Will S&P Downgrade Be Another Y2K Scare?

Remember Y2K? The world was gonna end because there was tons of legacy code that couldn’t accommodate the rollover to the new century. I know people in who went into survivalist mode, stocking up months of supplies, and others who took less extreme precautions, like having lots of cash on hand in case ATMs were disrupted.

As we now know, January 1, 2000 came in without major incident, since the widespread publication of this software threat to End the World as We Know It led to lots of preventive action. Perversely, the big effect of the Y2K scare was that it accelerated tech spending, since many firms bought new systems and upgraded hardware as part of their overhaul. That increased the severity of the post-bubble economic downturn. Remember, Greenspan dropped Fed fund rates to negative real interest rate levels and held them there for an unprecedented amount of time, which many argue helped stoke the housing bubble. So while Y2K’s direct effects were greatly overestimated, its indirect impact (on how long the former Maestro kept rates down) may not have been fully acknowledged.

It isn’t yet clear what the impact of the S&P downgrade of the US to AA+ will have. There are good reasons to believe, despite the media hyperventilating, that it won’t add up to much, and may perversely hit wobbly stock markets more than Treasury yields.

But there is a much bigger issue, namely S&P’s highly questionable conduct, the lack of any analytical process behind this ratings action, and the political implications.

Will the S&P Downgrade Have Much Immediate Impact?

Although I run the risk of being proven wrong, there are lots of reasons to think that the reaction in the Treasury market to the news will be underwhelming. We might see some reactions Monday as some investors who managed to be blindsided and aren’t happy with the downgrade exit but conversely, I know of investors who see any price softening as a buying opportunity.

Treasury yields fell 50 basis points last week despite the risk of a downgrade being very well telegraphed. S&P had asked for $4 trillion in deficit reductions (it tried disavowing that number) and made it clear it was going off to brood and might take action. And this market response took place with S&P leaking like a sieve. Not only was Twitter alight early on Friday with rumors of the downgrade, but some parties purportedly got the memo earlier in the week. From a credible source via e-mail:

Good friend passed on a note from a hedge-funder who thinks the S&P not only fudged its figures for today’s downgrade, but leaked it in-advance earlier this week to a few hedge fund insiders who made a killing off it. That would square with the fake “states face bankruptcy” panic scam earlier this year, which made a few people a lot of fast money.

I assume they did not make a directional bet but went long vol.

So what if bond yields go up 50 basis points on Monday, which is normally a monster move? It just puts us back to where we were last Monday.

So why didn’t investors dump Treasuries with this threat hanging over the market’s head? Maybe investors have wised up and realize the ratings are worthless (more on that shortly). Here is a partial list of reasons:

Investors that are required to hold AAA paper can continue to rely on the AAA ratings from Moody’s and Fitch. Two ratings will suffice for virtually all users (and there were media reports of various regulated investors seeking opinions and getting waivers if they thought they might need them). In case there were any doubts, the Fed, Treasury, FDIC, NCUA and OCC told S&P to go to hell and issued a press release saying that the entities they regulated to carry on as before. Bloomberg, which provided a comparatively sanguine account, noted:

“Yields are low in the face of a downgrade because there is nowhere else for people to go if they don’t buy Treasuries because they want to be in safe dollar assets,” Carl Lantz, head of interest-rate strategy at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the Fed, said before the announcement.

Investors may not be thrilled with the dollar, but the Eurozone is facing existential stresses, the yen and Swiss franc are in nosebleed territory, the yuan has capital controls (the Chinese do not want inflation stoking hot money inflows right now, thank you very much) and major investors see most minor currencies as speculative plays rather than stores of value. The greenback still fares pretty well in the beauty contest among Cinderella’s ugly sisters.

Finally, in a lot of markets, like repo (which serves as collateral for derivatives positions) there aren’t good alternatives to Treasuries.

Why the S&P Downgrade Stinks to High Heaven

There is plenty of well deserved derision on the Internet over the downgrade. Be sure to see #StandardandPoorsThroughoutHistory. IIlustrative: ‘Oh, I think eating the apple would be fine’.

Everyone remembers how the bond graders covered themselves with glory in the housing bubble. The sad thing is that prior to the early 1990s, the nationally recognized statistical ratings organizations were quiet, cautious, respectable, and made their dough rating corporate bonds, which they did competently based on clearly articulated standards (their muni businesses were more of a backwater). They did tend to be slow to downgrade, but everyone in the market knew that and acted accordingly.

The structured credit business ruined the agencies. Their processes became opaque and inconsistent. Would anyone have trusted their assessments had they known that rating agencies ignored basic credit ratios that had been widely used by banks for decades? Reader MBS Guy writes:

The black box issue for securitization is one of the things Dodd-Frank and the SEC (who’ve recently issued new NRSRO proposed regs) are focused on fixing. For MBS, S&P made its mortgage model available for purchase (and many people owned it), but all it did was spit out the numbers for the credit enhancement. It didn’t explain what the model was based on (nothing, as it turned out). For instance, as has been documented in various places, they never explained what their assumptions were for home price movements or GDP and they didn’t provide (or do?) any analysis of what borrower debt to income or LTV did, historically to borrower performance.

The biggest proof of criminal incompetence was their downgrades of RMBS versus CDOs made pretty much entirely of the same RMBS. They started downgrading RMBS en masse in July 2007. They didn’t start marking down CDOs until six month later, and the process took another six months. Yet it should have been impossible to downgrade the RMBS and not the CDOs at the same time. The downgrades were based on the failures of the underlying loans. You can’t have it show up in one product and not the other.

And S&P continues to screw up MBS ratings in the wake of heightened scrutiny. Its latest embarrassing reversal came on August 1. And the week prior, last week S&P messed up the CMBS market by changing the criteria for a deal after it had priced but before it closed.

With RMBS and CDOs, it was hard to see that the emperor was wearing no clothes, thanks to the complexity of the instruments, but it’s blindingly obvious here. Upstart rating agency Egan Jones at least goes through the motions of having a methodology (see its use of metrics). But this is silly for a fiat currency issuer. A country that controls its currency can always satisfy the IOUs it creates. The risk is inflation, not default. But ratings agencies assess credit ratings, not interest rate risk. Japan was downgraded to single A, yet that did not affect its ability to sell bonds at very low yields.

S&P has published criteria for sovereign ratings, but they are still vague and inconsistently applied. And no wonder. They aren’t paid to provide these ratings, and accordingly understaff the activity. Housing Wire quoted recent Congressional testimony by James Kroll:

At S&P, for instance, 100 analysts rate debt for 136 countries – a lot of responsibility, Kroll said, for an organization that failed to recognize the collapse of the mortgage-backed securities market.

“They wield all sorts of power. They can put ratings on entire sovereign countries, and with no liability,” Kroll told the subcommittee. “I don’t think CRAs have the wherewithall, the intelligence range, or the experience to be doing ratings on hundreds of countries around the world. I question if this is the job for the private sector.”

If you look at the S&P statement, it’s not a ratings judgment, it’s a long form political op ed. I suppose I should not be surprised, since the NRSRO’s “get out of liability free” card is that their ratings are mere journalistic opionion. As Robert Reich tartly observed:

If we pay our bills, we’re a good credit risk. If we don’t, or aren’t likely to, we’re a bad credit risk. When, how, and by how much we bring down the long term debt — or, more accurately, the ratio of debt to GDP — is none of S&P’s business.

Jane Hamsher highlights the hypocrisy of the S&P rating, since it shifted from its 2010 rationale of demographic stress to a February 2011 focus on entitlements. And it didn’t bat an eye at the $2.6 trillion deficit-increasing Bush tax cut extension at year end 2010. More from Hamsher:

Neither Moody’s nor Fitch downgraded US debt at this time. And S&P can’t quite come up with a consistent answer about why they are out there by themselves. It’s like they looked at a public opinion poll, decided that there was no way anyone would argue with “partisan bickering” as a justification, and crossed their fingers that nobody would actually question what it is that they were justifying.

S&P is playing footsie with the Republicans, who are passing bills to relieve them of the legal liabilities that Dodd-Frank exposes them to — even as the SEC is investigating S&P for fraud in the mortgage meltdown.

Some said that S&P wouldn’t dare downgrade the US debt. But it was all over four days ago when Pimco’s Mohammed El-Erian said that S&P was “under pressure” on the US rating.

If you didn’t happen to catch Devan Sharma’s testimony before the House Financial Services Committee last week, this was what he said:

As Dodd-Frank rulemaking progresses, we believe it is critical that new regulations preserve the ability of NRSROs to make their own analytical decisions without fear that those decisions will be later second-guessed if the future does not turn out to be as anticipate or that in publishing a potential controversial view, they will expose themselves to regulatory retaliation.

Pressures of that sort could only undermine the significant progress we believe has been made over the years by rating agencies and regulators alike to provide the market with transparent, quality and generally independent views about the credit-worthiness of issuers and their securities. I thank you for the opportunity to participate in the hearing and I would be happy to answer any questions you may have.


That’s what Rep. Randy Neugebauer, chairman of the House Financial Services Subcommittee said on April 29, when he requested documents from the administration: Treasury officials “may have exerted too much pressure on S&P.” The Republicans were already laying the tracks for S&P’s defense in April.

Here are a few more dots to connect the timeline:

April 18: Mitt Romney: “The Obama presidency was downgraded today.”
April 20: Mitt Romney: “Standard & Poor’s, one of the rating agencies, just downgraded their view of the future for America…If you will, they downgraded the Obama presidency.”
July 15: WSJ — “The Obama downgrade.”

They’ve been cooking this one for a while. S&P will defend themselves from the accusation of overt partisan manipulation by claiming the Treasury “pressured” them not to downgrade US debt. The media will focus on what Geithner did or didn’t say during his meetings with S&P in March and April. Nobody will ask about the ridiculous excuses S&P has made for the downgrades, or the fact that they are trying to wreck the American economy just as they did the British economy by playing God with their austerity prescriptions.

People are focused on the market implications of the downgrade, but that isn’t what this is about. It’s about a President who will now be relentlessly tagged with responsibility for a rating given by a disgraced organization whose victims should have liquidated them long ago.

As Politico reported, White House officials feared a downgrade more than they feared default. They know what it means, too. The Masters of the Universe have spoken.

Yves again. Sell on News at MacroBusiness elaborates on the issue that Hamsher and Reich highlighted, which is that this ratings action is really a power struggle over who wields authority:

Who exactly are these ratings agencies? Oh, those corrupted, easily deluded companies who are to sane analysis what a croupier at a roulette table is to an insurance policy. They showed in the lead up to the GFC that they go to the highest bidder and that they have little or no credibility. Suddenly these private companies have authority over the US government? And then let’s look at what happens to demand for US dollars if there is a downgrading. Nothing. The $1-2 trillion that they are arguing about is about six hours trading in the greenback. The US dollar is the world’s reserve currency and will be for some time….

They are nevertheless a symptom of a much deeper, long term issue — the replacement of the nation state with the market state…

There has been no real leadership about what the system should look like and what is government’s role in it. Yet these fundamental questions must be answered because those who believe markets should rule do not think governments have any role at all (other than to bail them out when the markets fail). They operate under the Ayn Rand delusion that people who make money are the true creators, the Atlases who impel the world, while everyone else is just an evil taker, sucking from the system.

This is nonsense. Not only does government have to set the rules that determine the frameworks of markets, in the case of the monetary system, which consists of rules, they are, by necessity, the only final point of reference (literally where the buck stops). Ratings agencies cannot be that, they are just another private player and an easily corrupted one at that.

So to try to remove government from the financial markets, as the market worshipers wish to do, is to set out to destroy the system itself (something the GFC almost achieved). When people are allowed to invent the rules of money themselves, make money from their invention of new forms of money that exploit the rules of the system, self organisation may work for a while — the competing self interests will for a time balance out — but eventually it will just collapse, as we saw in 2008. Making up new rules of money can be infinite, wealth creation cannot. It must have limits. Hence the necessity of the state’s role.

Just as the Y2K threat was overstated but nevertheless had unexpected, adverse intermediate term consequences, I doubt this chicanery will be cost free to the public at large. But the debt overhang that ideologues have used to whip the public into a funk is profoundly deflationary unless addressed head on, via writedowns and bankruptcies offset by fiscal stimulus. Deflation means that high quality bonds are the place to be, as the market action of last week confirmed, so Treasuries benefit from the very condition that S&P depicts as a disaster.

Thus the best outcome would be if the bond and currency markets shrug off the S&P action, which would reveal that the much feared downgrade was a paper tiger. But even if the marker response is underwhelming, it is hard to imagine that Obama will not take a political toll for his colossal miscalculation. It was he who stoked the debt ceiling phony crisis to implement a neoliberal agenda, who refused to reverse course and threaten to circumvent the debt limits when the process had clearly spun out of his control.

So even if S&P fails to land a body blow in the markets, its ploy has garnered press that seems certain to taint the Administration, and thus confirms the power of its reckless conduct. Thus the cost is not likely to show up in bond yields, but in something far more fundamental: in yet more destruction of the foundations of our society for short-term, selfish ends.

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    1. youniquelikeme

      Seriously Foppe, This seems to be the only place that delves into the story. Sadly, unlike the fairlytale world in the MSM, it also makes you realize how the power brokers see people as pawns in the game.

      Y2K or not, the poor are going to suffer the fallout.

    1. Jordan

      Let’s hope that there is. Clearly they have a political agenda intended to hurt President Obama. I think Moody’s, which is controlled by Mr. Buffett has the right idea; I am sure he let them know that it would be bad idea to challenge the actions of Dr. Bernanke and Treasury Sec. Geithner.

  1. attempter

    The Sell the News piece pretends to argue with Ayn Rand, but doesn’t present an alternative.

    those who believe markets should rule do not think governments have any role at all (other than to bail them out when the markets fail). They operate under the Ayn Rand delusion that people who make money are the true creators, the Atlases who impel the world, while everyone else is just an evil taker, sucking from the system.

    It’s true that this is exactly upside down, and needs to be turned rightside up. In this criminal system, the distribution of wealth is in inverse proportion to one’s role in creating that wealth. The rich are all worthless parasites and thieves, and nothing more.

    But according to the piece it’s apparently the State (or leprechauns or something) which is the real wealth creator. It’s not going to touch words like workers and citizen with a ten foot pole.

    But the fact is that we workers and citizens don’t need the State any more than we need corporations or any sort of worthless, bloodsucking Randian psychopath. We do all the work, we create all the wealth, it’s our right and imperative to own, control, manage, and distribute all the wealth. 100% of it.

    There has been no real leadership about what the system should look like and what is government’s role in it.

    Ain’t that the truth. Since it’s clear that the government plays no role whatsoever other than as bagman and thug, since it creates nothing but only destroys, it follows that worker and citizen don’t need it at all, and would be infinitely better off without it. We can be our own communities.

    1. Yves Smith Post author

      It never said the state was the wealth creator. It said the state sets the rules that makes markets. work. No state, no modern commercial construct. The relationship is symbiotic.

      You do need a state. You can’t enforce contracts with no oversight apparatus.

      1. lambert strether

        Yves writes:

        > You can’t enforce contracts with no oversight apparatus.

        True, but nobody said the oversight apparatus couldn’t be privatized; see post-Soviet Russia, or, closer to home, The Godfather.

        That’s why the growth of mercenary forces is going to turn out to be so useful!

        1. ambrit

          That’s why your founding fathers threw in that pesky Second Amendment. To establish a counterweight to the central government if needed.

        2. Greg

          > privatized

          Which eventually means, as S&P has so ably demonstrated, bought.

          Since, oh, 2009Q2, there have been emanations from the Very Serious People (to borrow a Krugmanism) to the effect that interest rates are too low. This is just the latest and most overt attempt to drive them up.

      2. JasonRines

        Yep. The only real value of a government is to prevent one group from robbing another. Unforunately, when the governent becomes the robber (as they alway eventually do) then it is the end of a government. What should we call America 2.0 since the constitution has been ripped to shreds?

        1. John Wessel

          I think America 2.0 actually sounds pretty good. Version 1.0 had a lot of great ideas but ultimately the spyware and adware took over and it was too hard to keep patching. In America 2.0, we want more of the core game play but with smarter security features, fewer bugs and a more streamlined user interface.

      3. attempter

        You can’t enforce contracts with no oversight apparatus.

        Perhaps. But where did you get the idea that such “contracts” are necessary or valid at all? At any rate, that’s part of what I’m disputing.

        And there are certainly ways communities can enforce agreements without the State (or its corporate doppelganger).

        But nothing can be done for humanity so long as power differentials exist. Obliterating those is a prerequisite. No valid contract could ever obtain where significant power differences exist (only unconscionable contracts of adhesion can exist there). Since by definition the State amasses great power, the concept of the State legitimately enforcing legitimate contracts is a contradiction in terms.

        1. Anonymous Jones

          You’ve confused yourself with an over-reliance on terms that encompass more than you realize.

          Once the “community” commences any type of enforcement of contracts and denies the legitimate use of violent self-help with respect to contracts, it *is* the State. Just because your community is smaller does not extract it from the semantic box of the “State”.

          It is not the size, the methods, the lack of entrenched full-time agents in a bureaucracy or the relative laxity of the community that is at issue, but it is the decision to have even *one single rule* of interaction among the members of the community and the decision by the members of that community to enforce such rule as a group. That is a State. You may like that State better, but it is a State and will ultimately suffer many of the same agency, decision-making and imbalanced power problems that all States encounter.

          If you expect that people are going to get along without violence, if you think that there is any method of human organization that will avoid human-on-human violence, you are almost certainly incorrect. The important questions are how that violence is regulated and who does the regulating. These are threshold questions, ones which cannot be successfully avoided solely through semantic sleight of hand.

    2. Jim Haygood

      ‘Sell the News’ (a pseudonym, evidently) also delivered this howler:

      ‘The $1-2 trillion [in federal spending] that they are arguing about is about six hours trading in the greenback.’

      This is like airily asserting (in 2008) that ‘The $100 drop in AIG’s share price is equal to about 3 picoseconds of trading in its stock.’

      True but irrelevant, in both cases. There isn’t the slightest functional relationship between an entity’s revenue, spending or market value, and the trading volume of its issues in the secondary market.

      Accordingly I have dropped my rating on ‘Sell the News’ to C+ (speculative/squirrely), with a negative outlook.

    3. John

      Even Ayn Rand liked using governments for national defense, domestic crime control, and courts to rule in contract disputes. Aircraft control officers? Not so much, which is pretty strange given the number of times hopping into a private airplane going save the day figures into the plot.

      I always laughed at the notion that all the heroes and heroines could eventually run off and live together in harmony up in Galt’s Gulch. The first time the tailings from Francisco d’Anconia’s great new copper mine contaminated the town’s drinking water creek or the first time Hank Rearden got caught dumping trash out on the Judge’s cabbage patch, there would be a Galt’s Gulch Waste Management Authority (GGWMA) created.

      Oh, I forgot. John Galt would quickly invent a nifty new technology to transform trash into static electricity and store it up in the atmosphere, reverse engineering his cool invention that powers the place.

      Atlas Shrugged is a great book for youngsters trying to find their sense of personal power. It’s a great book for teens needing to find their libertarian wings. The notion that it is being taken by some grownups as a serious basis for policy is too weird for words.

      Ad hominem arguments are making a big comeback, what with our having elected a black President and all, so I would undertake one by just noting that Ms. Rand was an avowed atheist her entire life. If someone wants to take that ontology as an axiom … and all that flows from it by way of misunderstanding the nature of human beings, what we owe each other, and how we’re related … that’s ok with me. Just so long as those errors are left out of national policy discussions.

      For Representative Cantor to rave about Rand while pretending to be Christian is a tad gagging since it relies on the continued ignorance of his supporters down home in Virginia. I think I preferred it when Mr. Bush referred to Jesus as his favorite philosopher. Mr. Cantor might want to read some of that material and have his mind truly transformed.

  2. RebelEconomist

    This situation is not really comparable with Y2K. Y2K was, by definition, a once in a millennium event. There was either turmoil on 1 Jan 2000, or there wasn’t. I agree that the S&P downgrade will not mean much for US yields in the short run, because US debt is such a cornerstone of the financial system that most debt holders will change their rules and procedures rather than be forced sellers, but the downgrade is like another hole in the US boat. A reason not to take on new exposure, a reason to search for alternatives a little harder.

    As for S&P’s reasoning, I think it would be hard not to downgrade a country with an influential group of politicians who have just shown themselves to be ready to drive the country to default if their demands are not met. This downgrade should be blamed mainly on the tea party nutters. And, as a US firm, S&P’s action must go some way to repairing their credibility.

    1. Cedric Regula

      Ya really. Are we gonna find out Jan 1, 2012 that the US taxpayer is not on the hook for $14+ Trillion now and who knows how much in the not so distant future?

    2. reslez

      [I]t would be hard not to downgrade a country with an influential group of politicians who have just shown themselves to be ready to drive the country to default if their demands are not met.

      Except by their own statements the S&P adores these guys and only downgraded because their demands were 85% met instead of 100%.

      This is pure politics and insider dealing. A pack of criminal frauds and idiots could not do better.

  3. Jim A

    The downgrades were based on the failures of the underlying loans. You can’t have it show up in one product and not the other.

    It was horribly negligent of them to not realize that since the pools were already diverse, further pooling and tranching provides very little additional risk management. The underlying MBSs were made and rated to the the same pattern, and so the losses in them were very highly correlated. Either most of them would pay off, or very few of them would. It simply wasn’t possible for only some of them to fail in a predictable, domino like fashion.

  4. Jim Haygood

    ‘Ratings agencies assess credit ratings, not interest rate risk.’ — Yves Smith

    Exactly. The primary factor which determines short-term returns in Treasuries is general interest rate movements. Ratings agencies don’t have the slightest insight into those.

    Secondarily, when default is of concern, economic recession is a key trigger of crises. Just look at the correlation of US bank and corporate failures to recessions. Again, rating agencies have no ability to forecast GDP. Whether a recession occurs in 2012 is of far greater import than S&P’s rating.

    Like analysts’ earnings estimates, ratings are primarily an analytical fig leaf to drape a veil of due diligence on institutional bond purchases. Real world bond traders and hedgers have little need of ratings, except as short-term news events to trade. The market-derived yield conveys more information than a debt rating.

    As for S&P’s rating cut, it was in the market all day Friday. Whether European debt is crashing or rallying on Monday will have far more influence on UST yields than S&P’s action, which is probably publicity-oriented more than anything.

    1. F. Graeber

      “Use 18 US 1361 to jail them for “criminal mischief.

      “Of course, the real point of the exercise may be to show that the rentiers are not subject to the rule of law. I mean, we know this because none of the banksters have been prosecuted for accounting control fraud, but now we really know it, since S&P is just thumbing their nose at the Fourteenth Amendment.”

      Sure. The “shall not be questioned” clause in the 14th Amendment means that it’s illegal to raise questions about the debt. That’s a, shall we say, creative — maybe a better description would be “blindingly stupid” — reading of the clause. And it’s always good to see people advocating the criminalization of opinions, because I guess the 14th Amendment does trump the 1st Amendment.

      1. lambert strether

        Check the statute and you’ll see. (I shouldn’t have written “thumbs one’s nose at the 14th Amendment,” since that’s not law, unlike that statute.)

        * * *

        Gee, it’s nice to see “free speech” being used to defend the work product of a commercial entity, even if the courts don’t agree. Money talks, I guess.

        * * *

        As to the larger point, that the rentiers are no longer subject to the rule of law, I note, from your silence, that you agree. That’s the main point at issue.

        1. F. Graeber

          “Gee, it’s nice to see “free speech” being used to defend the work product of a commercial entity, even if the courts don’t agree. Money talks, I guess.”

          Do you even read the stories you link to? The judge in that case ruled that the rating agencies could be held liable for offering up opinions that they did not believe to be true. In other words, she held that the rating agencies could be held liable for fraud. The fraud limitation on the 1st Amendment is, I think, pretty well-established, and not many people think it should not exist. You, by contrast, were saying that S&P should be convicted for offering an honest opinion, because that opinion consisted of bad-mouthing U.S. debt. This is, as I said earlier, blindingly stupid, as well as being offensive. Rentiers may not be subject to the rule of law, but this example doesn’t demonstrate that at all.

          1. attempter

            What is truth?

            We are talking about the ratings agencies here, and the finance sector in general. That judge must be extremely naive. Obviously to impute beliefs about “truth” or “falsehood” here is barking up the wrong sequoia. The goal is never anything but looting. Who cares what the looters think is truth? And we shouldn’t either. Their inherently criminal action is the only thing that matters.

  5. Allen C

    Anyone not looking beyond ratings is a fool. Any competent analyst concludes that the US is a greater credit risk than 40 years ago. 35+ years of chronic trade deficits and now massive debt growth without material, corresponding GDP growth has to be alarming!

    The evolution of the recent crises clearly demonstrates that investors are complacent until they suddenly realize the ugly fundamentals. Years of preparation were involved in Y2K. Essentially nothing has been done to address these unsustainable macroeconomic trends. The US continues to run up debts, the great outsourcing machine continues to drive production offshore, and numerous inefficiencies continue to increase costs.

  6. Malcolm

    So S&P are corrupt and criminal according to Yves, thus their downgrade is of no merit. So does that mean that Moodys and Fitch who have not downgraded are upstanding corporate citizens?

    The problem with Yves’ argument is that it is essentially ad hominem in nature.

    One of the smaller ratings agencies Eagan Jones who are widely viewed as credible downgraded the US a couple of weeks ago. Here is their data (PDF)perhaps Yves would like to comb through that and deal with the facts instead of jumping on the White House emergency PR campaign train.


      1. Malcolm

        Progressives are a fickle bunch and oddly in the virtuous circle of American politics strange as it may seem (as in the example you cite) sometimes find themselves standing next to their Tea Party fellow citizens.

        But in the case of the downgrade you are about to witness a PR campaign that makes the attacks on Palin seem like shadow boxing.

        Just wait till they identify the S&P analysts who wrote the report, pity those poor souls. If they so much as got a parking ticket they will be brought before a Senate committee.

        1. inthewoods

          “But in the case of the downgrade you are about to witness a PR campaign that makes the attacks on Palin seem like shadow boxing.

          Just wait till they identify the S&P analysts who wrote the report, pity those poor souls. If they so much as got a parking ticket they will be brought before a Senate committee”

          The problem with Palin is that she’s an moron and a grifter – White House had to do little on the PR front other than just let her speak out loud.

          1. Jackrabbit

            The Analyst is Canadian. (Wouldn’t that make him/her more independent than an American?)

            But that the analyst’s judgment was approved by a committee (which I believe included Americans) so the analyst’s country of origin is a moot point.

        1. Blunt

          Malcolm, p;lease supply the differences (in your understanding) between “essentially” and “in nature.” Knowing the uses of words one is writing before they write them so is a virtue.

    1. scraping_by

      What is the collective noun for strawman? A herd? A flock? A bale?

      “So S&P are corrupt and criminal according to Yves, thus their downgrade is of no merit. So does that mean that Moodys and Fitch who have not downgraded are upstanding corporate citizens.”

      Recent history shows S&P ratings on MBS and other structured instruments during the housing bubble followed the fees paid more closely than the objective risk of default. Since they’re in the information business, reliabliity is an important indicator of the value of the information. With a history of that kind of reliability, only the unwise or partisan would take their information at face value.

      And there was no mention of other rating agencies. If you’re going to put words in someone’s mouth, please make them literate.

      “The problem with Yves’ argument is that it is essentially ad hominem in nature.”

      Our gracious hostess’s viewpoint is that it’s a conspiracy. By definition, a conspiracy happens among people out of the public view. Calling out the conspiracy isn’t an attack on the conspirators, however. It doesn’t make them look too good, but it’s not unassailable proof of an evil heart.

      Bye the bye, using the word “conspiracy” is no longer the knee-jerk canard it once was. Too much has happened the last ten years.

      “One of the smaller ratings agencies Eagan Jones who are widely viewed as credible downgraded the US a couple of weeks ago. Here is their data (PDF)”

      And nowhere does Egan Jones mention that the federal government can disappear its entire debt by printing money. The entire downgrade farce is a exercise in reframing the government as something other than a government. All across the country, average voices are being put onto the media to say. “if our family did its budget like the federal government…” Which is saying that if my aunt had balls she’d be my uncle.

      “perhaps Yves would like to comb through that and deal with the facts instead of jumping on the White House emergency PR campaign train.”

      Facts? From the pdf:

      ‘ The non quant issues are generally subjective and a moving target, so each rating of a sovereign may differ because of the non-quantitative nuances being addressed.’
      The other howler is in the NB, stating that ‘In fact, seventy out of three hundred twenty defaults since 1800 have been on domestic public debt.’ I don’t know where Reinhart & Rogoff cherry picked a mere 320 defaults. Heck, that was Michael Milliken’s yearly rate back in the good times of the 1980’s.

      The difference between an analysis and an editorial is blurred in the modern world, in social sciences and even hard sciences as well as obvious subjectives like government. Both S&P and Egan Jones have put out editorials. The same tone and content as the WSJ, USA Today, Fox News, Sarah Palin, etc.

      1. Alex

        Recent history shows S&P ratings on MBS and other structured instruments during the housing bubble followed the fees paid more closely than the objective risk of default.

        Interesting point. Is it possible that someone paid them (in one form or another) to perform this rating?

  7. RueTheDay

    Krugman nailed it in his latest column.

    1. These are the guys that kept rating subprimes AAA until the end.
    2. There’s no logic behind this rating, it seems to be based on the arbitrary idea that $4 Trillion in deficit reduction over 10 years is some sort of magical construct.
    3. They acknowledged that their math was off by $2 Trillion but went ahead with the downgrade anyway.

    1. Linus Huber

      The down grade was overdue IMO. Look at how much the dollar lost value over the past many years. Alone on that basis a downgrade is more than justified.

      I agree that the US always is able to pay its bills as they can print their own money. The real question is how much value those dollars still have when payment is due. Based on recent history of how reckless the US government builds up debt and transferes losses from the private sector to the tax payer, it is rather obvious that the creditibility of its integrity is in question.

      1. pebird


        Think about that statement. If the US should be downgraded because the value of the dollar is dropping, how can ANY bond denominated in USD be rated higher than the US? Would the dollars paid by any corporate bond be worth more than the government’s?

        1. Cedric Regula

          The way it works so far in the 2nd/3rd world is corporations have to borrow in a reserve currency.

          We still have to figure how it will work if all reserve currencies get printed to oblivion. But I’m sure bankers and corporations will work something out.

      2. reslez

        The real question is how much value those dollars still have when payment is due.

        And yet the 10 year is around 2.5% which means zero people care. Plenty of people pretend they are worried to score political points, and plenty of others refer to amorphous “questions” which amount to nothing more than FUD.

        1. Cedric Regula

          Actually it means that 100% of the people in the bond markets are traders, and don’t intend to hold anything for ten years, and they also are using tremendous leverage to get the 2.5% to add up to real money. And/or the short term traders are the type that look at bond prices and play short term changes in the yield curve.

          Even tho everyone knew greece was going to blow years before it did, Greece bond yields sold at only a small premium over german bunds all the way up to within a few months of the auction that looked like it was sure to fail, then the Greece crisis hit the news.

          These guys run right to the edge of cliff, thinking they can pull up in time. Looking at long term rates as an indicator that everything is fine in the long term is delusional.

          But treasury prices will rally on Monday. T-bills yields will go negative one of these days again soon, methinks. That means we are really doing good and happy as hell.

  8. David Jones

    Amusing to read the article and comments above. Oh my, oh my, how the American left gets itself into such a dither over a minor ratings downgrade.

    Gee Dorothy, I guess we’re not in Kansas anymore and that wicked witch S&P is trying to tell us something.

    There’s no mention of the fact that in the CDS market the U.S. hasn’t been pricing as a AAA, AA+, or even A credit for some time, but heck who cares about what the market thinks. Listen fellow workers reality should be what our dear leaders say it is.

    Why should the printer of the world’s fiat currency have to live by any rules? We’re the greatest nation on the planet, the last remaining empire from the previous century, and we should be able to print and spend as much money as we want – medical care, retirement, and subsidized housing for all Americans.

    Socialist nirvana here we come baby! Who cares about the bill, we have the printing press, we deserve it, and the rest of the world can damn well keep lending us money to pay for it! After all, it’s our fiat money in the first place.

    1. ambrit

      Dear “Mr Jones,”
      Albeit you have all the earmarks of a Troll, I’ll try to put a counterpoint or two.
      First: You asume that the CDS markets are honest and even rational. This arena is one of the best examples of manipulated outcomes available. Most trading there is driven by large firms with clearly defined social and political agendas.
      Second: We are indeed not in Kansas anymore. S&P was indeed trying to ‘tell the US something.’ To wit; do as we want or die.
      Third: Your fourth paragraph is, I assume, couched in terms to be read as sarcasm. Unfortunately, read in plain text, you have very accurately outlined the real situation. The US is indeed a Sovreign State. Tha rest flows from that.
      Finally: What’s wrong with Socialist Nirvana? Have you ever had to sell your blood to feed your family during a layoff? (I have, back in ’83.) Have you ever had to live in a tent because what you made from a full time job didn’t pay inflated rents? (We did.)
      I could go on, but it’s time to go to work.
      Good bye, and good luck!

    2. Jim Haygood

      Within the past 10 days or so, I saw an article which showed how widely CDS premia diverge from debt ratings.

      If I recall, the X-axis was the CDS premium, and the Y-axis was debt rating on a scale of 1 to 10, with 10 being the threshold between investment and speculative grade.

      A curve was fitted to the relationship. But among the several dozen sovereign data points, there was a huge dispersion from the fitted curve.

      I wish I could post this article, but cannot recall where I saw it. Anyone else know?

    3. Jim Haygood

      David Jones may have been referring to a July 20th Bloomberg Brief, which said that CDS spreads implied an AA rating for the US.

      This proved to be an accurate forecast of a downgrade. If that’s ‘trolling,’ then I say ‘More, please, Mr. Jones.’


      Attentive readers will note that CDS spreads also imply an imminent downgrade of Belgium, Spain and Italy.

      1. LifelongLib

        “medical care, retirement, and subsidized housing for all Americans”

        What’s wrong with any of that? Or do you prefer early death, poverty, and homelessness for your fellow Americans?

    4. reslez

      medical care, retirement, and subsidized housing for all Americans

      If only. What we get instead is endless war, domestic spying, and Wall Street bailouts at enormous expense. Rather than hoping for a socialist nirvana we actually have a capitalist one.

  9. ArkansasAngie

    Queue Sideshows, Avoid The Real Issues As Much As Possible

    Would somebody just go shoot S&P for downgrading American debt?

    Honestly … I don’t care about why S&P did the dirty deed. Their intentions are irrelevant. The fact is this country is in trouble. Instead of letting distraction prevent us from addressing the problems we are served up propaganda from every niche and corner.

    The first thing to do is to institute a flat tax. The tax code is the single biggest source of corruption in Washington.

    It is the single largest reason why lobbyists are paid money. It is the primary reason which those wishing to influence government tax policy donate to politicians.
    I propose exempting the first $25,000 of income and taxing everybody else at the rate which is set by Congress every year.

    And to control the financial/accounting screams implement it based on this day forward. Existing program participants go to the end of their particular life expectancy. No waivers.

    The 2nd thing to address is ending Congress’ exemption from the laws they pass. If social security is good enough for us, it is good enough for them. If medicare is good enough for us, it is good enough for them. If we can’t descriminate, neither can they.

    1. Cahal

      ‘The first thing to do is to institute a flat tax.’

      I agree. 90% on the top 1% of earners. Capital gains and inheritance tax included.

    2. addicted

      A flat tax adds no more corruption than a progressive taxation system (how much harder is it to go through a table with 5 levels, instead of 1?).

      There are far more avenues which lead to corruption, and lead to lobbying (actual laws being changed, getting government contracts, getting subsidies, tax credits, etc.) Fare more effective than a flat tax would be to remove all tax subsidies. I think it would be a better idea if instead of offering tax subsidies, the government was only allowed to actually pay back the people those amounts. It would lead to higher transaction costs, and therefore some deadweight loss, but the process makes the places where our money is going far more transparent to the layman.

  10. MyLessThanPrimeBeef

    Japan alos survived her downgrades.

    The thing is, Japan used to copy us, now we are copying Japan.

    ‘You have a lost decade.’

    ‘We will have a lost decade too.’

    ‘Just to out-do you, we will have a lost century.’

    1. Cedric Regula

      A couple years ago the IMF announced that by 2013 Japan will have passed the point of ever reducing it’s national debt, even at miniscule interest rates it pays today.

      That also assumes that “sovereigns” will be able to borrow at zero or negative interest rates indefinitely when rolling over existing debt.

      There’s your lost century.

  11. Thingumbobesquire

    Downgrade Standard and Poors

    Anyone who believes that Standard and Poors should determine the credit worthiness of the United States is a damnable and sniveling fool. Alexander Hamilton provided the tonic for removing this sovereign Republic from the grasp of a financial oligarchy based in the City of London. His named antagonist in his reports to Congress was none other than Adam Smith. Smith’s doctrine that wealth was merely the product of buying and selling to get money, and that mankind must only be concerned with the principle of pleasure and pain and not the consequences of our actions upon the future of humanity is the epitome of a slave’s (or rather a subject’s) mentality. For the most part, both sides of the aisle accept (and that unthinkingly and blindly) these tenets of Adam Smith’s wretched ideology. The idea that the moneyed interests rule is their unshakable conviction. This is why they cower at the likes of S&P.
    The simple fact is that everything decent our nation has accomplished has been based upon the exact opposite principle. We have led the world because we have had a vision that our nation has a mission to uplift mankind and that the purpose of government is precisely to provide for the general welfare of future generations yet unborn. It is well past high time we throw off the shackles of the craven belief that “money rules the world.” What is required is that our citizens exhibit a backbone again and impose a swift end to the control of these financiers by re-enacting FDR’s Glass-Steagall. Call or write your Congressman now to support Marcy Kaptur’s Glass Steagall Bill H.R.1489 and Maurice Hinchey’s Glass-Steagall bill H.R.2451

  12. Dan Duncan

    Freaking hilarious. Yves is unintentionally using the Chewbacca Defense in defending the AAA credit rating of the United States of America.

    For the uninitiated, the Chewbacca Defense is straight outta South Park and its original intent–until now–was to lampoon the Johnnie Cochran’s closing argument in the OJ case.

    And today, we have Yves Smith using the same classic defense strategy:
    Yves, as Johnnie Cochran–defending the USA’s AAA credit rating:

    “…ladies and gentlemen of this supposed jury, I have one final thing I want you to consider. Ladies and gentlemen, this is Chewbacca. Chewbacca is a Wookiee from the planet Kashyyyk. But Chewbacca lives on the planet Endor. Now think about it; that does not make sense!


    “Damn it…She’s using the Chewbacca Defense!”

    Yves as Cochran:

    Why would a Wookiee, an 8-foot-tall Wookiee, want to live in Endor, with a bunch of 2-foot-tall Ewoks? That does not make sense! But more important, you have to ask yourself: What does this have to do with this case? Nothing. Ladies and gentlemen, it has nothing to do with this case! It does not make sense! Look at me. I’m a lawyer defending a the AAA credit rating of the USofA, and I’m talkin’ about Chewbacca! Does that make sense? Ladies and gentlemen, I am not making any sense! None of this makes sense! And so you have to remember, when you’re in that jury room deliberatin’ and conjugatin’ the Emancipation Proclamation, does it make sense? No! Ladies and gentlemen of this supposed jury, it does not make sense! If Chewbacca lives on Endor, you must acquit! The defense rests.

    Seriously, I’ve rarely come across so many red herrings in a single post. Each paragraph sends the reader off on a new tangential whiff of irrelevance.

    And this…a passionate defense of the sanctity of the USofA’s pristine AAA credit rating coming from a blog that has nothing but contempt for the USA. Priceless.

    Hell, Naked Cap has a Special Section, labeled “Banana Republic”– with almost a 1000 posts—each of which lambasts this country as being a complete and utter joke.

    And the commenters…with “Bravo! Great post!”…are you kidding me?

    This the same group of morons that regularly state that US Presidents are imperialistic “mass murderers”, it’s Congress is beyond corrupt (some truth on this one) and that the US populace is fat, stupid and warmongering….And now these same readers are criticizing a downgrade?!

    And no, I am not guilty of throwing down my own red herrings here.

    The S&P ratings downgrade is simply a reflection that the state of affairs in the USA is less stable and less effective than it should be.

    A blog that devotes a special section calling the US a Banana Republic…that gives a free and open platform to buffoons like George Washington…with readers who regularly call Obama “a mass murderer” and who have nothing but contempt for its citizens…has to agree that a downgrade is warranted.

    And the best part is…it is Naked Capitalism that’s calling the S&P hypocritical.

    Witnessing Yves’ cognitive dissonance as she lambasts the S&P decision—all because the S&P is ultimately repudiating MMT—while she has to hold her nose asserting that a rating downgrade is unwarranted is laughable.

    You can’t make this shit up.

    1. Jackrabbit

      Thanks for the Chewbacca story. You’re just so good at making things up.

      You’re love hate relationship with NC/Yves leaves me feeling much cognitive dissonance. Although you HATE NC you read NC (pretty closely) and take the time to make one (or more??) long posts.

      Yves is human – which I can’t always say for her opposition. And her concerns show a love for this country and others that is much stronger than your hate.

    2. Foppe

      it would seem you do not appreciate the distinction between a procedure or methodology and a conclusion.
      Sure, a downgrade may be warranted (though there are few other countries out there that do deserve a AAA-rating, so even that is dubious at best), but — and here is the key point, italicized lest you miss it once more — not on the basis of the evidence used/presented by S&P.
      Good day.

  13. Bob J Young

    I wish people who didn’t work on the Y2K problem, would quit disrespecting the efforts of those who saved your butt.

    The reason Y2K amounted to a “nothing” in the media was because an army of programers, scientist and engineers, spent the previous year testing, correcting and upgrading equipment. It was a herculean effort by and enormous number of people, and since we succeed all we ever get is disrespect.

    I won’t hurt to say thank you, rather than use the event as an example of something bogus.

    I personally was involved with effort in the nuclear industry, and yes, things would have shut down if we hadn’t upgraded the hardware and software.

    1. Oracle of Theft

      The media loves sensationalism. COBOL is boring, so is the predatory misuse of IT on Wall Street. They call it “investing”, I call it a “gamed screw”.

    2. monday1929

      In “The Black Swan” Nasim Taleb points out that a person who made the hardening of cockpit doors mandatory by September 10th 2001 would be forever reviled for raising the costs for airlines and passengers. Preventing catastrophe will never make one a hero.

      Separately, if it is any consolation, the Republican who replaces Obama (and 50% of the electorate will vote for a racoon if that is the Republican nominee and the other 50% will vote for a muscrat if that is the Democratic nominee)will be the most reviled President ever because he/she will rule during our worst depression ever.
      Let’s admit that most of us here would have welcomed the downgrade during Bush as a rare moment of honesty by a thoroughly corrupt company.

    3. addicted

      This, many times over.

      The Indian software industry that Americans apparently fear so much (no idea why…its decades behind), was built on all the money spent to fend off Y2K.

      Many people made many efforts to stave off the crisis. And all they got for succeeding was ridicule (well, also a lot of money).

      1. Yves Smith Post author

        You both are missing the point. A ton of remediation was done. The post clearly says that. Yet people still expected airplanes to fall from the sky. That’s the issue. The problem was sighted and addressed but there was still tons of panic. Here, the quick trigger types have had the opportunity to get out of the way, yet bond prices WENT UP.

  14. PaulinTO

    The statement that S&P and the other rating agencies screwed up on the securitization ratings is too obvious to even talk about. They were completely asleep at the switch.

    But I’m not sure that’s a valid argument to attack what they’ve done here. Looking at the US balance sheet, including debt, deficit, unfunded liabilities, and the partisan political circus playing out in the entire country, does anyone really believe it deserves a AAA? In this case it’s Moody’s and Fitch who are repeating the mistakes of the pre-crisis period.

    That doesn’t mean that I think the US is going to default, but there’s nothing about the analysis of what’s going on that adds up to a AAA.

    1. pebird

      I don’t have a problem with the S&P rating the government’s political stability – but they should just come out and say that is what they are doing.

      1. PaulinTO

        Remove the political circus part then. Is the US deserving of a AAA? Not in my opinion and I don’t see why anyone should demand that S&P explain their opinion in any specific terms whatsoever.

        1. John

          Query: is the USA less likely than any other AAA-rated debtors to default on its debt? If the answer is no, that’s why it should be rated AAA.

          That’s it.

  15. Jackrabbit

    Certainly there may be political games (there always are) but it doesn’t seem so black and white to me.

    1) The world has changed for rating agencies. Sub-prime hurt their reputations, and there is more competitive pressure (even though if S&P and Moodys remain on top). As noted, Egan-Jones has already downgraded US debt.

    2) There is a huge effort to make RA liable for their opinions and to the extent that the market itself recognizes and prices in these US fiscal problems, the agencies are exposed to reputational and regulatory risk.

    3) S&P made their concerns known months ago. The President and Congress did not satisfy their minimum requirement for retaining the AAA. NOT to lower the rating would then look like backing down and favoritism.

    4) That the GOP wants to lay this at Obama’s feet is no surprise.

  16. Cynthia

    Michael Hudson seems to think, as he has mentioned on Democracy Now! (listen to leak below), that the folks at S&P downgraded the US’s creditworthiness as a way of getting back at US lawmakers for passing a financial reform bill which would enable bond investors to sue them and other credit agencies for overrating the creditworthiness of government as well as corporate bonds, as was the case with mortgage-backed securities prior to the 2008 financial meltdown. If Professor Hudson is right on this, then the US Justice Department should launch an investigation into whether or not John Chambers and others at S&P are engaging in extortion against US lawmakers.


    And it seems to me that if bond investors can sue credit rating agencies for wrongfully overrating the creditworthiness of their bond investments, then governments — be they federal, state or local — as well as corporations should also be able to sue them for wrongfully underrating their creditworthiness, as it appears to be the case with the US government.

    1. Handsome Homo

      Delightful to see royalty hurl their lawyers at one another.
      (The low level dirt bags that Fannie Mae sends to lie in courts nationwide is terrorism, not a pissing contest between the powerful)

    2. Erik Kantoor

      Sounds about right, but I thought the credit ratings agencies behaved like high class hookers to the Banksters, knowing the role they were supposed to play in felating massive fraud.
      Seems that everyone is getting shot at, metawhorically speakin’

  17. rafael bolero

    If Obama were a real leader, he would have the DOJ counter-attack, and finally investigate, and prosecute, all these hit-men agencies for the criminal fraud of the AAA toxic mortgage tranches. Just kick’em in the teeth, at least hold them up them before the world. If we had a government and rule of law at the top. Or, rather, if the rule of law were not perverted to allow crime at elite levels.

    1. Race Bannon

      We’ve been over this repeatedly, he’s a vetted symbol of military financial hegemony. As will be the next Chief Exec. Concern yourselves with the brutal complicity of lower hanging political scum in a state, town or city near you.
      Let’s get Democracy rolling!

  18. Schofield

    Guess you’ll never believe that Terry McGraw the chairman of McGraw Hill who own S&P is a Mitt Romney and Republican Party supporter.

    1. psychohistorian

      It would seem that perhaps Mitt Romney is the next puppet to be “elected” to the presidency.

      I wonder if we will ever know where the million dollars that Mitt just got from some “poof” PAC came from?

      We need more kabuki or bunraku or and end to this nightmare…

  19. Foobar

    The S&P has little credibility.

    But Congress just lost a whole lot of credibility too… They used their credit card (voted to spend money) but bicker with bank about their bill (refuse to raise the debt ceiling).

    The US’ credit rating is simply a reflection of its past glory. The definition of a low risk debtor is not whether they pay on time, but whether their business model is resilient and profitable. Looting and pillaging is not resilient (be it via wars or via financial looting).

    That Congress now behaves like a group of 2 year olds only makes it harder to ignore that the has rot set in and the USA’s credit risk has worsened.

  20. Schofield

    Jason Rines

    “Yep. The only real value of a government is to prevent one group from robbing another. Unforunately, when the governent becomes the robber (as they alway eventually do) then it is the end of a government. What should we call America 2.0 since the constitution has been ripped to shreds?”

    A Pathocracy (Rule by Sociopaths). As defined in Andrzej M. Lobaczewski and Laura Knight-Jadczyk’s book “Political Ponerology.”

  21. gaw

    I find the entire tone of this post “highly questionable conduct, the lack of any analytical process behind this”…

    Yes, S&P were negligent years ago in their ratings of MBS etc. So what?

    Should they then just continue to be negligent forever? What is the alternative, just rubber stamp the fictional rubbish coming out of Washington instead? The recent ‘debt deal’ was a pathetic joke, just on that basis the AAA rating is undeserved. Athens and Washington, who is more credible? The answer is – neither.

    It is blindingly obvious to me that the scale of the US debt situation DOES REQUIRE some sort of drastic action. A mix of tax raises, spending cuts, shrinking Big Government etc, closing tax loopholes etc is required. Abolish Obamacare, DHS, end the wars and cut the Defense Budget by 50% at least, reform SS and Medicare, ending the subsidies for sugar and ethanol, ending mortgage tax deductibility, and many more things are required. Those are just a few ideas I can come up with in 2 minutes, but nobody in Washington could given decades.

    Democrats, Republicans, Tea Partiers – are ALL to blame, each in their own special way, for the sorry state of the US balance sheets, going back 30 years.

    Yes, balancing the Budget will cause a recession. That is a product of the fact that the Big Government is far too big a portion of GDP – it never should have been allowed to get so bloated in the first place. Recessions are a necessary part of the normal business cycle anyway. To argue, like Krugman etc, that somehow spending more money you don’t have to “stimulate” the economy will fix the sinking ship is lunacy. MMT and Chicago School “economics” (I use the term loosely) are just garbage for academics to debate, not viable paths yo a healthy economy. Color me Austerian, I’ll wear that t-shirt with pride.

    “Thus the best outcome would be if the bond and currency markets shrug off the S&P action” – no, the best outcome would be the USA is forced to get its financial house in order in a real and meaningful way in the near future, not next decade.

    I’m with the dissenting comments above. Don’t take this as a personal attack, I read this Blog every day without fail, and usually agree with almost everything.

    1. monday1929

      Same here, I have an “Yves” tatoo on my forearm, with an anchor. But on this one I differ,at the margin, with her. Maybe this is like the “AAA” student becoming happy with some “B’s”. You know, quitting the chess club and hanging out with the stoners and relaxing a bit, listening to some tunes, and not bullying the weaker kids anymore.
      Maybe it is just time for the US to get its Freak On.
      Oh, and buy lots more Puts, to buy justice for the criminal bankers who are harshing our high. GNW is helping to fill the Banker Bounty Fund.

    2. Blunt

      Another of the “the government is like my next-door-neighbor financial perspectives so well trodden in conservo-libertarian reaction.

      You folks have never forgiven the government for the Civil Rights Act of 1964 and the beginnings of Head Start and Medicaid have you? Nor, by the look of it, ever will.

      What has been evident to someone born in the South in the 1950s should become evident in the 2010s to everyone. If Jersey Girl is one she must be well aware of the wonderful legerdemain of “township” government – similar to the South African models.

      Just get over the animosity and recognize that government, society in general, MUST legislate against your misbegotten prejudices over skin colors, genders, sexual orientations, economic “class” characterized by so little in those who fall into the designated “highest class” of folks.

      Gawdess! Find a perspective that gets you past 1966, please.

    3. Valissa

      Thanks for your astute comment! There is something very refreshing about basic common sense.

      “the best outcome would be the USA is forced to get its financial house in order in a real and meaningful way in the near future, not next decade”

      I share this ideal of yours but different people have different ideas and theories as to what is the best order for one’s financial house. Hence all the arguments between the different economic theories and approaches to political economy. In addition to conflicting eocnomic theories, I do not see any desire by the political elites to do such a radical thing as focussing on getting the US’s financial house in order. They want to get elected and stay elected. Then there is the issue of all the many competing groups among and within the elites of all kinds.

      My guess, based on history and various factors… it will take about a decade for the US to get it’s financial house back into some kind of more stable order (to evolve into a new normal). I think this is true regardless of what choices are made to attempt to solve this financial crisis.

    4. Yves Smith Post author

      I love fact free assertions.

      “Government is too large in relationship to GDP”. Really?

      First, the reason debt levels blew out had nothing to do with the size of government. It was the DIRECT result of the global financial crisis. The US went from something like 23% Federal debt to GDP to 76% Federal debt to GDP. Collapsing tax revenues and an increase in spending in programs like unemployment insurance were the big culprits.

      Second, the US has far and away the smallest share of government to GDP of any advanced economy and also perform worse on most social indicators when you adjust for demographics and income levels. And that includes countries that are not having fiscal stress, like Germany.

      Third, the Federal government has run deficits over 80% of its history. The times we didn’t we had financial panics. England had much higher debt to GDP ratios during its industrialization period and it had no adverse impact on growth.

  22. Alex

    I’m downgrading the US because:

    1.) Our President is a member of the Kleptocracy.

    2.) Our President did not allow the Kleptocratic Bush tax cuts to lapse.

    3.) Our President and our Congress have not passed any tax raises on the wealthiest among us.

    4.) Our President is missing important anatomical equipment, including testicles and a spine.

    5.) Our Justice Dept. has not arrested the criminals responsible for the 2008 market crash, including the people at the rating agencies who enabled enormous banking fraud by rating crap as if it was gold.

    6.) Our Justice Dept has not arrested any bankers.

    7.) Despite the obvious need for such legislation, Glass-Steagal has not been revived.

    8.) Enforcement of a “level playing field” has not been undertaken since (at least) the end of the Clinton presidency. Our environmental, banking and stock market regulators have been totally captured by the industries they regulate. This has an enormous financial cost.

    9.) Long term problems such as infrastructure, global warming, education and employment are not being addressed.

    10.) The poor example being set at the top by business leaders, top bureaucrats, and major politicians is one of immorality and corruption; the center cannot hold.

    11.) Enormous sums are being wasted on useless wars which cannot bring the US any major or minor advantages.

    12.) Instead of facilitating trust, the government and other elites are harvesting trust to the point where the entire system is in danger of collapse.

    For these reasons I am downgrading the US to a rating of ASS. Anyone who disagrees can kiss mine.

  23. Cedric Regula

    One thing that bugs me about this is there seems to be lots of people saying that the rating methodology for “sovereigns” is bogus, but I haven’t seen any alternate proposals.

    Yves says: If you look at the S&P statement, it’s not a ratings judgment, it’s a long form political op ed.

    Robert Reich tartly observed:

    If we pay our bills, we’re a good credit risk. If we don’t, or aren’t likely to, we’re a bad credit risk. When, how, and by how much we bring down the long term debt — or, more accurately, the ratio of debt to GDP — is none of S&P’s business.

    Um…would there be any other way to rate a sovereign other than including a “political op-ed” which would be an observation of non-numerical issues like the willingness or ability to control spending, make that spending result in some effective investment which may enrich the country, and the willingness to tax it’s citizens/voters/campaign contributors for the cost of government?

    So according to Robert Reich we are a good credit risk until we aren’t. Then of course we can always pay off an enormous amount of debt by printing an enormous amount of monopoly money. Or if the leaders of the day get cold feet about wiping out the purchasing power and savings of the nation, the alternative is paying taxes all of a sudden to make up for a few decades of under taxation. Not to mention the difficulty in devising some sort of tax that could tax the trillions that the 1% have already avoided and stashed away somewhere. Failing that, how about a VAT? National sales tax? Carbon tax? Heartbeat tax?

    1. Cedric Regula

      I also have a problem with the logic:

      The rating agencies were criminally complacent with fraudulent CDS => governments deserve the same treatment.

      1. jawbone

        The ratings agencies were criminally negligent in order to make money; if they didn’t meet their customers’ requirments, they lost their customers and their payments.

        I guess some of us might wonder if there’s some kind of payment involved when they evaluate nations, even sovereign nations?

        And one might wonder who such paymasters would be and how they benefit from this particular downgrade….

        Why would they be dirty when serving their bankster customers an rating their products, but somehow remain squeaky clean when dealing with nations, who do not pay them…that we know of.

        1. Cedric Regula

          I hope governments don’t start spending our tax money to buy good ratings, even tho the CBO could rate it as one of the best uses of taxpayer cash we may have.

          In the old days the only thing I new about S&P was that the accounting department subscribed to it and used the corporate reports to monitor creditworthiness of our existing and potential new customers.

          The revenue and service info seemed properly aligned back then.

  24. DavidE

    Downgrad is meaningless. Berlusconi is already taking action on Italian downgrade. He will probably throw the S&P people in jail.

    S&P has pretty much lost its credibility because of the Triple A ratings it provided on the CDOs.

  25. Jersey Girl

    “I read this Blog every day without fail, and usually agree with almost everything.”
    Judging by your libertarian talking points, I highly doubt that.

    Whats more, you “Big Government” chest thumpers always seem to overlook the surplus inherited by Bush. It was these very same “Big Government” free-marketeers who, once selected, pillaged the coffers with endless wars, tax cuts for the wealthy and corporate welfare. Leaving the next administration to pick up your mess.

    The amnesia from you folks is no longer an annoyance, it’s metastasized into a terminal cancer.

    1. monday1929

      No, leaving the next fascist Administration to continue the same War Crimes and Corpoate fellatio. The surplus was just part of the still inflating credit bubble. Can you see that they are all bought and paid for? And yes, I voted for Obama.

      1. Jersey Girl

        monday1929 says:

        No, leaving the next fascist Administration to continue the same War Crimes and Corpoate fellatio. The surplus was just part of the still inflating credit bubble. Can you see that they are all bought and paid for? And yes, I voted for Obama.

        Most definitely. And what a shame that is. No, I was referencing the myopia of Republican 2.0 or The Tea Party nonsense. They love to pin the spending on the black man as if this mountain of debt just appeared as a result of Obama’s Hennessy flowin’ Hip Hop Summit.

        The fact remains we had a surplus, regardless of how we got, it was there. That was until Bush and his Greenspan minions looted it for all it was worth – and then some. Now that someone has to pay for that orgy, the Ron Paulites want to rewrite reality. Libertarians, Tea Partiers, Freedom Loving Patriots(c) whatever you wanna call them, have are nothing more than pawns.

        1. monday1929

          Can’t argue with you there. I think many Tea partiers are good people, just like many Republicans are. They just seem to see the world differently. And recent studies hint there may be a different brain structure (larger fear center). They are exploited, just like all of us, by the psychopaths who seek and gain power.
          There IS a Depression which WILL proceed no matter who is on power. Yves seems to strike a sensible balance when she points out the need to let weak businesses fail while keeping a strong social safety net. The actual, not theoretical, results of allowing millions of people to go hungry and homeless should make the libertarians,the Right, and the Darwinists the strongest proponents of this.
          I highly recommend NC readers Kate Wellings interview with Mark Lapolla (not political).

          1. Alex

            The Teabaggers tend to be white, racist assholes who’ve voted for conservative craziness for years in order to shit on brown people. “What, our son’s school has a couple black kids? Defund it!!” They’re white trash so they didn’t understand that they would be affected by the same laws they use to crap on colored people. (Duh!)

            Now the teabaggers are covered in shit, and they don’t understand why, but they do understand that they hate being covered in shit. Naturally all this must be the fault of some black person, so let’s all hate Obama, and that damn socialist Gubmint better not touch my Medicare!!

            P.S. I’m buying gold because Glen Beck said that’s how I can protect my money from socialist parasites. Let’s all pray before we eat. Thank The Lord for this lovely dogfood. Amen.

            /sarcasm and nastiness

    2. monday1929

      No, leaving the next fascist Administration to continue the same War Crimes and Corporate fellatio. The surplus was just part of the still inflating credit bubble. Can you see that they are all bought and paid for? And yes, I voted for Obama.

  26. lee

    I am stunned S&P would do this. Given the company’s corrupt past it is even more stunning. S&P, presumably, cares about is survival. Indeed (as you state) Jane Hamsher makes the case that this was done in order to defend itself from liability over the whole mortgage fiasco. That is certainty plausible. After all, liability there could sink the company. It is also really dumb. How shortsighted it is: downgrading a country’s credit rating to construct a legal defense –which defense may or may not work – and incurring the ire of government. Italy has already raided S&P’s office in Milan. I would not be surprised if the U.S. Government decided enough is enough and takes off the gloves (of course with this corporate beholden administration that is not a given). S&P was thoroughly corrupted and until this point has come out relatively unscathed. Upholding the rating was its safest course. Which leads me to one conclusion: this was an act of desperation. S&P was threatened from both sides, didn’t know which action would be worse, and decided a downgrade would be better for it. I think it bet the wrong horse. Hopefully, to redefine Churchill, “we are at the beginning of the end” for this company. Good riddance.

  27. primefool

    Hard to believe the S&P move did not have the blessing of the Fed/Treasury. In any event – none of our creditors ( China especially) will believe that it was not sanctionesd by the govt.
    Why would they sanction such a thing?
    It puts the world on notice that we do not intend our “grandchildren” to pay off the trillions and trillions of debt . Did some grandchild sign a loan document ageeing to pay his share of the trrillions and trillions? No? If so why will he pay for it ( in taxes, inflation etc) – he wont.
    The creditors better fall in line – revalue their currencies and accept whatever terms the US dishes out regarding their accumulated stock of US Treaasuries.
    That may well be the message.

    1. monday1929

      Yes, “How many divisions does S&P have?” to paraphrase.
      The only Rating that matters is our Nuclear arsenal. It helps if your (The US Govt) enemies (the American people,China et al) think you are crazy.

  28. primefool

    Other possible motivations:
    The credit agencies are a useful tool of our financial policy. ( Kinda like town criers). But they are only useful if they have some shred of credibility. One way to restore some credibility to them is to allow them to downgrade the US.
    Now it is fair game on the rest of the world and people will have a much harder time arguing that the rating agencies have no credibility because they never even consider downgrading the US.
    This may be particularly applicable to Eurozone – which the rating agencies are now free to downgrade to junk.
    This will maybe slow the Chinese down in their overt support of the Euro and push them back into US Treasuries.

  29. Tao Jonesing

    The S&P downgrade of long term treasuries (while maintaining treasuries of 2 years or less at AAA) will have market effects very similar to QE2, but the Fed won’t have to monetize the debt.

    This is a great thing for people seeking yield in what is clearly an unstable, deflationary environment. The flight to safety now gets a premium.

  30. primefool

    Economics/finance today is essentially like a medeival religious order. The public debates about various statements in the holy book is just for public consumption – to keep the peasants occupied. ( re – deficits, etc etc). When the priests go back to their smoking rooms – the discussions will inevitably be about money, armies and power.
    Therefore – it is best to analyze financial and economic moves on the basis of strategy – rather tha on the basis of some ridiculous conceptts in some obsolete textbook.
    Plausible startegy:
    1. get the credit agencies’ credibility repaired a bit.
    2. Put China and Japan on notice that we , not they, control how much , if any, they get paid back of their so called holdings of our so called sovereign debt.
    3. based on (1) above, the ratings agencies are now free to destroy the cdridit rating of Eurozone .
    4. So now we have our creditors in a zugzwang – they will have no choice but to continue to hold and buy more US debt ( because there will be no alternatives ) , but at the same time not have any hold on us because we can inflate/devalue and downgrade our US debt at will.

  31. Jim

    “The ratings action is really a power struggle over who wields authority.”

    And the winner of this power struggle, thus far, is the market-state–which is a new governing form in which the central state and the “free market” collude and “left” and “right” increasingly become the same–part of a corrupt status quo.

    Perhaps 60 to 70% of the blog posts and commentary on Naked Capitalism have directly or indirectly endorsed the idea that an important path to resolving our accelerating financial/economic/political/cultural crisis is an enhanced role for the state.

    I would argue, instead that this impulse, in both its left and liberal forms is exhausted (i.e that an expanding state offers no way out of the crisis but instead, taken the terminal corruption of the present market-state governing formation, deteriorates into, a perhaps, unintedended endorsement of the same structure of power it is supposedly containing.

    There are two primary groups on the blog who reject this exhaustion thesis.

    The first are traditional Socialists and Marxists who want to eliminate capitalism. Many in this camp appear stuck in the type of thinking predominant in the pre-1914 Social Democratic parties in Europe who embraced an evolutionary socialism through the hope of an incrementally enhanced state as the way forward or are still captured mentally by the extreme voluntarism of the Bolshevik catastrophe. Somehow the historical track record of “actually existing socialism” also tends to be ignored in their narrative.

    The second grouping that supports the perspective of the enhanced state is composed of disillusioned liberals increasingly alienated from the Democratic party because of its supposed capitualation to the “right” and many of the MMT advocates who still believe that our modern state has at its disposal the necessary operational mechanisms to focus on full employment, economic growth and the welfare of its citizens.

    Both disillusioned liberal democrats and the MMT network, erroneously assume that our culture is still capable of producing genuine public servants, who acting in their official capacities within Big Government and Big Bank (the Federal Reserve)are capable of furthering the public interest. In addition both groups also seem to assume the the architecture of our present governing system (the market-state)has not been fatally corrupted by neo-liberal experiments in collaborative government and public-private partnerships as well as Obama’s use of the debt crisis to further this same neo-liberal agenda.

    But if this present system of power(the market-state)is only capable of expressing didain for the public good then Big state along with Big capital must also be dramatically restructured– not enhanced.

    1. Tao Jonesing

      You raise some excellent points, Jim, but the only thing new about the “market-state” is your label for it. While I do think society can be deprogrammed of the evil that is neoliberalism, it will take 40 years to do so. Vesting more power in the state until that deprogramming happens would be insanity. We need to re-localize political and economic power.

      1. Valissa

        “We need to re-localize political and economic power.”

        YES! That is the only solution that makes sense to me. Not sure how that will manifest in the real world, but it could end up being a positive side effect of spending cuts.

        1. Cedric Regula

          They will cut the budgets of the CDC and FDA and we will all die of swine flu, bird flu, Mad cow’s disease, and salmonella.

          1. attempter

            What makes you think Monsanto/Smithfield/ADM/Wright Eggs, er, excuse me, “the FDA”, cares about any of those things? Since it does all it can to make those threats loom worse, it must have a strange way of caring.

            On the other hand, its vicious persecution of the raw milk movement, a template for the planned assault on all non-corporatized food production and distribution (as enacted in the Food Control bill and proclaimed in the FDA’s brief in the FTCLDF lawsuit) continues.


            Well, Big Ag is certainly happy with its FDA. Since this is Big’s Ag FDA, just as much as the OCC is Wall Street’s OCC, I reckon we the people would be far better off without it.

          2. Cedric Regula

            So far, I usually read about the various outbreaks in the press after only a couple people die of the stuff, then I read how all the stuff gets traced back and taken off the market and sometimes even the source is found.

            So I assume they must be doing something. Or this is all a huge hoax.

            I have no idea if raw milk is ok or not (I was bottle fed). I do like the idea of pasteurization, except I have learned it is not necessary when making beer. This is because hops is a natural preservative and also that no pathogens will grow in beer (the alcohol helps too).

            I know Mongolians make goat milk liquor (or maybe it’s yak milk or camel milk, I forget). So that may be ok.

    2. Valissa

      … the idea that an important path to resolving our accelerating financial/economic/political/cultural crisis is an enhanced role for the state.

      I would argue, instead that this impulse, in both its left and liberal forms is exhausted (i.e that an expanding state offers no way out of the crisis but instead, taken the terminal corruption of the present market-state governing formation, deteriorates into, a perhaps, unintedended endorsement of the same structure of power it is supposedly containing.

      Totally agree on that part of your analysis! That realization is one of the main reasons I stopped describing myself as a liberal in recent years (I limit myself to the culturally liberal label only). I have to admit it took alot of evidence and thought to accept that because I was thoroughly unconsciously indoctrinated into the liberal meme-plexes of my social class. The one aspect of being a liberal that I never was completely comfortable with was the love for and belief in the power of gov’t to solve all ills. I have always viewed powerful institutions of any kind with skepticism and suspicion. I agree on the importance of the gov’t providing some sort of social safety nets, but realize that social safety nets themselves become part of the looting and create unhealthy societal dependencies. I find the rhetoric of both the left and right annoying and somewhat irrational on the issue of social safety nets. Also, once upon a time I worked in the defense industry and saw gov’t waste up close and personal. That was back in the ’80s and we all know it’s only gotten worse since then.

      The big question is, can anything be done to slow down the increasing centralization of power that’s occuring in both the markets and the state? Can anything be done to decouple the market-state that is evolving into a strong centralized force? Our government is getting more and more authoritarian and both political parties are heavily invested in this.

      Polls show increasing numbers of people becoming independents and distrusting both parties and their lying and unrealistic prescriptions for a better world.

      1. mansoor h. khan

        Yes. Please study the social credit ideas of the economist named Clifford H. Douglas.

    1. wallyfurthermore

      It’s OK to shoot a messenger who diddles the content of the message they deliver. Math error? Oh, never mind, downgrade anyway.
      See, then it’s no longer a ‘message’, it’s a creation.

  32. David Jones

    Dear Ambrit, thank you for your reply. If I’m a troll can I still be your friend? Oh and yes, that was sarcasm like the 4th paragraph of my initial post. I’m so glad that you picked up on that. Clearly, you’re a bright boy/girl.

    Regarding that blood selling thing, really sorry. Yes, in the complete socialist nirvanas of Cuba and North Korea you wouldn’t have to worry about that at all.

    Maybe, just maybe, there were some other reasons for your drop into poverty than it was “society’s fault that I can’t make a living wage.” But, we won’t force you into a little self examination. That would not be very liberal of me.

    My family escaped from one of those socialist paradises that you worship, started with nothing, worked hard, paid for our own educations, and have become tax paying citizens.

    I’m really looking forward to continuing to working harder to pay higher taxes to support all those entitlements for everyone that you cherish. Remember, that great maxim of national socialism: Each must contribute to their own ability!

    Long live the progressive state! Let’s keep taxing, borrowing, and spending. As one of your favorite wicked witches, Dick Cheney, once said, “Deficits don’t matter!”

  33. Dominant Supreme Being

    You were doing OK until that stuff cutting up on free markets and Ayn Rand. After that, not so much.

    1. Yves Smith Post author

      I suggest you read ECONNED. “Free markets” is an intellectually incoherent, internally contradictory construct.

  34. Jackrabbit

    . . . the lack of any analytical process behind this ratings action . .

    The initial reports were that S&P went ahead with the downgrade based on the dysfunctional politics. I think that was misleading and that you put too much store in that. There does in fact appear to be an analytical process behind this (you can’t seriously believe that they would not have some analytical process).

    It seems that Treasury had a look at their model/reasoning and took issue with $2T (I think at issue was the amount of debt outstanding in 10 years time). From reading elsewhere, it seems that the model involves debt/gdp and the expected trajectory of same.

    In addition, the Tea Party was willing to let the US default. There is ABSOLUTELY NO willingness to increase taxes. And the austerity course that we are now embarked on is likely to reduce GDP.

    Also see my earlier comment.

    1. Jackrabbit

      It seems telling that Treasury is attacking S&P instead of the intransigent GOP. I suppose that’s because Geithner looks so foolish (having said in April that there was “no chance” that there would be a downgrade).

      One would think the Obama Administration would be quick to point out that they sought to meet the S&P minimum requirements with some common-sense measures like eliminating tax loopholes but the GOP/Tea Party refused.

      Attacking S&P makes it seem, actually, like the Obama administration IS to blame!?!?!

  35. Schofield

    Cedric Regula.

    “Then of course we can always pay off an enormous amount of debt by printing an enormous amount of monopoly money.”

    Or alternatively we could of course let the market carry on and create another huge asset bubble by printing an enormous amount of monopoly money!

    Whose monopoly money would you rather rely on to get us out of this shit? Because rest assured it will take the creation of a lot of money.

    1. Cedric Regula

      “Or alternatively we could of course let the market carry on and create another huge asset bubble by printing an enormous amount of monopoly money!”

      I think you are confused about whom this is. It is the current Fed and post Glass – Steagall banking regs and regulators. Or call it the government-banking complex.

      Of course in the past lots of third world countries announce 4-to-one up to ten-to-one surprise currency de-vals. They advise their rich buddies first so they can plan alternatives and try and save enough of their net worth somehow. Then the general populace is left with wiped out savings and a starvation level job. They then have to “attract capital” (slave owners) to re-capitalize government (hire the recently unemployed military) and industry and borrow some real money to buy oil.

      But that’s the good way, right?

  36. Steve

    Yves, I have enjoyed reading your blog for the three years I have been following this. I am not a commenter here or elsewhere. I am a well educated individual with an MBA in Finance from NYU and consider myself to be an intelligent person. My assessment of you to date is they you are one of the sharper commentators out there. However, I am very surprised at your commentary here. You have completely missed the point. What point? The world–yours and mine and every American’s–changed yesterday, and nothing will ever be the same. What you are writing here is simply static–chaff–chum. In terms of details, if you don’t think there will be massive tangible ripple effects from this, you are simply a fool.

    1. Foppe

      Could you please explain the relationship between your complaint and the post? Even if the world changes (and I find that thesis doubtful, as the change predates ‘yesterday’), it is still the case that there is no good reason to take S&P’s word on it. Certainly you may argue that US debt shouldn’t be rated AAA, but it does not follow from (the quality of) S&P’s research. Now, yes it is the case that their opinion is being listened to, and yes it will probably have consequences because people act on their words. But none of this happens because of a good ‘scientific’ reason — it is all pure politics.

    2. Tao Jonesing

      The world did not change yesterday. All that happened is the safest investment available in the world today has been given a yield premium for non-existent risk. Who wouldn’t want to earn high yields in a deflationary environment where all other asset classes must decline for lack of real demand? S&P did not deliver a message to US policymakers, it delivered a gift to capital holders, and the Fed and the pols were complicit.

      Economics is a religion. Finance is Real Politik, and the only statement that can be implied from the S&P’s actions is that of Mellon in the Hoover administration: liquidate everything. The Top 0.1% have decided that their portfolio must continue with its perpetual exponential growth, even in an environment of negative growth. Yes, this means that they’ll effectively liquidate people, but maintaining their factions is more important than people.

      1. Yves Smith Post author

        I don’t mean to pick on you, but I’m stunned at the ideology driven, fact free remark. What about deflation don’t you understand? Treasury yields DECLINED (with a lot of volatility) while the debt ceiling hysteria was on, and fell further when the deal was in and it was known the downgrade risk was still on, since the deal fell short of S&P’s desired number. The downgrade was apparently leaked to select parties early in the week and the market broadly on Friday, yet Treasury bond yield ended the week LOWER than they were at the beginning of the week, markedly lower.

        The budget deal commits the US to massively deflationary policies. The ratings action is noise compared to that.

        There is NO yield premium happening. Get your mind around that. This is parallel Japan, where the market didn’t give a rat’s ass about the nominal rating.

        1. Tao Jonesing

          The budget deal commits the US to massively deflationary policies.

          And I’ve said nothing to the contrary. Indeed, I’ve said that we’re in a deflationary environment, and that treasuries remain the safest investment in the world given that environment.

          There is NO yield premium happening. Get your mind around that. This is parallel Japan, where the market didn’t give a rat’s ass about the nominal rating.

          We haven’t had any trading in treasuries since the S&P announcement. There have been rumors of a downgrade for weeks, and the Fed was among those pushing them.

          You can argue, as others are doing, that the downgrade is priced into current treasury prices, and that, as a result, we won’t see much of an increase in yields. But to me, even 10 basis points is a premium in this environment.

          Be that as it may, there is no historical fact to support your assertion, which makes it as fact free as you accuse me of being. Please accept that we’re both making predictions of what will happen next, and that we both appear to have a different definition of “premium” in mind. If the yields look like they did during the artificiality of QE2, that’s a premium to me.

          I don’t mean to pick on you, but I’m stunned at the ideology driven, fact free remark. What about deflation don’t you understand?

          And what ideology is that? I’m just curious what you think it might be. I’m not aware of any ideology that I naturally align with, let alone fully accept, but if you have a label, pin it on me, and we’ll see how it fits.

          And fact free? Really? Here’s a fact: the S&P partially downgraded U.S. treasury debt after close of business on Friday. That will have consequences. Denial ain’t just a river in Egypt.

          Full disclosure: I have $200K sitting in 10year and 30year treasuries that were in the black on Friday, and I have no intent to sell them. Indeed, I plan on buying more in the immediate aftermath of the S&P announcement, which I believe will put us at least temporarily back up to or beyond the peak yields during QE2. The premium doesn’t have to last forever to be meaningful.

      2. Steve

        Apologies for not making myself clear. I have no complaint as such, but am simply disappointed. Let me see if I can clarify my reaction. 1) This event is one for the history books, like the Kennedy Assassination. The circumstances of S&P’s credibility, and everything else in this post, ultimately washes out. The only thing that will persist is the symbolism–it marked the end of an epoch. And that is also all that matters overseas. (Have you read any of the international press coverage?) Everything else surrounding the actual event is pretty much moot. No? 2) The US as an economy and a nation is like a prize fighter staggering with dementia pugilistica. Given the stress on the system, who will doubt that this event will have a significant negative material impact on the US? Is there any doubt this marks the beginning of the second leg down? As I am not one to post kindly do not consider a lack of response to mean any disrepect. Regards.

        1. JTFaraday

          I think it is true that there will be ripple effects from this, in light of which it is not like Y2000, and is consequently of symbolic significance.

          But the real damage has already been done, and it remains true that S&P played a key role in creating the circumstances of the US sovereign downgrade that it is now BELATEDLY bemoaning.

          If S&P is an intellectually sound institution, fit to proclaim on the financial soundness of the US government, how is it that it could not previously see the role that it itself was ACTIVELY playing in the destruction of the financial soundness of the US government that it now bemoans?

          What S&P is really downgrading is ITSELF, its business model, its intellectual framework, MBA finance degrees, highly ideological managements like that of “the Enterprise University” (which NYU’s president apparently prefers to the school’s traditional official motto of “a private university in the public service”), etc.

          To say that “everything else surrounding the actual event is pretty much moot,” is WRONG (not to mention self interested).

          The Tea Party may be too intellectually feeble to grasp that the REAL crisis is located firmly in the lap of so-called “finance professionals,” but that Tea Party is a runaway minority faction and its political days are already numbered–not that I expect it to go out any more quietly than S&P or any other group of financial professionals, including those in the Obama Administration who would prefer to push the US further into recession than acknowledge their own increasing culpability in the destruction of the US and the global economy.

          So transparently politically aligning themselves with the teapers, by insisting that the ONLY possible solution is for the full Congress to enact the teaper agenda exactly as the teapers imagine it “$4 tillion in cuts–or else,” when the teapers are at an all time low in their reputation nationally and globally just reveals a further lack of judgment on the part of S&P in particular.

          So, yes. This is new information about S&P and down the road when we do things like, say, re-name the “S&P 500” or eliminate it entirely because the middle classes who invested in it no longer have have any spare change, the world will be forced to actively recognize the end of an era and the world will also know who brought it to an end.

          There will likely be ripple effects from S&P bemoaning the crisis it itself helped to create, and regardless of those where they lead, we DO KNOW where they came from. And we know that S&P was right there at ground zero, destroying its own business model, the US, and the global economy with its own short sighted criminal collusion with the now zombie banks who are demanding the public’s last drop of blood.

    3. Yves Smith Post author

      You apparently did not read the post very closely.

      1. Have you not heard of expectations? This move was telegraphed in advance, and even leaked widely when the decision had been made. Yet Treasuries rose in price. That’s because this move has any impact, it is profoundly deflationary (in that it provides more pressure on the authorities to cut Federal spending at a time when the private sector is deleveraging, which means the Federal government needs to accommodate that via deficit spending.

      2. The people who don’t want to stop holding Treasuries have had weeks to get waivers or figure out if their charters permit them to continue to do that. If they couldn’t you’d again expect to have seen anticipatory selling. Didn’t happen, Treasury prices rose during the deb ceiling scare, albeit with more volatility.

      3. As noted, Japan was downgraded to single A (it’s now back to AA) yet continued to be able to fund at super low interest rates.

      I did not say there would be no effect. I said the effects are likely to be different than the ones widely assumed (and used as the basis for scaremongering).

      1. monday1929

        Yves, I don’t think there is ever any need to defend oneself from a “well educated” person with an MBA in Finance.
        The Degree and the inculcated mechanistic view of Markets (or what used to be Markets) that come with it make a response unnecessary.

        The thing that will change our world is if a Fractal began in May, or begins in the next 24 months or so, that corrects all of our Progress since 1781. The fact that Bank Of England interest rates are at their lowest in history (since ca.1694)that political Party polarization (by objective measures) is at its worst since the 1840’s and numerous other examples tends to confirm this is the case. As we make new all-time records in various measures, the case becomes stronger.

  37. Schofield

    Jim. Money creation relies on the use of fiscal and monetary tools to keep it under control so how can you not have some form of elected body to do that controlling even though it might be in the shape of an NGO working with an elected government? You certainly can’t take the Neo-Liberal’s road who’d have the private banks blowing asset bubbles forever and a day.

  38. rapier

    The deepest oddity in the ‘market state’ than the main actors in the market are corporations which are the creation of the state.

    Soon enough AAA rated, sorry for the pun, corporate debt will routinely yield less than US Treasury debt. We can thank God that at least it will not be banks in the class, initially. For when bank debt becomes superior to government debt then the banks will own the monetary system, not just run it as now.

    I have long conceived that corporate debt, and assets, which infers claims on those assets like stocks, would be the basic store of wealth in the world. As in not how many units of the S&P does $10000 buy but rather how many dollars, or whatever currency, does a unit of the S&P buy.

    Closer to Yves conception is that ‘the market’ will now dictate how much and on what government can spend. We are at that exact point now and they are not going to spend it on you. (the default of SS was always assumed by ‘the market’ and that default on Treasury IOU’s is as pure a default as conceivable. The long campaign to denounce those IOU’s has been a stalking horse for the total default of the Treasury. A Treasury default is a feature not a bug of ‘the markets’ plans) There is a murky part of this because ‘the market’ is going to have to defer to the military here. Later one supposes they will become full partners.

  39. K Ackermann

    I don’t understand. The US will NEVER default on its treasuries. It can print as much money as it needs.

    Does S&P not know this?

    1. Tao Jonesing

      Of course the S&P knows the US cannot default. Ignore the words and focus on the actions in the larger context. The partial downgrade of treasuries (short term treasuries are unaffected) effectively simulates what happened in QE2.

      Since the Fed cannot swing a QE3 right now this is the next best thing. Indeed, it is better because the flight to safety that is just starting will come with a premium. This move is a boon to the Fed, who clearly was complicit in bringing it about.

      We are beyond politics now. We are beyond all belief systems, including economics. This is a naked move of aggression in the class war.

      1. K Ackermann

        Very interesting take. I hadn’t thought of that.

        Impossible to prove, and very effective.

  40. Psychoanalystus

    Great post!
    I must say, watching the slow motion collapse of imperial capitalism has never been so much fun. I haven’t rejoyced so much since Boris Yeltzin climbed on the tank. Just lovely!

  41. Ignim Brites

    Have we not lately been reminded that it is unconstitutional to question the validity of Federal debt? If it is unconstitutional, it is illegal. So why have the officers and owners of S&P not been arrested?

  42. Hugh

    The ratings agencies are part of the kleptocratic apparatus. S&P may well be playing footsie with the Republicans, but that’s at most tactical posturing. Remember Obama, the Democrat, was all for the $4 trillion budget cutting spree and it was the Republicans who nixed it because of what were some fairly minor, relatively speaking, tax increases. On that basis, you would think they would be sucking up to the Democrats.

    What I think this is all about is laying the groundwork for the SuperCongress to loot entitlements. When viewing the kleptocratic enterprise, we need always to look past the atmospherics and ask ourselves what is being targeted by the looters. The atmospherics can be wildly inconsistent and contradictory but the overall goal, what is to be looted, never is.

    1. Doug Terpstra

      Yes, kleptocratic theater grinds tediously on and on without intermission as the certified whore of fraud takes its shamelessly familiar role in financial terrorism to an entirely new level — public policy lobbyists for Wall Street (Meanwhile, Helicopter Benny keeps his beanie low, awaiting his next stage cue).

      As Yves put it, this is pure “political op-ed” — more debt-hysteria circus and fear mongering to enable the greatest public heist ever in broad daylight, the looting of SS (not even part of the federal budget) to save Wall Street’s sorry ass. And with this sham downgrade, S&P adds thornier thicket To Br’er Obama’s briar patch, giving him and his unconstitutional cat-food politburo more cover to implement phase-two of the Shock Doctrine.

      Notice how right on cue, immediately after Geithner’s bogus guarantee that there could never be a downgrade — surprise, surprise, the impossible somehow happens—to equally phony howls protest from the White House? It is a despicable racket. But inevitably, terror-fatigue sets in, and in the end, to anyone paying the slightest attention, the con job becomes ridiculously transparent, leaving the emperor’s warted butt conspicuously exposed.

  43. TC

    The greater preponderance of causes and effects presently impacting markets surround issues of systemic solvency. Recent weeks’ hit on equities and commensurate lift in U.S. Treasuries are a reflection of this. Most immediately, the very same “cause and effect” dynamic should accelerate these recent trends on account of enemy of the state S&P’s downgrading its debt rating of the trans-Atlantic banking system’s lender of last resort. Yet the positive effect on Treasuries will be but fleeting if issues of writedowns and bankruptcies are left to fester in irrational fear of consequences justifying the present, insane posture taken in this matter.

    Those you know who are looking for a buying opportunity in U.S. Treasuries likely are aware of systemic solvency dynamics, accelerated by an imploding euro-zone, and now S&P’s treasonous downgrade. Treasuries have been surging simply on account of increasing risk to assets lower in the capital structure, pure and simple. No doubt, the rating agencies are worthless, as you say. Yet the reason Treasuries have caught a bid is all about increasing risk of a systemic solvency crisis. In this kind of climate Treasuries are the only game in town, at least for the time being.

    Yet this effect can be only temporary, as destruction of the U.S. Treasury is virtually assured in a world remaining willfully obeisant to the treasonous likes of Standard & Poor’s. Solvency issues are exploding and its only a matter of time before economic dislocation drives Treasury’s receipts even further into the ground. It’s only a matter of time before the U.S. Treasury’s “full faith and credit” is as worthless as Barack Obama, John Boehner, Nancy Pelosi, Eddie Munster (R-WI), Steny Hoyer, Eric Cantor, Harry Reid and Mitch McConnell combined.

    There will be no “shrugging off” this outlandish downgrade of the U.S. Treasury’s debt. The initial reaction in Treasury markets might seem to defy the downgrade, but don’t be deceived. Collapsing risk markets generally should be your first clue something extraordinarily dangerous is afoot. Treasuries might seem the place to be, yet this will hold true only as long as the U.S. Treasury’s “full faith and credit” has meaning in substance. Truth is we are barreling toward a moment when it won’t, so long as insolvent “assets” drowning the banking system are left intact.

    Thus, the only way to combat S&P’s willful attack on the United States is reinstatement of the Glass-Steagall standard on the U.S. banking system. There is no other choice.

  44. youniquelikeme

    The downgrade was probably leaked and as usual a lot of people who shouldn’t have, made money. The timing of the market fall wasn’t serendipity; it reeks of manipulation.

    Of course there is an analytical process, but rest assured that the value is to S&P. The value here in timing is it shows the power they wield and have made themselves “untouchables,” regardless of their involvement in the crisis that caused the financial problems!

    The downgrade should have happened long ago if it is about poor financial policy, during the bush years. This looks like a political stunt to downgrade Obama and the Democrats in an election year, with no regard to the unemployed or the poor.

    When a rating agency is captured by money yet wields the power to bring down countries, politicians can be bought by lobbyists and campaign donations, when there is a revolving door from Government, SEC, Fed, banks, justice system and so on and the GOP/tea party mandate is not to work for the people, but to destroy the President, the result can’t help but be crony capitalism,collusion and corruption. Y2k like or not, America has set it self up to fail.

    1. Jackrabbit

      I’m as skeptical as anyone – and I have no particular liking for any of the rating agencies – but it could just as well be that the GOP hardened their stance knowing that doing so would risk a downgrade (and thereby embarrass Geithner and the Obama administration). They wield the Tea Party as a blunt instrument.

      I’m not ruling out S&P political maneuvering but I can’t see a direct link to S&P malfeasance (see my 2 postings above).

      Also, some might fling mud the other way, saying that Moodys is compromised by Buffets ties to the Goldman – Obama Administration.

      Alternatively, we may be at a tipping point where there is a genuine difference of opinion. S&P’s rating change will definitely open some eyes – and that could be a good thing.

  45. Psychoanalystus

    As Hugh mentioned above, I too suspect this is all part of reinforcing the SuperCongress scam.

    I think we all need to start thinking about this SuperCongress in terms of the Corporate Junta that is going to lead the United States toward feudalism and absolute slavery.

    As such, the new term to learn for today is: Corporate Junta.

  46. Duppy1

    Seems to me that President Obama knew what game was afoot and has tried to protect his right flank with the offer of $4 trillion in cuts and $1 trillion in revenues. Why won’t the Repubs get blamed for turning down the compromise that would have placated the S&P gnomes?

  47. Jesse Frederik

    What’s interesting is that S&P assumes in their negative scenario that annual inflation will be 1.5%. THAN WHAT THE HELL IS THE PROBLEM? As if the Republicans would ever let the US default, it’s utterly ridiculous.

    Glad to see your going to guest blog at Glenn’s blog. Dedicated reader of both blogs!

  48. mjComment

    We were one day away from potentially defaulting. Seems like a pretty good reason for a downgrade.

  49. avgJohn

    I cheer the downgrade. The sooner the global financial system falls apart, the sooner we can begin to rebuild our nation and our lives. It’s the elites in this country that have the most to lose if when their global empires fall.

    Bring our troops protecting global elite interests abroad home immediately( some 100+ countries I understand), adopt policies to restore jobs in America rather than bail out Wall Street banks, begin to figure how to rebuild our infrastructure, finally investigate and hold accountable those who have sold America out.

    We are blesses with an abundance of natural resources, including fresh water, have a highly educated workforce, an infrastructure that simply needs upgraded and repaired, empty factories and mills all over America that could be renovated and upgraded with current technology investments, and a population yearning for a brighter future.

    We simply lack the belief in ourselves and lack the imagination to actively begin build a new future. We are from the same gene pool that built this great country and even though it is cliche, “necessity is the Mother of invention and innovation”. I say good riddance to Wall Street style free trade and globalism, I give it an -F.

  50. Bluffraise

    Currency war is starting to hit other players(countries). Old tools of the 30’s were trade specific. EU will run out of lipstick for it’s little piggies which will hammer the banks and dry up trade. Less money= deflation

  51. spigzone

    Yves, you’re missing the obvious. EVERYTHING eliticon is now bent to dismantling/privatising social security, medicare, medicaid and social spending.

    The american people MUST be deeply shaken and fearful to swallow this.

    The downgrade is a calculated step in that larger plan.

  52. Yirgach

    “Y2K Scare. “Y2K overstated”

    It may seem like it was overstated, because we all woke up on Jan 1 and not much had happened. What did happen was that BILLIONS were spent rewriting code in all kinds of things to prevent a near meltdown of civilization.
    That’s what happened. I know, cause I was part of it.

    The Y2K thing was a bad metaphor. Can’t you think of anything better?

  53. Mickey Marzick in Akron, Ohio

    [Yves]: “They are nevertheless a symptom of a much deeper, long term issue — the replacement of the nation state with the market state…” BINGO! Couldn’t have said it better myself.

    S&P is a sideshow… credit ratings be damned.

    This is a titanic struggle between two forces – CAPITAL and the STATE – to determine ultimately where AUTHORITY/POWER resides. It has been brewing for well nigh 40 years, if not longer. But make no mistake about this one, in a “market state” CAPITAL is sovereign. In the NATION-STATE the nation – the PEOPLE – are sovereign [sometimes, or at least in theory]. But the ideological underpinnings which underlay the ascendance/triumph of the former have been diffused among the “people” for two generations… and become deeply rooted so the market state has acquired traction – a following.

    Take “starving the beast” to its logical conclusion and the the state is subordinated to CAPITAL with many former functions/services of the state now performed by CAPITAL for a price in a “market state”. This is not the 19th Century version of the nightwatchman state, but the latter’s outsourcing/displacement by CAPITAL – aka privatization! Security? Water and electric? It is only now that CAPITAL can make such a play because its concentration and centralization has progressed to the point, both nationally and globally, that it now rivals the state. The only notable exception perhaps is the military – the means of violence – and it is wielded on behalf of CAPITAL.

    The “debt” mountain is the means with which CAPITAL intends to discipline/starve the STATE – to show who is BOSS once and for all. It is predicated on the institution of private property – private ownership of the means of production – and so long as this institution is not challenged as contrary to the interests of the nation – the people – CAPITAL will supplant the STATE; the NATION be damned!

    This is about POWER between CAPITAL and the NATION/EARTH [people in general EARTHLINGS] – plain and simple. The conflict has always been there. But its only in the aftermath of the Second World War that CAPITAL has evolved with a global reach that now rivals what were once the exclusive prerogatives of the NATION-STATE. The starvation of the latter signifies the ascendance of MARKET TOTALITARIANISM – nothing less than the triumph of the MARKET over the STATE with the latter withering away for lack of resources with which to balance the legitimate interests of CAPITAL with those of the NATION. I will concede that there are no “legitimate interests” in a stricty Marxist context. But I don’t inhabit a Marxist utopia… a vacuum if there ever was one! Let’s get real and work with the cards we have been dealt. How we get from here to there is the issue at hand.

    Debt and credit ratings are only the means with which CAPITAL intends to relegate the NATION-STATE to the dustbin of history – as just one more fetter on the GLOBAL capitalist accumulation process. The MARKET STATE will increasingly become decoupled from the NATION – its people – in this race to the bottom. Better yet, not to have a centralizied/federal state at all, but a plethora of neofeudal market manors reminiscent of pre-Renaissance Europe dispersed across the planet that CAPITAL can play off against one another in a perpetual war of all against all predicated on possessive individualism. It is the capitalist utopia in which the MARKET is sovereign.

    Yves, you’re on point here! This subject/topic is much too important to get lost in a piece on the ramifications of S&P’s downgrade of US credit… Thank you.

    1. JTFaraday

      “The “debt” mountain is the means with which CAPITAL intends to discipline/starve the STATE – to show who is BOSS once and for all.”

      Really?? Because this looks to me like a clear case of a not potty trained zombie two year old stomping his little feeties at Big Daddy for not cleaning his poopy mess up quick enough.

      One thing I will say about the Tea Party is that they were quick to discover where the real power lies today and quick to try to seize it, and that power is in the government, not the markets that find themselves continually looking to the government.

      True, they’re not voting your interests and the zombie poopy diaper tantrums continue unabated.

  54. solo

    S&P is obviously part of the bipartisan scare campaign–abetted by the usual suspects (corporate media, mainstream academe, etc.)–so successfully being implemented against the poor, elderly, infirm and generally powerless. S&P’s leading light, a man named Chambers, gave the game away yesterday, declaring in a CNN interview that Congress should have opted for Obama & Co.’s “grand bargain” of $4tn in “deficit reduction”; and, failing this, the coming joint Congressional committee (designating the cuts of the recent “deal”) should replicate the guidelines laid down by the Simpson-Bowles commission, appointed by Obama. –The “American people” were foolish enough to fall for the Bush-Cheney junta’s scare tactics (WMD, “mushroom clouds”, etc.), which paved the way for massive war crimes; so it is no surprise that a mere rip-off of the remnants of the welfare state is proving to be a walk in the park. When B. Russell declared, “Fear is the basis of the whole thing,” he was referring to the Christian religion; but he might as well have been glossing the land of the brave and the home of the free; a very Christian locale, to be sure.

  55. skippy

    AC/DC >.o Singing D.C. Dept. Treasury shook me all night long.


    Skippy…If their intent is to throw the unproductive…cough…debt indentured fiat electron speed reducers, into the pit, thank you for my mega yacht, but bye bye debt barnacles…you’ll need a personal see:


    PS…could say so much more but, to busy hunting down malfeasance and slapping some new mud on the pit, ambivalent ambiance for the road ahead.

    Ohh ideology whats it good for…oh yeah…war…


    1. Psychoanalystus

      >>> could say so much more but, to busy hunting down malfeasance and slapping some new mud on the pit <<<

      Don't strain yourself too much, Skippy… it ain't worth it.

      Tell me, how's life treating you down under these days? Any austerity stories you'd like to share with us? :)

      1. skippy

        Funny you ask as I’ve been perplexed at my mobs attitude. You see, it was end of financial year, so whilst retail numbers are in the can, for consecutive months…EVERYONE is buying luxury cars[!!!] (Its like driving down sunset blvd all over again! LOL).

        Although at the sons rugby club the mob are starting to sniff the winds. I’ve handed out Yves book to a curious couple, tried to point out a few blogs, given a brief mechanical explanation from hers and likes perspective. But, most are just adjusting their living accoutrements with the imprimatur aka Fiji is the new Noosa…resort designation, it costs less but is more exotic (HAHAHAHA).

        Skippy…its like watching the desert encroach…slow…but undeniable…effects can be felt from over the horizon…unseen…withering heat…blows from it…grapes become raisins…good thing I’ve acquired a taste for Valpolicella!

        1. Psychoanalystus

          Yeah, I work with a few Australians, and they’re clueless. No chance most of them could get through Yves’s book without also reading this blog for at least a year.

          Here I’m still waiting for the Chinese economy to crash, so that the Australian third-world-style raw material export economy to crash too, and so I could then finally afford to move in at Mona Vale, north of Sidney, and get away from all this insanity once and for all :)

          1. Skippy

            I’m worried, many see an invulnerability to this quadrant, which is based on old times, heroes and the ongoing Americanization (numbing down with trinkets). Although the spirit during the floods gives me hope, its not to far gone…yet.

            Skippy…I’ve come to enjoy our Gestalt moments.

            BTW better weather and view around here and w/out so many heads getting in the way, unobstructed.

  56. wallyfurthermore

    If the S&P fuddled the numbers to justify the downgrade, which the US Treasury says they did, can they be sued for financial losses they cause?

  57. fred Gilbert

    I think you have lost sight of the real facts. The US owes 7 times its yearly income and basically has no assets. It borrows 45% of what it takes to run the place yearly.

    How can that justify a AA+ rating? The place is totally bankrupt and will never pay off what it owes.

    Don’t complain about S&P, complain that the rest of the rating agencies are too stupid to downgrade.

    1. securecare

      Put your crayons down and shuffle off to nap time like the child you are.

      What a display of ignorance.

      1. JTFaraday

        Last week the US had a household budget. This week it has a business budget. I call that progress.

  58. Siggy


    Nice post, cogent!

    The Fed and the FDIC have sent out mother-may-i’s amending the triple A requirement for Tier-1 capital. Or, if things begin to look unkindly, change the rules.

    Individually and collectively the ratings agencies look to be foolish and in many respects unnecessary. The classic bit of incompetance is to downgrade RMBS while ignoring CDO’s.

    Money has been piling into Treasury debt for some time as the EU tries to cope with a number of insolvent sovereigns and a passle of zombie banks. Makes the well leaked early warnings and the downgrade rather pointless.

    For our part we have been preoccupied with an artificial crisis manifest in our need to reestablish the limitation of the amount of indebtness that the Treasury Department may assume. All of this when it should be very clear that the problem is not the ceiling it’s the fact that we’re piling on more debt than we can service. Pity, when much of the recently incurred debt has been assumed in the hope that the additional debt will be the fuel of additional consumption.

    You want generous Social Security, Medicare, Medicaid, 100 weeks of unemployment insurance, auto purchase incentives, house purchase incentives, reduced withholding taxes and anything else you heart desires? Well then how shall you pay for all of that? No new taxes? Really, what ledgerdemain will materialize the funds to support the whole of Federal Government.

    It’s a lot the Greeks demonstrating against austerity and not wanting to pay for anything.

    If there is a moral here it might be that one really is quite foolish to buy the sovereign debt of any sovereign, especially since all sovereign debt is denominated in some fiat money medium.

    1. Cahal

      The trolls certainly do not like this one. I’ve yet to see anybody come up with an objection that hasn’t been shot down in flames by Yves or her commenters.

      And that’s not specific to this article.

  59. card shark

    are you all insane!!!?!!!!!! you are spinning this against s&p?!?!? you are out of your minds. the govt borrows 40 to 50 cents of every dollar it spends, and that is fiscally responsible and should be awarded AAA rating? its not as if they u.s. was downgraded to ccc. nobody said they cant pay their bills, but clearly the u.s. has fiscal issues that are troublesome and need to be addressed. if interest rates rise, the u.s. is in serious trouble. that alone should tell you all is not well. and because you claim they can print as much as they want, they deserve AAA??? have you heard of hyperinflation??? you people have your heads buried in the sand.

    1. securecare

      And you have zero clues as to what is happening since you are distracted by the bright shiny trinkets tossed out for the masses to fixate on.

    2. Psychoanalystus

      Yeah, you’re right. We’re totally screwed. We obviously can’t print a few more trillions to pay off the Chinese. And Obummer can’t mint a few one trillion dollar coins either, because his high moral virtues won’t allow it.

      So I say S&P better downgrade us to ZZZ- right away and put us out of our misery once and for all…LOL

  60. Susan Lee

    Your post is brilliant, especially the point about replacing the state with a market state.
    Susan Lee

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