington

      “I don’t think you can argue that their opinion of the U.S. debt is wrong”

      Eh, yes, you quite definitively can. The US issue what amounts to the worldwide reserve currency. The US dollar will, for the next decade or two at least, be a valued means of payment. Therefore the US CANNOT be forced into default and so S&P are definitively wrong.

      You might as well be trying to argue that an apple will float upwards when it detaches from a tree. Yes, you could come up with contorted circumstances in which it could happen (e.g. if someone invented an anti-grav machine; if there was a very large fan underneath etc), but people would just laugh at you and tell you to get real. Ditto on this, I’m afraid.

      1. RHS

        I think you missed my point completely. Credit worthiness is a continuum from AAA to CC. The time it takes to go from AAA to CC can be decades, Venezuela being one example of this which took exactly two decades going form AAA to junk passing though several rating categories to eventual default. The fact that US can not default today does not mean it will be in the same position two decades from now.

        I would argue if nothing is done over the next two decades the U.S. certainly will be in a position were it might not only be able to default but be forced to default. Of course two decades is long time to have political gridlock over the issue but our political parties get along so famously or should I say infamously when it comes to big issues. Surely there is a chance of inaction on such a time horizon. So moving from AAA, or no chance, to AA+, or some chance, is not out of the question.

        1. Philip Pilkington

          “I would argue if nothing is done over the next two decades the U.S. certainly will be in a position were it might not only be able to default but be forced to default.”

          I’m glad that you have the superhuman capabilities to see so far into the future — it must be rather comforting. Seriously though, I have no time for these vague wishy-washy ‘predictions’ (assertions?).

          The use of language shows up the vacuity of the argument. “…if the US does nothing…”. What does that even mean? Of course the US is not going to ‘do nothing’ — as in, sit there in a stagnant state — but then this assumption actually highlights the way you’re approaching the problem.

          You’re projecting short-term trends into the long-term. You’re taking the world economy as it sits today — or, more specifically, how it sits in your mind — and projecting this into the future. We’ve heard this argument before — it’s nonsense. Economies grow. Geopolitics change. In short, stuff happens — and neither you or the ratings agencies knows what that will be. (Oh, and the Venezuela comparison — don’t make me laugh/cringe…).

          “Surely there is a chance of inaction on such a time horizon.”

          First of all, no there isn’t. There REALLY isn’t.

          Second of all, now its clear what you’re arguing: reign in the debt. Dumb argument without any macroeconomic grounding. You reign in the debt in a time of private sector uncertainty — you end up in Japan’s situation.

          Thirdly, I think implicitly you see that this is a political move by S&P to push for austerity and economic contraction. When you say stuff like ‘inaction’ and all that you’re responding exactly how S&P — and most of the administration — want you to respond. You’ve sort of proved my point through the very fact that you’re saying these things. So, either you see its a political move — i.e. a move to push policy in a certain direction — or you’re rather unreflective.

          1. RHS

            “I’m glad that you have the superhuman capabilities to see so far into the future — it must be rather comforting. Seriously though, I have no time for these vague wishy-washy ‘predictions’ (assertions?).”

            Fine I will quote the CBO. “To prevent federal debt from becoming unsupportable, lawmakers will have to restrain the growth of spending substantially, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches.” http://www.cbo.gov/doc.cfm?index=12085

            “You’re projecting short-term trends into the long-term.”

            Yes the economy will grow but no where near baseline if current Wall Street estimates are right.

            “Venezuela comparison — don’t make me laugh/cringe”

            I only use that to show that as an example of how credit can deteriorate slowly over time, not as a prediction of what will happen to the U.S. which would be crazy to say the least.

            “Second of all, now its clear what you’re arguing: reign in the debt.”

            Personally I would like to see the Bush Tax cuts expire along with some reform of healthcare to make it more like the Australian system which has a national healthcare system that coexists with a private system which as managed to constrain healthcare costs fairly effectively. But that will never happen.

            Purely from a credit analysis perspective though. What has me concern is that Republicans may not allow revenue raising and Democrats may not cut healthcare spending. Neither seem capable of compromise on issues that are core to their political identity. One wants market based solutions based on individual choice (fend for yourself) the other wants gain efficiencies through public (collective) action. Either one would work though I have my own opinion on which one is best for the American people. Reconciling the two ideological positions appear to me to be very difficult. Hence, we will tend to inaction as long as we have divided government.

        2. Psychoanalystus

          Two decades??? History teaches that empires have traditionally fallen rather precipitously, and that was before the information age. Today such an event can happen literally overnight.

          Psychoanalystus

  12. Lilguy

    To the extent the market drop yesterday was a function of S&P’s “negative” rating on US credit, it is probably linked to the fact that many institutional bond buyers must keep a minimum percentage of their bonds in “AAA”-rated bonds. At some level, those investments are threatened by the S&P move.

  13. slothrop

    “The whole premise of the rating is incorrect. The U.S. may eventually experience unacceptable levels of inflation, but the experience of Japan shows that stop-and-start fiscal stimulus is more likely to result in protracted near-term deflation.”

    Inflation/deflation debate is pseudo-intellectual, academic nonsense.

    If a person’s income is reduced from $100k to $50k the “economy” experiences “deflation,” but the actual person experiences INFLATION, because all nondiscretionary costs have now DOUBLED.

    “Default is impossible for a sovereign currency issuer.”

    As deflation is impossible in a fiat currency.

    ?

    1. Philip Pilkington

      I see that you’ve realised that all words and concepts are relative — i.e. that they only hold meaning in their relation to other words and concepts. Now, let’s see if you can figure out the implications of this.

      Does it mean that words and concepts have no inherent meaning? Or does it mean that words and concepts are context dependent? If the latter is the case, does this mean that we have to define ‘inflation’, for example, properly before we use it (in relation to other concepts)?

      Perhaps your problem is that you’re not using ‘inflation’ properly. ‘Inflation’ for economists means a ‘general and sustained increase in the price of goods and services’. Your meaning seems to be something like ‘price increase’. There’s a rather large gulf between these two meanings.

      But then perhaps I’m being ‘academic’ — a word that, when used in the context you use it in, becomes pejorative.

      1. slothrop

        One more time, professor:

        DEFLATION is IMPOSSIBLE in a FIAT currency.

        It has never happened in the history of the world. And until a politician gets voted in on a platform of austerity, it never will.

        Spare me the philosophicus linguisticus analysus.

        1. Yves Smith Post author

          Japan has a fiat currency and has been in and out of deflation. It has had negative interest rates on bonds.

          1. skippy

            and nuclear reactors never go boom x4…cuz…their profitable (with gov backing…snicker)…lol…profit expressed as electrons…mimicking value with in small time frames are susceptible to all manner of machinations.

            Skippy…the day is young…eh…dear lady…in their minds the formula is empirical and yet economics is a work in progress…shall we fudge about with *their* daughters…me thinks not.

    1. Max424

      Without question this is an “orchestrated piece of austerity theater,” and in my opinion, it should be nominated for a Tony, and win.

      What’s really interesting; who would accept the award? Everybody? Imagine: As one, ten thousand Oligarchs rise from their seats and rush the stage like giddy schoolgirls; each iterating to themselves their opening lines — which are all the same.

      “I would like to thank myself, because without me, I would not be possible.”

  14. MyLessThanPrimeBeef

    I believe Treasury prices fell and yields rose yesterday after the downgrade.

    Maybe Standard and Poors should do it more often.

    They may even be the good guys.

  15. Hugh

    Again kleptocracy is a system. If they could just back up their vans to the door and cart off all the loot, they would. In fact, they do do this when they can, but there is still this residual fear of rebellion among the rubes that they think calls for a certain level of kabuki.

    It is a waste of time and energy to look at S&P’s downgrading threat as if it were some real world assessment of the credit risk of the US government. The aim was rather to provide a mini-Shock Doctrine to help legitimize and push cuts against (looting of) the lower and middle classes. That and its distractive value are its only purposes.

    And the effect of this fabricated announcement on the stock market? How silly is that? The markets in case you may have forgotten are completely rigged. Baker is wrong in trying to assign some rational cause to the markets’ movement. There is none. This is not the real world. It is a stage play to engage us, theater to distract us, kabuki to beguile us as they loot us.

  16. FatCat

    Oligarchic FatCat here, so listen up little chumps, because I’m not going to say this twice: S&P and Moody are both in my back pocket. As such, they will not report anything before I allow them to. You can count on one thing: I will not allow them to downgrade this country before I unload all my US investments. So go ahead, my little peasants, and buy US stocks, bonds, and property, because I guarantee you that your money is safe. You have MY word on it!

    FatKiddie

    1. OligarchMe

      Hi there, FatCat,

      It was a pleasure to see YOU at BP’s shareholder meeting the other day. WE sure make a killin’, didn’t we?… Just remember: don’t eat that oily shrimp… that’s for the little people…LOL

      And hey, thanks for the heads up on the upcoming Greek fire sale. I can’t wait to get my hands on Greece’s power and water utilities for less than I spent last week on MY mistress’ birthday bash. I sure plan to inflict some major pain on those stupid Greeks — I’ll triple their power bill as soon as my signature dries on the contract…LOL

      Let me tell you, bro, this neoliberal shock doctrine sure worked wonders for ME!…LOL

      I say let them eat oil!…LOL

      OligarchME

      1. FatCat

        Hey there Oli,

        It was great to see you at BP’s meeting too! Yeah, I took home 2 billion from them. Not too shabby, huh?!

        Hey, you go right ahead and buy Greece — it’s all yours, bro. If it’s OK with you too, I’ll settle for Ireland and Portugal. The problem is, what do we do with the chumps that live there? You know, I am talking about those credit addicted inferior Neanderthals we herd to OUR malls and OUR baseball games every weekend. You know, the morons we got to vote for OUR Tea Party. I really don’t want to share my countries with them, you know… I am top primate — I don’t share my habitat with inferiors. What do you think if we get our friend, Rupert Murdock to brainwash them into emigrating to greener pastures, like China or India. Or Africa – we’ll just put them to work in our lithium mines… for a bowl of rice a week…LOL

        But hey, stay put, ‘cause the greatest fire sale of all times is coming up in 2 years or less. I’m talking about the United States of America, bro. If Goldman Sachs implements my plans properly, in exactly 24 months this country’s bonds will be junk, and the dollar will run a trillion percent inflation. We’ll buy up this whole country for peanuts. Manhattan for 2 ounces of gold. California for 10 pieces of silver. Texas for 5.

        I just love this neoliberalism stuff. I’ll confess, I don’t understand all that Milton Friedman theoretical bullshit, but I sure know how to implement it, don’t I?!

        FatCat

  17. Sy Krass

    Actually, you can go form to AAA to junk overnnight. Especially if you are of the persuausion that all things financial have been manipulated since the Nikkei crash (see QE in Japan, S&L bailout as the beginning) and we have not allowed the Kondratieff wave to play out completely (which I am). The flashcrash taught us – there is no floor under this, except for an imaginary one. If you came back from the future, I would not be surprosed if you told me the DOW went straight to 2,000 or went to 100,000 and then 2,000. Both scenarios are plausible.

  18. skippy

    WOW what a shot across the body politic public bow.

    That pit in plain view do make a soul think twice about skullduggery against ones masters.

    Skippy…Electrons of price, not to be confused with value, move around 7x the circumference of the planet in a second. Those that miss match price vs. value are completely naked to others…machinations…strong emitters.

  19. Objectivist

    I hope that this serves as a wake-up call that the desire to cut spending is not simply a goal of the Tea Party that he can brush aside nor is it a petty political debate that he can avoid.

    If nothing else, this proves that it is an issue that must be dealt with. The upside is that if Obama continues to ignore the growing problem, 2012 will be a walk in the park for a fiscally conservative candidate.

    objectivistpolitics.blogspot.com

    1. Psychoanalystus

      My friend, the only ones that make sense here regarding the Tea Party are FatCat and his greedy buddy above. The Tea Party is another scam of the oligarchs, another tool in their toolbox of plunder.

      Look, empires fall. The American Empire has reached the end of its rope. It is now succumbing to the same shameful and humiliating death dozens other empires suffered before: it is going bankrupt. Mighty empires rarely go down with a bang — they do it with a pathetic whimper.

      But that’s OK — no biggie. The world will move on.

      Psychoanalystus

  20. Cathryn Mataga

    Maybe there’s a closet Tea party supporter working over at S&P. Credit ratings are a matter of ‘free speech’ you know. Politically, a ever-looming threat to lower the rating is the best move. Once they pull an A, then their ammunition is gone.

  21. steve heller

    It’s amazing to see that there are still people who don’t realize that the US government is bankrupt beyond imagination, and there is no way for it to avoid default in real terms.

    Yes, the Federal Reserve can buy all of the trillions in debt that the government issues; in fact, they’ll have to, because no one else will, certainly not at anywhere near these interest rates.

    So they will not ever “default” in nominal terms, but the result of that policy will be the total destruction of the purchasing power of the “dollar”. To see this happening in real time, just watch the price of gold.

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