So What? Part Two

By James Kwak

So, Standard and Poor’s went ahead and downgraded the United States yesterday, apparently because we have a dysfunctional political system. Who knew?

As I said before, I don’t think that S&P has added anything new to the world’s stock of information. In the short term, the most worrying thing about a downgrade is what I called the “legal-mechanical consequences”: the possibility that investors, who value their own opinions more than S&P’s anyway, might have to dump Treasuries because they are no longer AAA. Apparently, this is not going be a huge problem. Binyamin Appelbaum of the Times says that (a) many of the rules place Treasuries in a different category from other AAA securities to begin with and (b) since the downgrade only affects long-term debt, money-market mutual funds are safe.

Still, I think the whole thing is preposterous. S&P downgrading the United States is like Consumer Reports downgrading Coca-Cola. Consumer Reports is a great institution. For example, if you want to know how reliable a 2007 Ford Explorer is going to be, they have done more research than anyone to figure out the reliability history of every single vehicle. Those ratings are a real public service, since they add information to the world. But when it comes to Coke and Pepsi, everyone has an opinion already, and no one cares which one, according to Consumer Reports, “really” tastes better. When S&P rated some tranche of a CDO AAA back in 2006, it meant that some poor analyst had run some model fed to her by an investment bank and made sure that the rows and columns added up correctly, and the default probability percentage at the end was below some threshold. It might have been crappy information, but it was new information. When S&P rates long-term Treasuries AA+, it means . . . nothing. And if any serious buy-side investor were tempted to take S&P’s rating into account, she would be deterred by the fact that the analysis that produced the rating included a $2 trillion arithmetic error.

When it comes to sovereign debt issued by major countries, investors already use their own judgment instead of following credit ratings. These are the current ten-year yields for fifteen countries that had AAA ratings on Friday:

  • Switzerland: 1.17
  • Singapore: 1.79
  • Germany: 2.34
  • Sweden: 2.34
  • United States: 2.56
  • Denmark: 2.58
  • Canada: 2.63
  • Norway: 2.63
  • United Kingdom: 2.68
  • Netherlands: 2.77
  • Finland: 2.90
  • Austria: 2.97
  • France: 3.14
  • New Zealand: 4.50
  • Australia: 4.64

(Data from Bloomberg: I couldn’t find Liechtenstein or Luxembourg.) That’s a pretty big spread for fifteen securities that are supposedly equally risk-free. Part of the difference is probably due to inflation rates, but higher inflation expectations should affect sovereign credit ratings anyway, since inflation is the most likely escape hatch for any country that issues debt in its own currency. You see the same disparities for 5-year credit default swap spreads, from Switzerland at 35 basis points to France at 144 (with the United States at 55).

Felix Salmon says that the United States doesn’t deserve a AAA rating anyway, and when a significant minority of Congress (with disproportionate political power) actually wants to default on the debt, it’s hard to argue with him. But I don’t see what point there is in credit rating agencies rating Treasury debt when it doesn’t help investors and can only create confusion and increase borrowing costs through mechanical factors. Instead, I think S&P should have just said:

“We have decided to no longer rate sovereign debt issued by the United States, Germany, the United Kingdom, Japan, and other countries whose debt is closely followed by all major investors already and for which underlying fundamental information is widely available. We recognize that our opinion is no better than anyone else’s, and certainly no better than that of the market as a whole, but because of our status as a credit rating agency, it cannot help attracting attention it does not deserve and triggering consequences it does not merit. We will focus on our core mission, which is providing new information to the market about securities that are not already heavily analyzed by all the investment community.”

Update: A friend who knows these things better than says that falling Treasury prices, by forcing investment banks and other borrowers in the repo market to put up more collateral, could force some institutions to deleverage.

86 responses to “So What? Part Two

  1. Well,
    i find it quite amusing that you and other people (cf. Krugman) argue that S&P should either not rate Government Bonds at all or at least shouldn’t have downgraded the US Bonds.

    Well, it is their JOB to give credit ratings for any kind of bond.
    And they are free to give any kind of rating they want. Even rating agencies are (or are supposed to be) free enterprises.

    The “mechanical” problems, resulting from a downgrade are self-made. Why DID the SEC introduced the dependence on ratings for institutional investors in first place? And why have they only allowed few companies (the NRSRO) and laid down the foundation of the rating agency mess?

    I think regulators are at fault here, that the rating of just one single agency matters that much.

  2. This whole thing, you know, giving any type of credence or value to this ratings agency, just drives me nuts.. I’ve watched a CNN interview with the Sr manager of this group and nobody bothers to call these idiots to the carpet on their past and why on earth we should trust them at all. They were complicit in shoveling epic piles of BS which devastated tens of millions of people’s lives. Just pathetic.

  3. Singing Around the Campfire

    Since when does a questionably corrupt rating agency get to downgrade the credit health of USA?

    What the administration should be doing is launching a criminal probe into the conduct, relationships, and bank accounts of its’ personnel, in light of what they did during and after, and before the world financial meltdown, and global collapse, followed by years of world depression, with a breakdown crisis before us.

    Re-assign some field agents dogging peaceful activist groups and gun owner coalitions, and put them on this, Mr Holder, Mr. Mueller, and President Obama.

    This isn’t a taste test, wait n’ see.

  4. S&P was not alone in the debacle. There was the entire financial industry (of which S&P is just one small part) and the captured academic economists. Not to mention our bought and paid-for federal government in its totality. Of course we shouldn’t give credence to S&P — or to any of the rest of them. And yet the debacle just continues.

    Watch “Inside Job” and “The Secret of Oz.” Read Ellen Brown. Buy the DVDs and lend them around. Discuss with your friends and neighbors the need for fundamental change.

  5. The only appropriate response is to revoke S&P’s NRSRO designation.

  6. @ Carla, absolutely right on, “the debacle continues” with added ferocity, increasing speed, and more dire consequences for millions.

    That USA will be seen as less credit-worthy and the USD $$$ less stable and appealing, even if Moody and Fitch and the other rating agencies say they are staying put with AAA and watching a “trending negative”( or some such), meaning further dislocations, disruptions, and higher degrees of entropy.

    PTB may need more ugly and desperate measures, another false flag attack, but much bigger and deadlier….something that could trigger off a cataclysmic round of exchanges?

    On this fine August, Saturday afternoon, it appears everything being done to prop-up this drowning system is ineffective and failing, what other device is left in the ole bag of tricks?

  7. For crying out loud, James! Count the number of currencies repesented by the countries cited! Have you ever heard of currency risk?
    Separate out the bonds denominated in euros, and then you can assess country default risk within that group. Probably the relatively high rate for France represents the presence of Greek bonds in a lot of French bank portfolios. Take a moment and look at the interest rates paid by other governments issuing US dollar denominated bonds. (Sigh, I tire of pointing out basic economics to you!)

  8. Steve From Cranbury

    Since the Enron/WorldCom/Tyco debacles and the absurd AAA ratings to bundled subprimes, two things should be clear:

    The credit rating agencies lack the competence and integrity to rate credit, period.

    The credit ratings agencies can be heavily influenced by the big dog banksters who pay most of their
    fees.

    IMO, the banksters are using the credit agencies to push their agenda to kneecap Social Security and Medicare, which they share with deficit hawks in both parties. These guys want to gut the safety net so the financial demands SS and Medicare make on tax dollars are be reduced and these tax dollars diverted into their pockets.

    When these dishonest, bankster puppets can dictate US Government policy, it is clear the oligarchy reigns and the rest of us are screwed.

    Yes, S&P is correct in noting our politicians are unwilling of anything resembling good governance, managing budgets, managing government programs by acceptable management practices. Yes, they are out of control spenders, squandering our tax dollars to satisfy campaign contributors.

    But S&P is wrong to try to identify “how best” to manage our deficit problems. Who elected them? And given their horrible track record in rating the scoundrels in the private sector, why should anybody listen to them? Who elected them to decide government policy?

    That S&P can be so brazen is a signal Americans need to get off their butts, stop whining “you can’t fight city hall”, abandon narrow partisan and ideological wrangling and deal with the elephant in the room — big money, co-opting our crooked politicians, has captured our government will continue to run our governments and our economy into the ground unless we get together to stop them.

    IMO a short list of demands coupled with a threat to vote out all incumbents if the demands aren’t met
    is a viable solution. For 2012, the demands ought to be:

    A Federal Government “Buy American” policy, phased in over 2 years.
    Overturning Citizen’s United, by Constitutional amendment if necessary.

    Down the road, we need to get together to figure out how we can get political parties and big money
    out of our political process. We also need to figure out how to implement policies and rules to keep our
    jobs, wind down our chronic $1 to $2 billion a day trade deficit and take back control of our governments
    at all levels.

  9. Question – Why does the wealthiest family in the known universe own S & P Rating Agency (McGraw-Hill?)? Control the largest uranium industrial producer “Cameco”? Hold the “Lion’s Share” in the largest mining (rare earth) ,gold,silver, platinum, nickel, and platinum,…etc.,etc., “Rio Tinto”? Have a huge controlling interest & ownership – a virtual lock of “Shell Oil Petroleum”? Control the largest French, German, and British private Banks, and basically gives Basel, and Bilderberg their marching orders, using Fox,The Economist, Washington Post, etc,..etc,.. their print format?
    Guess who?

    Ref. “Credit Default Swaps: Evolving Financial Meltdown and Dirivatives Disaster Du`jour” (4/11/08)

    http://www.globalresearch.ca/index.php?context=va&aid=8634

    Ref: “Credit Rating Agencies” S&P ($$$) / Moody’s ($$) / Fitch ($) __ (Insurance products)

    http://en.wikipedia.org/wiki/Credit_rating_agency

    Thankyou James and Simon

    God Bless You, Julian Assange :-))

  10. I think S&P have knowingly given TBTF banks a convenient reason to increase interest rates for small businesses and average, i.e., disregarded, consumers. It will have an apolitical appearance to most, and career politicians will get to blame one of the ‘objectively analytical’ NRSROs for hurting a shaky recovery, not the banking and corporate interests who fund their campaigns.

    S&P thinks we’ve forgotten about its complicity in the financial crisis, and, if not, wants to convince skeptics that it’s back on the beat. Right. Like Sascha wrote, the SEC granting such weight to rating organizations who, for years, have been paid by the very investment banks they are rating is absurd and insulting.

  11. That was the most amusing interpretation of yesterday’s events I’ve read so far, and I hope that the outcome of it as trivial as you say.

  12. Good to see so many here aware of the stupendous blunders and meaningless opinions of the too-slippery-to-prosecute ratings agencies. Firedoglake.com has pinpointed their political agenda nicely. They, and their corporate enablers are panderers, prostitutes, and pimps in nice suits — kind of like too many elected Congress persons. The ratings agencies’ incompetence became public with Enron and Worldcom; how they remain relevant is totally mysterious. They need a long furlough. I like Steve from Cranbury’s solutions above. It is the only path to increased jobs.

  13. Seems like a waste of another ‘crisis’ unless Obama can spin another web of deception out of it.

  14. @earle – “……It was an ironic twist, since according to Benjamin Franklin and others, restoring the power to create their own currency was a chief reason the colonists fought for independence….”

    BY LAW, we are supposed to be having a Constitutional Convention to do the same thing again. We are a nation of REALISTS – we can count on the consistency of depraved avarice always being a part of the scene and it is our DUTY as an intelligent species to keep it pinned down.

    Orcs are *real* genetic aberrations – they did NOT evolve organically in harmony with truth beauty and goodness. JJR Tolkien’s (a WARRIOR, I might add, just like the “Mr. Y” authors) *fiction* is *truth* on so many levels.

    And it was so educational (in a gawk at the bloody accident way) to watch CNBC pundits, who wanted to be seen as Hobbits, call upon the one cultural touchstone we have – the Lord of the Rings – to yell at each other this past Friday morning….”….my precious…”

    Take out Jim Jones *religion* and political correctness (the social child of the fusion of communism and fascism, imho) – and we’ll have a FAIR and JUST War.

    But only after we RESTATE the Declaration Of Independence – freedom from rigged casinos and Ponzi schemes…

  15. The trouble is China cares about the downgrade and how it impacts the value of their investment in T-bills. They now want an international body to supervise the issue of every US dollar. Putin calls the US the world’s parasite. This is why it matters. This is why your idea for letting the Bush tax cuts finally expire is the right way to go. It needs to happen now to show good faith. Then the wealthy who have made trillions of dollars over the last decade need to finally pony up and pay more. Some of them made out like bandits during the years we’ve been at war. China came out really well from our wars in terms of oil contracts with Iraq and mineral rights in Afghanistan. If China gets paid back with cheaper dollars, too bad. The debt to social security needs to be paid first and also to countries like Japan who have suffered much and could really use their money. Fixing our broken healthcare system is now if not before an issue of national security. Panetta is going to have to accept the pentagon has to cut and follow the guidelines for doing so set out by Gates. That’s a start.

  16. Patty Craven

    This reminds me of when Obama got the Nobel Peace prize on the same day that he sent thousands more troops to fight in a questionable war = not peace, much death and destruction. What that sequence of events did was devalue the Nobel Peace prize.

    In the same vein (IMO), the rating agencies are losing their credibility. After all, the current model (for most but not all of them) is designed around the rating agencies being paid a fee by the entities they rate. That is a conflict of interest if ever there was one. So, who can trust them or their ratings?

  17. inside the Buyside

    In theory there’s no difference between theory and practice. In practice there is.

    If you’re institutional it’s meaningful; legitimately or not.

    It isn’t Armageddon but it portends a new reality. A reality in which credit is more expensive and long held beliefs are discounted into spreads and therefore prices. The underlying malignancy has been developing for thirty years; all are complicit…some more than others.

    A solution to the problem on this side of the Atlantic is achievable. Painful but achievable. We, because it is WE, will choose to react on our terms or to wait and the terms dictated by others.

    Lest I seem too pesimistic, google the Louis Rukeyser (Wall Street Week) 1987 Crash video.

    Inside the Buyside

  18. Moses Herzog

    James, you know I am an admirer of your writing, and your ability to “get it right” about 90%+ of the time. BUT James this post has a major weakness and needs an addendum at the bottom or some type of footnote. You mention that S&P made a $2 trillion math error. I also heard about this $2 trillion S&P math error on NPR. I don’t doubt the validity of the fact S&P screwed up and it certainly wouldn’t be the first time S&P F*CKED UP. But can you give is the details of this math error, and what the figures specifically pertained to??? We know you’re busy with family and professorial like duties, but enquiring minds want to know.

  19. @Steve from Cranbury: “The credit rating agencies lack the competence and integrity to rate credit, period.
    The credit ratings agencies can be heavily influenced by the big dog banksters who pay most of their
    fees.”

    No kidding!

    You say we need to come up with a solution “Down the road.” Are you very, very young, Steve? How far down the road are you thinking? How much time do you think we have?

    I would say, like, maybe 10 minutes.

    Seriously. What would we be waiting for?

    It should be pretty clear by now, the only change we can believe in is going to have to come from US.

  20. “The credit rating agencies lack the competence and integrity to rate credit, period.”

    Sure, they are way too optimistic, honestly how most of those developed countries could eventually pay back such big amount of debt ? ( US, japan, many european countries )

  21. @ Steve From Cranbury: For what it is worth, I think your assessment is very likely on target.

    There is no way S&P came out with this downgrade on their own — whether it originated with the banksters or politicians doesn’t much matter, as the end result will be the same: just another twist to the financial terrorists tactics to screw “the small people,” to protect and benefit the financial terrorists and their allies.

    This really is a war.

  22. You don’t even understand what ratings are (No, a AAA does not mean risk free) yet feel comfortable telling S&P how to do is job?

  23. IIRC there were AAA-rated naked synthetic CDO’s (or whatever) being used as gambling chips in the Wall Street casinos. A tad of cognitive dissonance to consider these rating agencies credible no?

  24. as if we could live forever
    pursuing tomorrow
    not knowing what to cherish
    never closing the circle
    from which pours the
    fullness of life
    ______________

    Hah! My contribution to the poetic musings that sometimes appear at Baseline.

  25. Bruce E. Woych

    James:

    This is your best post to date.

  26. How is it any different that a rating agency is paid by the same entity for whom ratings are being determined for a financial product, than it would be for a federal auditor of tax liability to be receiving additional compensation from the individual or corporation being audited?

    Most everyone would concur that the latter situation is unacceptable, and that the auditor should be investigated for receiving bribes, etc.

    No, the relationships involved in rating determinations have an immediate appearance of a conflict on interest; that the ratings are manipulated for pecuniary gain, and moreover, it’s been demonstrated that a ton of lying occurred in misrepresenting the relative risk of certain bonds, while shorting these in the background.

    The entire system stinks to high heaven, and will eventually fall to earth in a rotten heap of fetid rubbish.

    Until that time, the rest of us will continue to be robbed blind, by a criminal rogue element, facilitated and enriched by a banking cabal that requires abolition and utter dissolution and disbandment.

  27. This is somewhat off the topic, but I had to pass this article along. It is a really excellent analysis.

    http://www.nytimes.com/2011/08/07/opinion/sunday/what-happened-to-obamas-passion.html

  28. Fine comment. Only nit is that US is only nation that has been able to print money with impunity — up till now. Once we have a truly competitive market, including deflated asset value, then we’ll see.

  29. Moses Herzog

    The problem with S&P is when there was a Republican administration we had two unfunded wars, an unfunded prescription drug benefits plan, a cut in revenues from rich individuals, a cut in revenues from international corporations and there was total disconnect with the nation’s ratings. Also could anyone at S&P tell us why no cuts in municipal bond numbers??? How can you have a cut in the nation’s credit rating and S&P does their more traditional “monkey sees no evil, monkey hears no evil, monkey speaks no evil” ratings for municipals???

    http://www.bloomberg.com/news/2011-08-06/buffett-says-s-p-s-downgrade-mistaken-still-doesn-t-see-another-recession.html

    http://www.bloomberg.com/news/2011-08-06/asia-central-banks-set-to-stick-it-out-with-u-s-treasuries.html

    I’m wondering out loud, if China finds America’s spending so worrisome, when does China plan on selling their own Chinese government bonds to their own people, and which Chinese citizens do they think would be dumb enough and naive enough to buy them??? Answer: ZERO The fact is when you have a nation of 99% liars, the paper that the government turns out is just above the price it costs to make it, which is why 1 Chinese Yuan equals 16 American cents, and every PSB (Public Security Bureau) guard at a Chinese bank tries to trade you their RMB for your U.S. dollar at a better rate ( and no fee) than the bank gives you at the banks rotating door.

    It’s not to difficult to see through Chinese lies, as they are used to telling the lies of a 5 year old child to their own literally beaten down citizenry. The Han people (merchants and police) abuse both those in Xinjiang and Tibet. And the provincial governments of Tibet and Xinjiang appoint local puppets to rubber stamp the Han government’s killing of the local culture. The anger has built up over many years.

  30. The only thing new here with the Chinese is that they are implementing American economic and terrorist policies to achieve their politicial ends, just as our gvt has been doing for so many years here and abroad. They were tickled pink when they figured it out (@ a year ago) cause its just to easy to trust the people and then bust out the military card when things don’t go their way. We do the same here, undercover like, and for the same reasons, paranoia of losing their power.

  31. @Sascha: Why is it amusing? I agree with you that structural dependence on NRSRO ratings is a bad thing. Sure, S&P is free to say whatever it wants. But shouldn’t it take into account (a) the value of the information to its customers (nil) and (b) the collateral damage they could be causing?

    Industrial corporations are “free” to dump toxic byproducts from their operations into rivers, so long as they comply with applicable regulations. Your position is equivalent to saying that it is fine for them to buy additional toxic chemicals in bulk, solely to dump them into rivers (that is, they are not the byproducts of making something), so long as they comply with applicable regulations. Sure, it might be legal, but it’s still wrong. And I’m free to point out that it’s wrong.

  32. @Del: Yes, currency risk affects interest rates. But by the same token, currency risk should affect credit ratings. In fact, currency risk does affect credit ratings: that’s why the rating agencies publish both domestic and foreign currency ratings for sovereign debt.

    So if France’s 10-year yield is higher because of currency risk, then by the exact same token, France should have a lower credit rating because of currency risk.

  33. Mr. Kwak,

    Where was the criticism when deeply troubled Greece, Spain, Italy etc were downgraded? Is Spain or Italy not analyzed enough by investors? Do investors generally invest billions in anything without analysis?

  34. Moses Herzog

    As it seems is an all too common occurrence for me, I have to answer my own question (Did that sound too arrogant??) Rather ZeroHedge blog answered my question. I’m not sure if I agree with ZeroHedge’s political commentary, but the answer is nonetheless appreciated. For anyone else who might be interested and found many media sources lacking in getting past the inertia of explaining something (only a $2 trillion error, nothing which anyone would want to specify the details on for crying out loud) past a 15 second sound bite:

    Standard & Poor’s Clarifies Assumption Used On Discretionary Spending Growth

    “New York, Aug. 6, 2011. In response to questions, Standard & Poor’s today said that the ratings decision to lower the long-term rating to AA+ from AAA was not affected by the change of assumptions regarding the pace of discretionary spending growth. In the near term horizon to 2015, the U.S. net general government debt is projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption.

    We used the Alternative Fiscal Scenario of the nonpartisan Congressional Budget Office (CBO), which includes an assumption that government discretionary appropriations will grow at the same rate as nominal GDP. In further discussions between Standard & Poor’s and Treasury, we determined that the CBO’s Baseline Scenario, which assumes discretionary appropriations grow at a lower rate, would be more consistent with CBO assessment of the savings set out by the Budget Control Act of 2011.

    Our ratings are determined primarily using a 3-5 year time horizon.

    In the near term horizon, by 2015, the U.S. net general government debt with the new assumptions were projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption – a difference of $345 billion.

    In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP).

    The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook. None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision.”

  35. James,

    Your analysis of the spread between 10 year rates is missing two important considerations. The first is that some countries such as Switzerland, Germany, U.S. and Japan (which isn’t AAA but has a 10 year yield of about 1%) are safe-haven/funding countries. When the global economy is doing poorly, monies flow into these countries and push their 10 year yields down compared to their neighbours (such as France).

    The second is the economic prospects of each nation’s economy push that nation’s bond yields. Right now Australia is the best example of this effect. Of all OECD nations, Australia is probably in the best fiscal shape with very low debt, a comparatively small deficit, a booming economy. And yet their 10 year yield is 4.64%? What gives? Well an investor in Australia can choose to invest in the Australian economy or in gov’t debt. Since the Australia is booming, investments in the real economy generate high returns. Gov’t debt has to generate a higher yield to attract funds, and hence the high rates.

    The converse is true for Japan, which has had a moribund economy for decades. Since it is difficult to find a high return in the Japanese economy, Japanese gov`t bonds are an attractive option even at low rates like 1%.

  36. OK folks. So you want a revolution. How about one bold step. Put bumper stickers on your car with the message of your choice. Be brave. Risk the scorn of your neighbors and co-workers, perhaps. Let’s see how brave you all are? I’ve noticed that stickers have gone out of style. Or people have so little bravery that they can only write on the internet.

  37. When an organization has a $2 trillion error and then goes, “Uh, we don’t care anyway” then it’s obvious that the organization’s activity is simply political. Either it is trying to influence policy, which is iffy, or it’s trying influence elections, which is unconscionable.

    In any case, a $2 trillion error that doesn’t change conclusions makes me think of a quote about people with similar political proclivities:

    “the intelligence and facts were being fixed around the policy”

  38. @btraven “There is no way S&P came out with this downgrade on their own — whether it originated with the banksters or politicians doesn’t much matter, as the end result will be the same: just another twist to the financial terrorists tactics to screw “the small people,” to protect and benefit the financial terrorists and their allies.

    This really is a war.”

    And they’re getting bolder and stupider (along with more and more modulated, calm discussions – which is nothing more than a signal of deepening sociopathy) – there is no credibility left in the role of the credit ratings agency! Of course, “…it’s my job you are after…”

    What *job*? To help suck up all FIAT *money* to the printers of the *money* who never released enough *money* into REALITY to cover the interest because they always had the intention of OWNING everything and everybody’s labor?!

    Micro-analyzing the micro-management of DELUSION…..

  39. James, it is probably better that currency risk be assessed separately from credit risk, as appears to currently be the practice, as you point out. After all, individual countries (other than the US) who issue US$ denominated debt probably can do little to affect the relative movement of the $ vis-a-vis other currencies. Similarly, a small Eurozone country may be poorly placed to meaningfully influence the Euro foreign exchange rates.
    Of course, by all means an investor in any of the bonds of the countries you cite must make an assessment of currency risk, and the extent to which one wishes to be exposed. Therefore, the simple listing/ranking you provided is very misleading from an foreign investor perspective.
    With respect to your observation that:
    “So if France’s 10-year yield is higher because of currency risk, then by the exact same token, France should have a lower credit rating because of currency risk.”
    I was trying to make the point that France’s eurobond borrowing rate is higher than Germany’s (or the other Eurozone countries you cite) probably because of the greater share of Greek Euro debt in French banks, raising the spectre of an expensive bailout of French banks. This is “credit risk” not “currency risk”. Apples and Oranges.

  40. @sharon

    “First they came for my bumper stickers?”

  41. wallyfurthermore

    “Instead, I think S&P should have just said:”

    Given a pulpit and a ‘moral’ mission (ie: arithmetic be damned), they simply couldn’t shut up.

  42. @ Carl:

    The 2 trillion “error” in the S+P’s calculations was actually a difference in discretionary spending growth rate assumptions, neither of which can be said to be more accurate than the other. Stated another way, the best prediction that the CBO can make for the total debt of the USA in 2021 is somewhere between 20 and 22 Trillion dollars. This is a mere 10% prediction confidence range, which is actually pretty dang tight as far as economic predictions goes.
    Put another way – presume that the expected debt would be 19 Trillion in 2021. Of what consequence to your 2011 actions would a +- 1 Trillion variance from this amount be? I’d say not much at all. If the goal is to reduce the overall size of the debt to somewhere around 50% of GDP (what I think S&P is really saying here), then we’re talking about needing actions with 7-8 Trillion effect. Again, the effect of a 1 Trillion prediction tolerance on policy would be zip squat.
    The Administration is being petty in its criticisms. The better argument would pertain to a sustainable level of debt and the extreme influence world financial entities have on long-term public policy these days; but the markets have already spoken, and they will not accept a compromise.

  43. Falling treasury prices? Could happen, but many professionals don;t share that that view. A crisis is good for Treasuries even with a downgrade. The Repo markets will play a role, and there will be Treasuries sold. However, lower prices will not be the cause; the mechanism is the collateral agreements and changes in haircut. In this scenario some Treasuries prices would fall relative to others if the less liquid issues are the one held as collateral.

    The de-leveraging could be from from higher haircuts, but risk measures such as increased volatility, or a general risk-off sentiment are the more likely force behind any de-leveraging

  44. Fred in Cinci

    Many are quick to shoot the messenger, but S&P is quite correct to call out the problem. The U.S. has a decades-long addition to debt, mounting entitlement payment obligations and a AA political process for keeping its fiscal house in order. In short, S&P just said the emperor has no clothes. Truth hurts.

  45. Steve From Cranbury

    Carla, let me clarify my comment.

    Here’s what I said:

    IMO a short list of demands coupled with a threat to vote out all incumbents if the demands aren’t met
    is a viable solution. For 2012, the demands ought to be:

    A Federal Government “Buy American” policy, phased in over 2 years.
    Overturning Citizen’s United, by Constitutional amendment if necessary.

    Down the road, we need to get together to figure out how we can get political parties and big money
    out of our political process. We also need to figure out how to implement policies and rules to keep our
    jobs, wind down our chronic $1 to $2 billion a day trade deficit and take back control of our governments
    at all levels.

    IMO, we need to identify goals for 2012 and goals after the 2012 election….down the road.

    We need jobs now. And we need jobs that put us on a path to manage down our trade deficit.
    The TD is $10 trillion now and is increasing at $1 to $2 billion every day. Because we have shut down over 42,000 production/manufacturing business and laid off 4.5 million production/manufacturing sin unce 2000,
    America reverse our trade deficit. If we don’t reverse it, our economy will continue to die on a withering vine of debt.

    By demanding a Federal “Buy American” program and townhalling our congress this month with this message, and again in 2012, we can put this high on the agenda. Just like the Tea Party put the Federal deficit high on the agenda.

    All of us who want to turn America around have to agree that unless we force rebuilding our manufacturing base, our economy is screwed. Without a sovereign, strong economy, our safety nets are gone. Our
    independence as a nation is gone. Right now, we have Standard and Poors trying to dictate slashing
    entitlements.

    In 2012, let’s force a real, private and public sector jobs program that can reverse the damage to the middle class and create trade deficit reducing jobs.

    Down the road, we need to focus on the “real change” we want and neither party will deliver:

    Get rid of political parties.
    Get concentrated wealth out of politics, lobbying and public advocacy.
    Pass a Constitutional amendment to explicitly say corporations and other business
    entities are not persons and forbid them a voice in our politics, our governments and our regulatory agencies.
    Create a US nation-preserving economic plan. Let our companies compete all they want overseas,
    but rule the goods and services they sell in the United States must be produced in the 50 states.
    (The Fortune 500 company I retired from decided in the early 1980s to divest in America and invest
    abroad. Why? Because America is a mature, low growth economy. Growth and profits are in South
    America and Asia.) No stimulus plan will reverse the demographic realities that stimulate our corporations to move their investment overseas.
    Create a Constitutional Convention to define the objectives and process of our Federal government
    for the 21st century. (Everybody who participates must read and sign George Washington’s 1796
    Farewell Address, with special attention to what he said about political parties and why we should steer clear of them.)
    Create a national resources policy focused on creating a domestic natural resource supply that’s sustainable. Why? Because the multi-national corporations will drive up commodity prices sky high.
    We can sustain a decent standard of living only if we protect ourselves from the global commodity wars.

    BTW, the commodity wars notion comes right out of the Dept of Defense scenarios of the world in our
    future.

  46. The government approved rating agencies did miss the Housing Bubble/Financial Crisis. But, so did virtually all of the popular financial/economic punditry, so-called think-tanks, and, it appears all of our politicians. That’s not to say there were no voices sounding a warning, e.g. Dean Baker of CEPR, among others.

    When you get that kind of mass incompetence its difficult to do much about it. At least that seems to be the case here in America.

    Having failed to purge our system of such incompetent individuals, we now find ourselves listening to their daily braying about future doom, as if there was no past. For to mention the past would only serve to point out their incompetence. Its as if there has been a collective decision to ‘forget’ – a sort of grand conspiracy to go forward with a massive lie of omission in the hope that ‘all’ will be able to retain their jobs, standing, and/or be re-elected.

    It would be nice if the media introduced the downgrade story by first stating ‘the discredited rating agency has decided … ‘ and some seem to have done just that, but this fact is quickly lost as the topic moves on to the possible consequences of such a downgrade.

    When the extortionists decided to hold the honor and good faith of this country hostage the President should have simply stated as much to the American people. He did not, instead he caved in to their demands, and in doing so gave them a remarkably powerful tool, which they have already indicated they will use again. (By the way, I don’t think they will be limiting their demands to matters of debt next time -i.e. why not go after abortion rights?)

    When Moody’s made its announcement, the President should have issued a news release stating that a discredited incompetent rating agency has decided to downgrade US debt. And go on, further stating that,

    “If you, the citizens of this great land, or anyone else for that matter, chooses to believe that Moody’s downgrade has merit, please contact us here in Washington D.C. for we’ve got a boatload of securitized mortgage products we’d like to sell you, that the same agency gave a triple-A rating.”

    Kabuki is now often used to describe the goings on in Washington. I’m all for the introduction of expanding the American vocabulary. Staying with the Japanese theme, personally, I’m hoping to hear about waves mass seppuku – kabuki with more of an edge, if you like. Which is of course unlikely, but surely a few rounds of mass resignation soes seem to be in order – starting with whomever you like.

    kc

  47. “Two Parts make a Whole?”

    “The S&P’s, “Credit Rating War Machine (CRWM)” cuts down, blows up, and cuts off America’s credit worthy legs with “Triple-A – Rated – IED’s (Improvised Explosive Devises), and ironically the the post “CRWM” wants to fit the crippled victim with a “Fiscal Prosthesis” for their bad behavior!
    “Off with Their Heads”, says I – sic the CIA, FBI, and HS on their tail for treason,… this crippling assassin (Screw the People) S&P!

  48. Correction:

    In my post (above) I wrote Moody’s, it should have been Standard & Poors.

    My apologies.

    kc

  49. Could the purpose of the downgrade been to flush out the money in treasuries, to make it available to the stock market?

  50. @Steve from Cranbury: You seem to have exhaustive prescriptions. I’m just not seeing how we’re going to meet them.

    Yes, well, I agree we need that Constitutional Amendment declaring that only people are people, and corporations do not have the rights of personhood. That alone will be devilish hard to pass and BTW are you actively working with http://www.MoveToAmend.org ?

    Have you read this http://www.nakedcapitalism.com/2011/08/james-galbraith-on-fraud-and-how-bad-economic-thinking-got-us-in-this-mess.html ? I’m sending it to all my friends and colleagues for their consideration. Are you?

    If we do not recognize that the rule of law is no more, then I don’t think we’ll get very far. And without the rule of law, I have no idea how far we can get.

    In one of my daughter favorite expressions, I think “We’re up sh*t’s creek.”

  51. Desi Girl - Doing Gods Work

    Jamie, Jamie, it is scary to think that you wrote a book on the financial crisis without knowing how leverage works in the financial system.

    Good to see you are wrong again.

    Your friend who told you about leverage/repo/collateral sounds line an intern…and you say that he knows these thinsg better than you. Ha Ha!!

    So, let me do you a favor and help you out here: Repo rates on *some* securities may go up from 3% to 5% AND will have NO impact on financial institution leverage because they are running at record low leverage. Given where we are in the cycle and record cash on balance sheets, leverage may go from 1.0x to 1.2x and will still be low.

    In the medium term there is almost no comparable security to the US treasury in terms of size and liquidity so tehre will be very little forced selling to deleverage.

    Nice, done with my good deed for the day.

  52. S&P’s actions, detrimental or not, are simply passive-aggressive paybacks for the US government taking them to task in the Levin hearings (and otherwise) related to the financial crisis. Clearly, each of the officers from each agency looked like complete worthless, sacks-o-sh*t in front of the entire world (excluding investment bankers, who looked even worse). “Our ratings are just opinions and no one should use them to make investment decisions”. Wow, anyone see a control weakness in Basil II?

    Let’s see… bank reserve requirements, per Basil II, are met if, among other things, they invest in financial instruments with a AAA rating. The rating agencies issue the ratings. Therefore, the rating agencies, to a large degree, define the pool of low risk securities available for banks to invest in. However, those same agencies are saying, “by the way… don’t make investment decisions based on what we say.”

    What a freakin racket!!! You can’t hold me responsible for anything but I’m going to effectively define your pool of acceptable securities. CDO’s… “oops, sorry bout that :-)”

  53. i don’t think consumer reports is providing a public service in the usual sense of that phrase. you’re supposed to pay for their ratings, or at least borrow their publication from an agency, such as a public library, that has paid for the ratings.

    i also don’t agree that S&P should stand aside. when it comes to this type of analysis, the more opinions the better.

    the best argument here is the kind Krugman has used: based on the way they did their analysis, and their track record, S&P simply lacks credibility.

    but why say it would be better for them not to rate a bond or other security because so many others also rate it? that’s indefensible nonsense.

  54. Moses Herzog

    Those who like to whore bonds (otherwise known as debt) for a living, you know—the skanky ones who sell their badly dressed wares, spreading disease to the lower IQ members of society (“Bond Girl” at self-evident, are you hiding from the rain under the awning of the adult toy merchant???). Meredith Whitney is still here, and Meredith Whitney still has her integrity and hasn’t sold her soul. What say ye???

    http://www.zerohedge.com/news/muni-market-prepares-hundreds-and-hundreds-downgrades-tomorrow

  55. @ James Kwak,

    Poor James, you miss the point once again. Sure S&P has been a corrupt rating agency who most likely deliberately missed the boat on the MBSs.

    But does S&P move equity markets? That’s a rhetorical question if you don’t get it. It may not move the yield because of our unusual position as a reserve and flight currency, but it sure has helped continue to depress equities and commodities worldwide. The final tally will probably be trillions more beyond the equity decline *before* the downgrade. Are trillions substantial enough for you? And yes you could say we had it coming, just like the downgrade.

    More importantly, the downgrade will further lock in an encore performance of the 1930s: i.e. force even Keynesians like you and Krugman to tighten. That’s not gonna end nicely.

    So sure, trivialize it by comparing S&P to Consumer Reports and reap the coming whirlwind.

  56. I must confess that I am stunned. It turns out that S&P did not publish the best of their economic judgment, but instead delivered a harsh blow to the pride of Americans. Somehow, the acronym AAA became a status symbol that Americans are not willing to give up..

    Folks, for Americans this must be very hard, but it all boils down to simple economics, and if everybody knew the US didn’t deserve a AAA rating, I don’t see the problem with S&P making the truth public. Actually, this is an honest action on their part, since they were probably aware of the damage such an action might cause to their business.

    I thought looking the truth in the face and taking immediate steps to correct the faults was the American way. Even if it means that your competitors are ahead of you, for now.

  57. In all due respects the answer to this is simple. The USA is unsustainable. It is a federation but acts like a unitary state.

    Local governments get special funding in aid from state governments
    State governments get special funding in aid from the federal government
    The Federal government wants special funding in aid from foreign governments (selling of bonds)

    What does the USA spend the money on? Most spending is social security (a wash since many pay for it to start with), medicare (ok medical care but not everyone lives to the age of 65), the national defense (any military has to kill, destroy and scare the other party into submission. )

    How much is to roads, bridges and expanding telecommunications? How much goes to research and development?….not much

  58. @ Ze

    Guess what – the S&P’s motives are far more sinister than what the public is aware of? Their long-term “Oligarchy Manifesto” is but a (6th-inning?) model designed and to be implemented as that of a algorithmic oblique programmed-text,… encrypted to consolidate their goal for their founding, and direct offspring’s (the original creature [Federal Reserve] from Jekyll Island has reached maturity?) being Goldman Sachs, JP Morgan Chase, Wells Fargo, and CitiGroup!
    Look for Bank of America, and Morgan Stanley to flounder as laggards because of the US downgrade. The Big Six,… Two-Big-To-Fail, will be whittled down to “Four” for now. JMHO
    Me paranoid,… you betcha?

  59. What *job*? To help suck up all FIAT *money* to the printers of the *money* who never released enough *money* into REALITY to cover the interest because they always had the intention of OWNING the fruit of everybody else’s LABOR?

    God’s work…?

    Never putting enough money into circulation to pay the interest is BEYOND morally reprehensible. It basically commits to turning the entire planet into a lunatic asylum where everyone must hone and develop skills in lying, theft and murder.

    It’s tough to get people to understand that money is issued as DEBT. Critical mass is building in this knowledge – that it is all a head game….”in the beginning there was *MONEY* and then came life” – the new religion, the new holy book….

    Stay inside your human skin for a minute and ask – WHO gave anyone permission to do such things….?

    Answer – they have the FREEDOM to create pain and suffering because “…I can…”

    So why is no one giving themselves permission to be just, fair, honest, kind, generous, thoughtful, creative, hard working…?

  60. Something the ratings critics are overlooking, the AAA should have been lowered slightly before/during / or after the 08 bailout. Politicly it could not have been done then, add more debt, and time to the mix and the fix is even more difficult. When the fix becomes politicly unfeasable ($4 trillion in cuts/10 years and immediate end to the Bush/Obama tax extensions) the fallback to lower ratings is completely justified. Just as gold being the new reserve currency, slipped under the rug of dollars quitely behind closed doors, went by without hardly a notice. My quandry is will the saftey net be built before the fix is implemented, if not,the rural depression will be one such as never to have been seen before. And cities could burn at nite from restless youth syndrome.

  61. From: A brief history of credit ratings agencies.

    In 1975, financial institutions, such as commercial banks and securities broker-dealers, sought to soften the capital and liquidity requirements passed down by the Securities and Exchange Commission (SEC). As a result, nationally-recognized statistical ratings organizations (NRSRO) were created. Financial institutions could satisfy their capital requirements by investing in securities that received favorable ratings by one or more of the NRSROs. This allowance is the result of registration requirements coupled with greater regulation and oversight of the credit ratings industry by the SEC. The increased demand for ratings services by investors and securities issuers combined with increased regulatory oversight has led to growth and expansion in the credit ratings industry.

    An Overview of Credit Ratings
    Countries are issued sovereign credit ratings. This rating analyzes the general creditworthiness of a country or foreign government. Sovereign credit ratings take into account the overall economic conditions of a country including the volume of foreign, public and private investment, capital market transparency and foreign currency reserves. Sovereign ratings also assess political conditions such as overall political stability and the level of economic stability a country will maintain during times of political transition. Institutional investors rely on sovereign ratings to qualify and quantify the general investment atmosphere of a particular country. The sovereign rating is often the prerequisite information institutional investors use to determine if they will further consider specific companies, industries and classes of securities issued in a specific country.

    Credit ratings, debt ratings or bond ratings are issued to individual companies and to specific classes of individual securities such as preferred stock, corporate bonds and various classes of government bonds. Ratings can be assigned separately to short-term and long-term obligations. Long-term ratings analyze and assess a company’s ability to meet it’s responsibilities with respect to all of its securities issued. Short-term ratings focus on the specific securities’ ability to perform given the company’s current financial condition and general industry performance conditions. (For more information see What Is A Corporate Credit Rating?)

    Conclusion
    Investors may utilize information from a single agency or from multiple rating agencies. Investors expect credit rating agencies to provide objective information based on sound analytical methods and accurate statistical measurements. Investors also expect issuers of securities to comply with rules and regulations set forth by governing bodies, in the same respect that credit rating agencies comply with reporting procedures developed by securities industry governing agencies. Understanding the history and evolution of ratings agencies gives investors insight on the methodology that agencies use, as well as the quality of ratings from each agency. The analyses and assessments provided by various credit rating agencies provide investors with information and insight that facilitates their ability to examine and understand the risks and opportunities associated with various investment environments. With this insight, investors can make informed decisions as to the countries, industries and classes of securities in which they choose to invest.

    Read more: http://www.investopedia.com/articles/bonds/09/history-credit-rating-agencies.asp#ixzz1URKgxU00

  62. @ earle.florida

    Perhaps this is all a conspiracy, but I wouldn’t be surprised if Moody’s and Fitch followed suit within a few months, especially in case the federal government were asked to guarantee the debts of states and local municipalities.

    The sooner the truth becomes public, the faster the necessary fixes can be made. For, is there any point for the gvernmenmt to buy more time, instead of doing a serious attempt at de-leveraging the country?

  63. @ James Kwak,

    Glad you thought the downgrade was nothing and am also glad you’re not managing my money.

  64. @ Ze

    It has finally come to fight or flight, or better said,… that a push has become a shove! A boxed in China will, and logically must come out of the closet, regarding its tail-wagging-the-dog methodical fiscal ideological policy. Obviously the turmoil in the US markets is trivial in comparison to what will befall China if they repatriate their foreign assets – a losing dilemma of damned if I do ,and damned if I don’t proposition.
    The US MultiNationals are fast exiting their markets over Intellectual Property (IP), “Knock-Off’s”, etc., etc., and the weakness in the Chinese Central Bank that has yet to unravel or show its trump-less hand in a slowing “Communist” backdoor world economy where a ~ 1.3 billion population has only 5%-10% benefiting or said, having prospered.
    The next positive move that hopefully the american politicians will do,… is to coalesce as a plurality and pass a restructured meaningful “Corporate Tax Law” – let’s say 15%-18% with a zero-percent tolerance of riders (absolutely no loopholes, credits, deferred, etc., etc.,? JMHO

  65. @Steve from Cranbury

    More 2012 demands:
    1) Eliminate gerrymandering of all Congressional and state legislative districts. No incumbent protections.
    2) Much stricter adherence to “one person, one vote”
    3) Eliminate filibuster abuse (i.e., make ‘em stand up & talk!) and one-Senator “holds” on legislation or nominations
    4) If we can’t repeal Citizens United by amendment, then full disclosure by statute
    5) Recreate a progressive estate tax (with generous exemptions), to prevent a permanent economic aristocracy.
    6) Bring real prosecutions against bankers involved in fraudulent foreclosures

  66. Steve From Cranbury

    Carla, thanks for your reply. Yes, I support Move To Amend and have downloaded J Galbraith’s article.

    I agree the US is up the creek. And I think only a focused, well orchestrated grassroots movement can turn this around.

    I focus on rebuilding our US manufacturing base because unless Americans can control their job base, the Multi-Nationals will continue to do it for us. To our detriment.

    That’s why I’m going to the Congressional Town Hall meetings in my area (if there are any this month) to look these Congresspersons in the eye and tell them we must have a Federal “Buy American” program now. If we can succeed in making this happen, we can then expand to other initiatives to fix our political and economic system.

    My background is as a director level Fortune 500 executive. Americans need to realize the Corporate America’s “Divest in America, Invest Abroad” globalization strategy is not new. My company adopted this strategy in the early 1980s. Result: Stagnant wages for many Americans and a slow erosion of our job base and a need to borrow $1 to $2 billion a day so we can buy shoes, toasters, clothes, tvs and just about everything else.

    Because of our cost structure, our ability to export ourselves out of this mess is limited.

    Because Corporate America has chosen to Divest in America, a higher educated workforce, even in technology won’t restore our job base. China and India are educating millions of high tech workers
    every year. Who can be hired at a fraction of US high tech salaries. And who can be educated at a fraction of the cost of a US college education.

    First, we have to take back our economy. Then reform the rules of the game for both our politics and the way we do business. Look at how unemployment is wrecking the ability of our governments to support basic programs. If we don’t restore job growth, we can’t get out of this vicious cycle which will cave not only our standard of living, but our ability to use our governments to turn things around.

    IMO, the best way to begin taking back our economy is to use Tea Party tactics to convince both political parties they don’t stand a chance of re-election if they don’t support a strong “Buy American” policy.

    We also need to get them working on the “Move To Amend” strategy.

    What the Tea Party, the NRA and AIPAC have demonstrated is we don’t need a majority to twist arms in the Beltway. If 5 to 10 million Americans emailed their Congress persons that they would vote out all incumbents into the future who don’t support “Buy American” and “Move to Amend”, we’d get some action.

    The NRA, with about 5 million members, virtually dictates the rules of ownership, AIPAC, also with millions, not tens of millions of members, virtually dictates our Mid East policy. The Tea Party plus the oligarchs are well on their way to dictating our Social Security and Medicare policies.

    The lesson is we need no more than 10 million grassroots activists focused on one or two common reforms can successfully change policy.

    It is important to make this happen in 2012, to dispel the defeatist “you can’t fight city hall” mentality which cripples American’s will to fix the mess we’re in. And it is important to show we must adopt a single or dual issue strategy or we lose our focus and our impact.

    Critical mass and focus are the keys to reform. Not a third party or primaries or fruitless appeals to reason to our representatives in the Beltway. We need a hammer. Vote out all incumbents who don’t support Buy American and Move to Amend can succeed. But only if progressives have the will and the self-discipline to make it happen.

    We need to convince MoveOn and other progressive outfits with large followings to adopt this agenda. I wish I could figure out a way to have a personal meeting with the head of MoveOn.

    Carla, let’s figure out how to co-opt MoveOn.

    Meanwhile, be sure to attend your Town Halls this August and August 2012 and make Buy American your one and only issue. Take as many of your friends as you can.

  67. @ Steve: I applaud your efforts to take back and reform this gvt. ( I can tell you have put a fair amount of thought into it) From my experience though, the farther uphill you a push a boulder, the more resistance is applied by the rEactive boulder. A good example is, on average it takes the energy of 1000 gal of gas to make a car. Rather than preserve that car far into the future, we trash it and compete to buy another from the world sources. A big reason corp America left town was from union activists who drove up wages and future liabilities, that to this day, those issues have not been addressed (just borrowed upon). To demand jobs move back to America and not address the current liabilities would not get enough support to even lift off the ground. You could help bolster a sagging economy with the idea though.

  68. James, thank you for the sanity check. Personally, I believe that the world is corrupt, kind of like humanity suffering from the equivalent of a computer virus. The major media seems to view this as within the normal spectrum of human activity, I happen to have now lived for over 65 years, and to me, it seems as if the entire political sphere has forgotten the meaning of governance in exchange for some insane popularity contest which is even more absurd than picking Miss America. When, or even can, we recover from this kind of change in the paradigm of governance, American style. It looks to me like there are some “puppet masters” behind the scenes who are trying their best for chaos. For some reason, the extremes, led by folks like Colter, Armey, Cheney, Bush, Cantor, and others, completely forgot that there was a country which inspired humanity to its very best moments, and decided that if they couldn’t have everything their way, they would simply destroy everything. Sadly, it appears that they are going to succeed.

  69. Stocks and bonds are too risky these days. Investors aren’t reacting to S&P, but belatedly to actual global economic REALITY. The S&P was a mere catalyst. Global economic collapse no longer looks the purview of doomers and fringe lunatics, does it? Flee to cash, gold, and non-USD denominated assets. Bonds (even the shortest-term US treasuries are too risky for capital preservation). Baseline Scenario is really kicking A$$ these days. Great posts and comments.

  70. Daniel Barkalow

    I think the purpose of the downgrade is not to inform people that the US political system is sufficiently broken that there is a danger of defaults; as you say, the news coverage is sufficient to make at least as good a judgment of this as the ratings agencies can make. I think the purpose of the downgrade is to avoid having ratings that disagree with what everybody knows. If S&P can’t recognize what anyone who looks at the news knows, this casts doubt on S&P’s ratings of other securities. Sure, Consumer Reports couldn’t effectively downgrade Coca-Cola, but if Consumer Reports said things about Coke that were out of line with general opinion, people wouldn’t be so willing to trust their reports. The theory is that they go through the same process regardless of whether people already know the right answer, and people can evaluate their process based on whether it comes up with the right answer in the cases that people already understand. Of course, they could just fake going through the process, since they know what it is that people know, but if they don’t come up with a reasonable answer, it just looks bad for them.

  71. Well it is nice to see James espouse a “So what?” opinion. Short-term capital markets reaction withstanding, I am hard-pressed to believe that the smart money hasn’t already discounted that fact that the US is locked in political gridlock, tepid tax revenues and high government expenditures. Short-term movements in the stock market could (and should be) attributed to a combination of rational fear (reduced government expenditures while the economy is poised at a tipping point) and stupidity (OMG S&P downgraded our debt!).

  72. jeff simpson

    @Carla: Thanks for the link to the Galbraith speech. A quote contained therein helps explain why the Dow is down 500 points today (why people want cash instead of less liquid assets). “Absolute distrust, leading to absolute liquidity preference is the incurable consequence, it seems to me, of financial fraud.”

    This is, of course, but one interpretation of today’s events.

  73. There’s a political and criminal component to this that’s barely being discussed. It’s not that Standard & Poor’s doesn’t have any clothes, it’s that their threads are all from Saks 5th Ave. The collusion between Wall Street and the ratings agencies to create the trash that was sold off to the banks and investors will lead to endless pain for the suits. Mark my words. It isn’t just people who comment on sites like this who understand that.

    How we get out of this is beyond me at this point, given the crater most banks have fallen into what with the billions in bad paper most are still holding. And outfits like Goldman Sachs are not about to stop the gaming operations given the margins they’re expected to show.

    None of it gets resolved till the jokers who did this go to jail and that hasn’t happened yet, but the outline of how it might is becoming clearer. If push comes to shove, the government may finally hammer Wall Street. No sense going down if you don’t take people with you, right? The analogy is Mexico. Having allowed the thugs to believe they could legitimately use physical violence to spread their corrupt ways, the government is now engaged in a tong war to reclaim that right for itself.

    Now map that onto our situation. Having allowed the financial thugs to believe they could use market violence in the form of worthless paper to spread their corrupt ways, the government may engage in a tong war to reclaim control of the financial system.

    Farfetched? Mabye. But something along these lines looks increasingly likely given the arrogance, stupidity and outright corruption of S & P and the other ratings agencies. They are nothing but tools.

  74. @Steve from Cranbury

    Okay, I’m always for common sense – there is NO WAY that making things in USA for USA people is *too expensive* – that is IMMENSE bs – *weird software* math.

    And if we need soaring *political* rhetoric, well, who can’t help but think that our earle from FL can restate the Declaration of Independence – if he stops having his breath taken away by the shrewdness of the Orcs :-) and their great big spider web….

    We need a USA *putin* – “….I’m not calling anyone, they’re all calling me….”

    Multinational corporations have EXTRACTED too much wealth and we’re sick of hearing how much trillions they’re sitting on in *cash*. They are WELCOME to get the hell out of Dodge. And take their rating agencies and their *for profit* health insurance companies with them…

    How many reading along got hammered with that schtick that for-profit health insurance companies used to cut off the last couple months of COBRA benefits – the “your last payment was 2 pennies short and if you don’t remedy that by noon tomorrow, you’ll lose benefits…”

    Meanwhile – 2 trillion – whoops, have mercy, anyone can make a mistake…

    I think that that kind of willingness to screw your friends, family, and neighbor doing crap at work like that 2 cent schtick is the real reason we are where we are today….and the corporate apparatchiks are not interested, NOR COMPETENT, to do work that builds wealth (greatest good for greatest number)

    So it’s NOT government – it’s your neighbor that’s the real problem.

    For a while, Grandma shared a room in the hospital with a lady who had her own private nurse to watch over her because the lady had *dementia* and was wandering around to other rooms stealing stuff…the day I was there, they brought in dinner. The lady greedily ate, and kept asking her nurse if the nurse was okay with the fact that the nurse got no dinner while she got to enjoy such a delicious one in front of her. It gave the dementia lady great happiness to eat in front of a hungry nurse with no dinner – not sure if that inappropriate behaviour was due to the *dementia*….seemed more like the inability of old people to care anymore about putting on a good face..ditto for the very rich criminals….

    Let’s hope we can get 10 million to focus on “Buy American” – the cause would be even more likely to succeed if the 10 million were people who CAN make the *stuff* we need!

    So how about that? Research and sign up 10 million USA people WHO MAKE STUFF and are willing to keep their products and business all *local* – USA only…?

    “I’m not calling anyone, they’re all calling me”

    :-)

  75. @Steve from Cranbury: A Federal Buy American imperative is a great idea. As far as co-opting Move-On — Good luck. They’re totally captured by the corrupt Democrat party. I say forget ‘em.

    Regarding “Buy American,” the only way is for the feds to initiate this. For consumers, it’s practically impossible, so little is made here any more: Buy American WHAT? Confesson: I already own a Honda Civic, and I neither can afford, nor do I wish to trade it in for an American “brand.” My Honda was made here, anyway. And the American companies are making everything overseas.

    I absolutely agree, we should be making everything we need in this society….but getting from here to there is going to be a really REALLY hard slog.

    I think we need an entirely new monetary system, accountable to the voting public. Eliminate fractional reserve banking; restrict private banks to lending out only what they have and living on the spread; take money creation back into the federal government where it belongs (and where most people mistakenly think it currently resides), and have the feds spend debt-free money in circulation to build the manufacturing and social infrastructure we so sorely need. What say you?

  76. The test pilots who strapped themselves into small cockpits at Edwards Air Force base after WW2, including the master, Chuck Yeager, had a term for what’s happening to the USA…..”augering in.”

    This is when an aircraft loses all control, and starts spinning violently in a fast, downward, and deadly trajectory, eventually hitting the ground.

    Brace yourself, my friends at Baselinescenario, all I am seeing is that airplane.

  77. Mr Kwak,
    Why is it that a declining bond yield is requiring some institutional investors to deleverage?

    There might well be some of that going on (rather than just margin calls), given the way the stock markets have been plunging. But in my ignorance, I can’t think of a causal relationship.

  78. Why not down grade all of these incompetent politicians and their personal credit?

    http://americaspeaksink.com/2011/08/bad-credit-from-very-bad-politicians/

  79. @Carla – “I absolutely agree, we should be making everything we need in this society….but getting from here to there is going to be a really REALLY hard slog.”

    Really? HISTORY on so many occasions proves you WRONG. Need me to put together the FACTS and examples? Let’s take another arm of *health care* – big pharma – in that article called “6 creepy new weapons” – pharma bragged about how quickly they could put together the *weapon*….

    “I think we need an entirely new monetary system, accountable to the voting public. Eliminate fractional reserve banking; restrict private banks to lending out only what they have and living on the spread; take money creation back into the federal government where it belongs (and where most people mistakenly think it currently resides), and have the feds spend debt-free money in circulation to build the manufacturing and social infrastructure we so sorely need. What say you?”

    THIS idea – “an entirely new monetary system” is what is NEVER going to happen. LIFE operates by laws of physics (or how God does things :-)) and those LAWS are contrary to the new age holy book – “….in the beginning there was *MONEY* and then came life….”

  80. Steve from Cranbury

    Carla, I agree. The Federal Buy American policy is IMO the most important thing we can accomplish in 2012. Of course, we need it right now. The politicians won’t touch this unless we force them Tea Party/NRA/AIPAC style. Time to hit the Town Hall meetings with Buy American Now signs.

    We also need to support MoveToAmend and demand this as well.

    We must be successful in forcing a Buy America initiative. You’re probably right about MoveOn.

    We need at least 5 million Buy America or else activists. What websites should we try to get behind this
    with one voice? Maybe Firedoglake and Naked Capitalism. What other websites should we talk to?

    We must support, but not be distracted by, a Federal stimulus program to rebuild our infrastructure.
    We need infrastructure improvement and the jobs it can generate.

    But we must also remember, government created jobs do nothing to turn around our $1 to $2 billion dollar
    a day borrowing for imports. We’ve got a $10 trillion cumulative trade deficit to turn around.

    We should not try to fight global investment by our corporations. We should just make sure they pay
    fair taxes. But we must insist that all goods and services they sell in the US not only to the Federal Govt,
    but all Govts and all consumers be produced in the 50 states (not American Samoa or some other bogus
    location).

    Progressives have to get focused on America’s balance sheet. The totality of our assets and liabilities,
    our imports vs exports, our dependence on foreign energy and other natural resources, the quality of
    our human capital (I know that sounds cold, but we forget that unemployment is lost productivity).

    In short, the globalized corporations have zero interest in the survival or quality of life in America or in our democratic ideals or the values of our Constitution. In fact, the are using the World Trade Organization and the International Monetary Fund and the World Bank to subvert our national laws and regulations.

    We cannot stop them globally, but we could force them to “Make It In America” and to adhere to our laws
    and regulations. We’ll need, as you say, a complete re-engineering of our political, financial and non-financial economic systems to make this happen.

    My hope is Americans can take back control of our country and use our national resources, all our assets,
    to build a nation that truly reflects the democratic ideals of self-rule and an economic system that is socially decent and fair and economically and environmentally sustainable.

    If we don’t, the global corporations will strip mine what’s left of our balance sheet and move on to greener pastures abroad. As they have been doing for at least 3 decades.

    IMO, we need as a people to do a thought experiment. If we were the major stockholders in America, not only its businesses, but its commons and political processes, what brighter future would be re-engineer for ourselves?

    Progressives have to stop focusing on laundry list of “issues” and deal with the structural political and economic issues that are currently ruining us. We have to stop supporting outfits like MoveOn, that are fronts for a political party. We have to create a coalition of websites to support that will take our message to
    their millions of surfers/members. We have to stop pretending our political leaders just “don’t understand” but if we appeal to them, they will reform. They won’t.

    IMO, even if Obama had kept and aggressively supported all his rhetoric about real change, the Democrats and GOP would have kneecapped him. The primaries aren’t the answer.

    We need to get rid of political parties altogether. But in the meantime, we need to force them to create jobs in the US private and public sectors. Just as we forced foreign car companies to build factories in America.

    Critical mass — 5 to 10 million of us demanding jobs and overturning Citizen’s United is a necessary first step. Beyond that, we need to create a focused plan or we’ll just dissipate our efforts in a laundry list.

    No focus, no force and the politicians and their corporate masters win.

  81. Steve from Cranbury

    On “we can’t afford to make it in America”. This is nonsense. We can afford to buy cars made in America.

    Of course, consumer prices will go up. That’s a sacrifice we need to make to create an economy that builds the “Wealth of Our Nation”, not the wealth of the global corporations.

    Yes, we need to re engineer our banking and financial system, how we create and use money as well as our
    economic processes. But not as much as you might think. Hyundai and BMW make and sell cars right here in America. We can do this with any product or service we choose.

    We have of course to think also about wages. Our wage structure is so dysfunctional that it forces about 40 percent of American households into economic semi dependency. “The Market” has proven it will do everything to force an increasingly unequal distribution of wages, goods and services.

    So we have a choice. Live large for another decade on the cheap toasters and TVs at Wal Mart or work together now to re-engineer our system to it works for America and all Americans.

    Yes, the power elite will fight us tooth and nail. The politicians will have no part of it unless we create a revolving door by voting out all incumbents who don’t cooperate on our very focused, step by step agenda.

    The main problems are citizen apathy and defeatism and lack of an alternative vision of what our future could be with we the people, not corporate American, created our political and economic processes.

    Now, go to your Town Halls and demand jobs.

  82. @Steve from Cranbury

    “We’ll need, as you say, a complete re-engineering of our political, financial and non-financial economic systems to make this happen.”

    Is that what Carla said…? Funny, I thought we’ve been talking about how Nihilism destroyed everything that worked well beyond imagination in the REAL WORLD in order to SUCK UP via *websites* and *weird programming* (virtual reality world) all the FIAT $$$ released as debt – a flash crash – and now you all own everything in USA ON PAPER, so to speak – why would you want to re-engineer something that worked exactly as planned?

    Sorry, but I need an example of a *non-financial economic system* that needs yours and Carla’s re-engineering….? Genomes? Seeds? Bees? Rain? Atmosphere? Atoms?

  83. @Steve from Cranbury: Do not pass “Go.” Do not collect $200. But DO go to http://www.nakedcapitalism.com and watch the Dylan Ratigan rant Yves Smith posted there. Bear with the shouting, it’s worth it. And you can contact me directly, if you wish, at MacsScholarship@aol.com.

  84. Here is an idea for a new fiction film, called “The Rise and Fall of the Dollar”, taking place between 2011-2020:

    Act 1: Secret preparations for inflation. All people in the know gradually sell their dollar-denominated assets to someone else, probably a foreigner. This may take 3-4 years. As the debt is being exported, there is a mounting cry about US assets being controlled by foreigners. Various steps are taken to make other alternatives (Euro, Yen, gold) seem riskier than the dollar. In the meantime, Americans holding ARM’s gradually swap them into fixed-rate mortgages as long as interest rates are still low.

    Act 2: The coming of the beast. The fed raises its inflation target to 5%. The dollar tumbles. By a lot. By that time, only foreign pension funds hold the US debt. Everybody else has diversified into commodities, or a basket of currencies from developing and/or exporting countries (China, Brazil, Australia). As a result, Americans are hurt by rising prices, but do not lose their pension savings.

    Act 3: Happy end. US exports pick up, because of the weaker dollar. Interest rates shoot up, but are left artificially low by the fed. that forces banks to re-capitalize in front of the coming wave of defaults. A recovery finally takes place, perhaps in 2017 or so. Angry foreign pension funds can only blame themselves for having been so stupid to believe in the dollar.

  85. Back to the topic, S&P downgrade. They have a point, but instead of downgrading the U.S. debt, they should have make a new AAAA grade and moved some things there.