“Is Too Much Significance Given to U.S. Credit Rating?” Posted on August 2, 2011 by Yves Smith A useful discussion with Marshall Auerback on Fox News on the debt ceiling deal and the implications of a possible downgrade of US Treasuries. Enjoy! Watch the latest video at video.foxbusiness.com Post navigation ← Randy Wray: The Budget Compromise – Congress Creates a Rube Goldberg Doomsday Machine Small Business Owners Using Pawnshops to Make Payroll → Subscribe to Post Comments 26 comments Paul Tioxon August 2, 2011 at 11:24 pm To think that Standard and Poors, which is a business rating service, even thinks that the rest of the world’s governments even thinks they need them as a reference for the US Government credit worthy status is over reach of a scale out of proportion to the ratings service role in the world, among nation states. As Marshall points out, even Pimco, a large scale operation, but still dwarfed by the US Gov’t, takes an internal measure of this and other matters not as large as the USA. The obvious question, does S and P even deserve to be taken seriously, even if they were not a corrupt organization. Does anyone really think that the largest economy in the world powered by high per capita income populace and a taxing authority in the IRS, can not be counted on to honor its obligations, even when it is written into the US Constitution, in addition an unbroken history of paying without fail. There is no new information that a rating agency can produce that most universities and government finance ministries can come up with on their own to make a sound determination. Linus Huber August 3, 2011 at 3:42 am Well, sure the Government will honor its debt BUT at what value of the dollar? When you pay back your debt with dollars 50% lower in value, that to me is some kind of default too. Instead of jumping onto S&P for their credit rating activity (which is anyway rather a disservice to the investor as it often misguides and reacts all to often after the fact) one should focus on the unsustainable path the US Government choses to take. One can refuse to recognize facts that stare into your face but at one point the market will react violently. Procopius August 3, 2011 at 6:01 am Well, the Debt Ceiling deal is certainly unsustainable, but the markets don’t seem to be reacting “violently.” Just a steady slow decline in the stock market, probably because the real economy sucks, and a steady unusually low interest rate on Treasuries. I think the stock market will react more in a couple of months as the reality seeps in that reduced government spending at this time is sending us into a new and deeper recession, but I don’t think it’s going to react violently. Linus Huber August 3, 2011 at 8:57 am Do not be fooled about the treasury market not reacting because once it starts, it will be divestating. It will happen eventually and politicians know that is the reason they are talking about budget cuts but real cuts have not really been done. I do not know the future like all of you too but I do think that the only way to avoid the treasuries not to get hammered at one stage of this saga, would be that they really do budget cuts and get the deficit under control. Also never forget, there exists a lot of manipulation promoted by the FED that is meant to kill speculators. john August 3, 2011 at 9:50 am The bond market attack is a myth that survived the demise pegged currency era which was its natural habitat. With floating fiat currency the market simply can’t beat the issuing central bank: it has never happened. With regard to the value of a dollar to pay off bonds, see this: http://blogs.forbes.com/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/ Its a fiat money world no, like it or not, and you should understand how it interacts with the banking system. Mark P. August 3, 2011 at 12:34 pm Linus Huber wrote: ‘Well, sure the Government will honor its debt BUT at what value of the dollar? When you pay back your debt with dollars 50% lower in value, that to me is some kind of default too.’ Do you seriously imagine that post-2008 there ever could be any other way out for the U.S. — besides collapse — other than such massive devaluation, done over a decade or so? That was baked in, even if we had nationalized the banks. The only question is: how long will the dollar’s global reserve currency status stand? Murray Simmonds August 2, 2011 at 11:35 pm In what way is a populace “powered” (<> by borrowing money that, in the long run, it cannot hope to ever pay back? Get real! There’s always a **first time** at which a country fails to pay back what its borrowed! Past history, with respect to repaying by the due date, is by and large irrelevant! It is the kind of arrogance that permeates your post that is largely responsible for the >>MESS<< that the USA currently finds itself in! David W August 3, 2011 at 12:08 am You must mean the unemployment >>MESS<<, right? There is no finance mess. As our ignorant chattering political class has been working overtime to solve our HUGE FISCAL CRISIS which is about to wreck America, US 30 year treasuries have strengthened and now are returning under 4%. With the upcoming downgrade of US debt we'll probably see further strengthening, and now the markets have finally discovered the economy sucks and no one is buying anything. The next move will be a corporate tax holiday so all that overseas cash will move back home and be put to work hiring Americans! Paul Tioxon August 3, 2011 at 12:38 am S&P should do the honorable thing and put a pistol in its legally individual mouth and blow its brains, what little there is, out. Murray, do you have an argument to present? Or are you just having a bad hair day? The mess this country is in? A major contributing factor to the mess was the S&P ratings of subprime mortgage securitizations that have been shown to be fraudulent. The ratings agencies were bought to produce the results that their clients paid for. So, who is paying them now to lie about the US Government? If they can be bought to lie about making bad investment gold plated, sure fire bets, they can be bought to lie about the capacity of the government to be inadequate. Murray, I know you know that you are a dope. Ratables for public finance are the source of revenue that can be used to issue debt. We have 325 million people, citizens and non citizens living in the country. And most of the time, most of the them are working and paying taxes. Since you don’t know what I am talking about, you obviously don’t pay taxes and don’t know that hundreds of millions of other people do. SO, Murray, put up or shut up. Make an argument. Not noise. We don’t run for public office here in NC and don’t have to kiss yr ass. Anonymous Jones August 3, 2011 at 1:19 am Oh Murray, Murray, Murray… There is often on display here in the comments a lot of stupidity, cognitive bias and delusion, but you are trying to set a new standard! “borrowing money that, in the long run, it cannot hope to ever pay back” The government is borrowing money in a currency that it can print at will! Not only can it “hope” to pay it back, it is literally *impossible* that it cannot pay it back. Well done, sir. :-) I mean this, seriously. It is easy to be partially wrong. There are many, many ways to slip up and make mistakes. But to be 100%, 180 degrees wrong can’t just be an accident. It must be a sign of immense skill. I’m convinced of this. And then you go on to top it! “There’s always a **first time** at which a country fails to pay back what its borrowed! Past history, with respect to repaying by the due date, is by and large irrelevant.” Wow, you seem to have a definition of “irrelevant” that is completely sui generis! I don’t know, maybe, kinda, you might sorta make an argument that *imminence* of default might maybe be relevant to a lender. I don’t know, maybe it’s just me. I guess lenders should just ignore all past credit history in making lending decisions. I’m sure that it’s all, as you say, “irrelevant” and lenders for thousands of years are just cuckoo to rely on such things. Hilarious! Linus Huber August 3, 2011 at 4:00 am Well, I do not see that much wrong with Murray’s comment. Of course, the US Government can always honor its debt but if the dollar they compensate you for your treasuries has a value of 50% only, that is also some type of default. A good measure of the dollar’s value may how much it is in terms of gold. In addition, once the creditibility for the government to honor its obligation in dollars of comparable value of today, it may be a sudden loss of confidence that triggers interest rates higher and fast. That will be a game changer that even politicians cannot ignore (see Italy or Spain). The next part of “there is always a first time” is a rather good statement as well. There is in physics something called “phase transition” that describes how a seemingly stable system changes abruptly. I think Mr. Murray wants to indicate that when we follow the present course of not addressing problems properly, such a point might be reached. john August 3, 2011 at 9:56 am Again: http://blogs.forbes.com/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/ There is a huge distance between debt deflation, where we now stand and inflation. People enamored with the mythology of neo-classical economics have been screaming about bond runs and inflation for the last thirty years and using micro moves of several basis points to prove their point, but only when those micro moves are up. Maybe you should reconsider your predictive models. Susan August 2, 2011 at 11:41 pm some past history, as I understand it: debt to GDP ratio is currently about 50% debt to GDP ratio at the end of WWII was 110% Looks to me like we can handle this debt level, as long as interest rates are not sky high. Right now, interest rates are between 1 and 2 percent. very low, indeed. I think the US should borrow some more money and start up another WPA to fix infrastructure and build a green energy grid. psychohistorian August 3, 2011 at 12:34 am I would rather we tax the rich and their corporations for the funds rather than borrowing to move our country forward. The rating agencies are just more arms of the elite propaganda machine and have way past outlived their “trust until” date. That said, the global inherited rich still wield complete control, own everything and have their sociopathic puppets attempting a global Shock Doctrine event. I am not making any bets on their probability of continued success but if history is any guide they will continue to do so and the rest of us will suffer. MyLessThanPrimeBeef August 3, 2011 at 2:29 am Those ratings agencies, is it me or are they kind of moody? I mean, is being poor the new standard for their victims? Juan August 3, 2011 at 4:34 am psychohistorian, The big 3 rating agencies, [but particularly the duopoly], through the issuance of safeguarded opinion rather than analysis, played a major role in the so-called ‘subprime crisis’ and following larger scale break down. They very much helped portray risky as riskless. You might find this May, 2007, paper by Rosner and Mason of interest: Where Did the Risk Go? How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1027475 Rather than ;tax the rich and their corporations’, how about killing the hundreds of billions per annum in direct and indirect subsidies — “So, just like that, we have more than $20 billion in savings in only a handful of credits. If we analyzed the thousands of them on the books the total would be staggering; it’s in the hundreds of billions per year. The system is so broken that BP claimed a $9.9 billion tax credit on its Gulf spill; yes, the same one that cost federal and state governments billions of dollars to mitigate, put thousands of coastal people out of work, and deeply affected wildlife of the region. If a corporation can be rewarded for a disaster it created, it is no wonder that our nation is in a fiscal disaster. … Uncle Sam allows that same destructive behavior with our finances. ” http://journal-register.com/opinion/x1926601642/CONFER-Tax-credits-and-corporate-welfare Consider the amount since the 1981 Tax Act with its accelerated depreciations and tax credits [many of which simply became tradeables]. Direct expropriations are increasingly in order. kezza August 3, 2011 at 12:54 am A very significant part of the trouble with the downgrade is that certain funds (e.g. 401(k), pension funds, etc., especially those outside US) have contracts that say they must hold whatever percentage as triple-A bonds (or whatever). A downgrade would automatically trigger a reduction say of holding 50% in US treasuries to 30% (and those 20% would then need to be additional Japanese/German/British treasuries since there aren’t that many choice of big “safe” treasuries around), all done with the computer automated algorithm. Now who is going to buy those 20% that these funds are fireselling, and how to pay for them (with your gold? with your virtually nonexistence foreign reserve? Certainly not with any electrons or US Federally back stuff because it isn’t of enough credibility with the downgrade!) CaitlinO August 3, 2011 at 1:11 am OT but I couldn’t find a contact button. There’s an article up at HuffPost describing supposedly advanced talks that are contemplating the offer of the Mother of All Get Out of Jail Free Cards for BOA: “Participants described the talks as fluid. Remaining issues include the scope of the release and the breadth of borrower relief, sources said. For example, it could involve a release from liability for alleged lending abuses; alleged failure to properly securitize home loans in accordance with state laws; alleged abuses of distressed borrowers who fell behind on their payments; alleged illegal behavior when foreclosing on those homeowners; immunity from suits involving a combination of those claims, or from all of them — an effective grant of immunity from prosecution.” Yeah, that should about cover it. http://www.huffingtonpost.com/2011/08/02/bank-of-america-justice-foreclosure-fraud-settlement_n_916490.html Done Gone Galt August 3, 2011 at 1:15 am Why worry about ratings? Treasury auctions will be fine as long as we’ve got Ben and the ZIRP shills. What can possibly go wrong? MyLessThanPrimeBeef August 3, 2011 at 2:21 am I think Troy issued its own currency but then it incurred a debt that it refused to pay back (borrowing Helen without any collateral). It defaulted. Middle Seaman August 3, 2011 at 5:51 am Had Troy done it to Obama, they would have gotten away with it and even got Helen’s sister Mary for good measure. Robbery is a question of geography. MyLessThanPrimeBeef August 3, 2011 at 2:24 am In any case, when the Chinese got into rating the US, the patriots know it’s time to dump the ratings game. Jim Nichols August 3, 2011 at 3:09 am This was a great segment. Something I can pass along to my friends that they’ll be able to follow. SH August 3, 2011 at 4:06 am Amen Marshall. If you want good analysis, get good analysis, if you want an inside track to riches, play the ratings agencies. Good to see Marshall go free market. Pearl August 3, 2011 at 6:38 am Marshall–you were excellent! Philip Pilkington August 3, 2011 at 8:52 am Great stuff. Marshall is getting a lot of good TV coverage these days. Keep it up. Comments are closed. Tip Jar Please Donate or Subscribe!