By Marshall Auerback, a hedge fund manager and portfolio strategist
So the ratings agencies have reared their ugly heads again. David Beers, head of S&P’s government debt rating unit, announced Friday night that S&P has downgraded the U.S. credit rating for the first time, from AAA to AA+. It’s a sham: S&P’s whole analytical framework reflects ignorance about modern money. If the US government, Treasury, and the Federal Reserve, capitulate to this outrageous act of economic extortion, it will effectively be sanctioning a beer hall putsch by the rentier class.
Justifying its decision, Standard and Poor said “political brinkmanship” in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.” It said the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings in the future.
“It’s always possible the rating will come back, but we don’t think it’s coming back anytime soon,” said Beers.
Of course, the response from Treasury was equally inane: “A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman said last Friday.
$2 trillion, $4 trillion, who cares if the S&P is math-challenged? It’s irrelevant! The notion that the US can arbitrarily summon up the ability to register $4 trillion in “savings” demanded by Standard & Poor as the price for upholding America’s AAA rating is nonsensical, as it ignores the impact that the withdrawal of income will have on the overall economy and, by extension, the size of the government deficits that the ratings agencies regularly decry. Credit ratings are based on ability to pay and willingness to pay. A sovereign issuer of its currency, which issues debt in said currency – like the US – always has the ability to make US dollar payments. Whether it chooses to do so is another matter. But that’s a matter of politics, not economics.
The Obama Administration would have been on much stronger ground if they challenged the constitutionality of the debt ceiling because, if successful, it would have eliminated this threat to the US AAA credit rating once and for all in terms of precluding an UNWILLINGNESS to pay. You wouldn’t have a bunch of extremists threatening a default on funds which were already appropriated and spent. The ballot box, not the debt ceiling is the way to solve this kind of dispute.
There is, therefore, an opening for Moody’s to gain a competitive advantage over S&P. Moody’s can announce that whereas any issuer of its own currency can always make nominal payment on a timely basis, ability to pay is absolute and beyond question for the US government.
Therefore, when reviewing the US government’s credit rating, only willingness to pay is a consideration. And given the recent Congressional proceedings regarding the debt ceiling, an entirely self imposed constraint.
Moody’s could therefore put the US on notice with regard to willingness to pay and ignore the flawed economic reasoning which characterized the rest of S&P’s rationale for the downgrade.
To be fair to Mr. Beers, his agency did specifically cite the political brinkmanship of a number of US Congressmen, who seemed far too inclined to contemplate the option of default as a means of securing greater spending cuts on the part of the US government. But that wasn’t the full story. S&P placed particular emphasis on the size of the cuts, implicitly suggesting that larger cuts would have superseded the political questions. That’s intellectual dishonesty at its worst.
Not that it matters here, but for the record, the S&P (along with Moody’s and Fitch) covered themselves with glory during the housing bubble, rating toxic subprime junk as AAA rated paper. Not only were the agencies politically corrupted by virtue of their incestuous ties to Wall Street, but criminally incompetent as well. Yves Smith gives a perfect illustration of the latter:
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.
Here are a few questions the S&P ought to have considered before it issued its debt downgrade:
Is government spending so high that it is competing with private sector spending plans? Certainly not – substantial amounts of plant and equipment remain idle, unemployment remains at depression like levels, and there is ample capacity for firms to expand if they want to do so.
Businesses, however, are constrained by inadequate demand for their output, a phenomenon which would become even worse if the US were to follow the prescribed level of cuts advocated by S&P to retain its AAA rating with these economic blackmailers. That is a real cost (and it also drives those “horrible” government deficits higher, as tax revenues plunge and social welfare expenditures via the automatic stabilizers rise).
Is government issuing so much debt that it is causing interest rates to skyrocket? Not in the slightest. Rates have actually gone NEGATIVE in term yields under 12 months over the past few weeks (so much for the notion that the end of QE2 would drive rates sky-high). We have a deflation problem, not inflation. And the political dysfunction that Mr. Beers describes could have easily been avoided through a number of options which would not have left the country in the hands of irrational deficit terrorists. As Joe Firestone notes:
Treasury can cease issuing long-term bonds, and sell only three-month bonds. Three-month bond interest rates are generally controlled by overnight rates for bank reserves, and overnight rates can be driven down to near zero by flooding the banks with excess reserves. That’s basically how the Japanese keep their bond interest rates near zero, and that’s how we can do the same.
Firestone is right: A sovereign government like the US only sells securities in order to drain excess reserves to hit its interest rate target. It could always choose to simply leave excess reserves in the banking system, in which case the overnight rate would fall toward whatever rate the central bank offers to pay commercial banks for excess overnight reserves.
As far as the short term impact goes, yes, US bonds are down in response to the news of the downgrade. How long lasting is this likely to be? For historical comparison, consider the case of Japan (thanks to Bill Mitchell): In November 1998, the day after the Japanese Government announced a large-scale fiscal stimulus to its ailing economy, Moody’s Investors Service began the first of a series of downgradings of the Japanese Government’s yen-denominated bonds, by taking the Aaa (triple A) rating away. The next major Moody’s downgrade occurred on September 8, 2000.
Then, in December 2001, Moody’s further downgraded the Japan Governments yen-denominated bond rating to Aa3 from Aa2. On May 31, 2002, Moody’s Investors Service cut Japan’s long-term credit rating by a further two grades to A2, or below that given to Botswana, Chile and Hungary. This at a time when the Japanese economy was then almost 1,000 times the size of Botswana’s, had the world’s largest foreign reserves, $446 billion; the world’s largest domestic savings, $11.4 trillion; and about $1 trillion in overseas investments.
In a statement at the time, Moody’s said that its decision “reflects the conclusion that the Japanese government’s current and anticipated economic policies will be insufficient to prevent continued deterioration in Japan’s domestic debt position … Japan’s general government indebtedness, however measured, will approach levels unprecedented in the postwar era in the developed world, and as such Japan will be entering ‘uncharted territory’.”
“Uncharted territory” – well, the last time anybody looked, the Japanese government was still comfortably issuing 10 year government debt at around 1%. That Japan’s debt is largely domestically held is irrelevant: the denomination of the debt, NOT the debt holder is the key consideration.
There are only two sectors to issue bonds to, the domestic private and international. US and Japan are on opposite ends of the spectrum, with the US issuing a lot to the latter (though still more domestically in fact), and Japan issuing a lot to the former. The interesting thing is that this hasn’t mattered at all in the determination of rates–the key difference affecting relative interest rates between the US/Japan and, say, the periphery countries of the euro zone, has been the nature of the monetary system–the US/Japan are currency issuers under flexible foreign exchange, whilst the member states of the European Monetary Union are not. As Professor Scott Fullwiler indicated to me in a recent email exchange, “For the former, rates follow monetary policy; for the latter, rates follow markets’ perceptions of default risk. This is why for the former credit rating downgrades are complete monetary non-events, like QE. Note further that if the int’l sector were to stop buying US debt, this just means that the US trade balance improves and the breakdown of governmnet debt sales starts to look more like Japan’s.”
To argue otherwise is to ignore the actual causation of the transaction, which is that China exports something to the US in exchange for dollars, and then that money goes into their checking account at the Federal Reserve. It’s called a reserve account because it’s the Federal Reserve, and they give it a fancy name. But in reality it is a checking account, just like you or I use. Now China has 3 choices with what they can do with the money in their checking account. They could spend it and buy real assets in the US, which would be great for our economy, or they can put it into another currency (say, euros), in which case the dollar declines, which enhances our export position, or they can put it in another account at the Federal Reserve called a Treasury security, which is nothing more than a savings account. In other words, the bond purchase, if it occurs, comes at the end of the transaction and actually ‘funds’ nothing.
Economist Warren Mosler has noted on numerous occasions that China and others buy US Treasury securities primarily to support the dollar versus their own currencies, and thereby drive exports to the US, and not because they are looking for safe investments per se. That is, it’s a consequence of their drive for ‘competitiveness’ and their desire to net save in US dollars. It takes two to tango. And with no Treasury securities China would be forced to buy state debt, corporate debt, euro debt (say, Greek bonds?), equities, etc. which is highly problematic for them for a variety of reasons.
A final question for Mr. Beers: Is government spending so high that the dollar is crashing in international exchange markets? No. Certainly the dollar has its ups and downs — we’ve got a floating exchange rate and it is supposed to go up and down. So let’s assume that our dollar falls because China no longer wishes to net save in greenbacks. In fact, this has been occurring over the past several months and the bond market has gone up during this period. If this were to go on long enough, the ultimate impact would be that our external balances improve significantly (as does the likely desire of foreigners to accumulate cheap US assets via FDI), because our exports increase, which means the current account deficit goes down and less bonds are available for China to ‘fund’ us”.
Now that’s not the way I would go as a growth strategy, as it entails a “race to the bottom” as far as wages go. Moreover, if budget deficits are not allowed to grow large enough to enable private domestic agents reduce their overall debt levels, then the economy will remain mired in its stagnant state. With austerity being pursued everywhere it is a fool’s hope to think that net exports are going to swing enough to save the day. But from a straight sectoral balances point of view, IF we did export more, these increased exports would mitigate the ability of countries like Japan or China to net save in our currency. By definition, this would also correspondingly reduce their holdings in US Treasuries.
Floating rates float. This is not synonymous with economic and financial degeneracy, as our economic moralists, or the gold bugs seem to imply. Over the past 10 years, the Australian dollar has fluctuated between 50 cents to $1.08 against the greenback. The last time I looked Australia was still surviving and thriving. One can also consider the more extreme case of Russia in 1998, during which its entire financial system imploded and the ruble lost two thirds of its external value against the dollar. Yet the currency itself did not “evaporate” and the ruble remains Russia’s currency unit of account today.
And for those who argue that “markets rule”, it’s interesting to see the initial response: money flooding into the yen, despite the fact that Japan has a credit rating lower than the US (remember, neither Moody’s, nor Fitch, followed the S&P downgrade) , in a country which has a public debt to GDP ratio twice that of the US (not that we think that’s a horrible thing per se). As for the Swiss franc, the other beneficiary of this move, it is worth recalling that but for the Fed opening up dollar swap facilities with the SNB in 2009, the Swiss franc wouldn’t be worth the value of a piece of toilet paper that you scrape off your shoe in Grand Central Station.
It is questionable how much of the furor surrounding the downgrade is ideological and how much is really a misunderstanding (an “innocent fraud” in the words of John Kenneth Galbraith).
Governments around the world have been led to believe that they need to issue bonds and collect taxes to finance government spending, and that good policies should be judged by their ability to enforce fiscal austerity. Mainstream economists and ratings agencies such as S&P have guided policymakers into imposing artificial constraints on fiscal policy and government finances, such as issuing bonds when running deficits, debt ceilings, forbidding the central bank to directly buy treasury debt, allowing the markets to set interest rates on government bonds, etc. While last Friday’s downgrade per se probably won’t do much, if anything, to interest rates, growth, and employment, ratings agencies like the S&P reinforce the current deflationary state of affairs because their perverse rating actions simply reinforce efforts for further substantial deficit reduction and a balanced budget amendment. Ironically, if the siren songs of “sound finance” are followed, we will get exactly the outcome now predicted by the likes of Michelle Bachmann: the US WILL become like Greece.
43 comments
Comments are closed.
Thanks for the posting. Its the following sentence at the beginning of the last paragraph that got my attention:
“Governments around the world have been led to believe that they need to issue bonds and collect taxes to finance government spending, and that good policies should be judged by their ability to enforce fiscal austerity.”
This summary of the purpose of government is lacking, IMO and being ALWAYS judged by the ability to force fiscal austerity is very short sighted policy position at the least and morally bankrupt at the margin.
By all means, lets have a public discussion of the purpose of government…is it for the rentiers or the rest of us? The pendulum is pegged on the rentiers end of the scale currently and while it might look like societal failure from our perspective, from their perspective they have consolidated their power and are just culling the herd for better control and less stress on resources.
I will admit that my international perspective is through reading rather than boots on the ground experience but I see the rest of the world ready to call America on its “behavior” and I say more power to them because the current America that I see is a fascist imperial bully prick and needs to be taken down.
What’s extraordinary is the amount of ground covered by this post without any room for the term Free Market.
Search it yourself.
Every aspect of monetary policy is a carefully controlled.
Here’s something I lifted from Zero Hedge just now…
G7 Says Will Take Every Action to Stabilize Financial Markets
G7 says it will commit to secure liquidity in market
G7 will cooperate closely on currency market actions
G7 says it will be in close contact next few weeks
G7 says disorderly moves in markets hurt economy
G7 says currency rates should be decided by markets
The last point is Kabuki for idiots.
Contagion spreads; it doesn’t dissapate. It infects larger and larger bodies until everyone is dancing like zombies.
Please read ECONNED, I discuss at some length that “free markets” is an intellectually incoherent, internally contradictory construct. That makes it the perfect vehicle for propaganda. If you believe in it, you are a mark.
I have read ECONNED – it was extremely valuable. My comment wasn’t intended as a criticism, but merely to point out again the free market fallacy.
OK, sorry, I just get riled whenever I see “free markets”, even when intended as a critical usage. It tends to reinforce the construct
Is there a book I can read that shoots down “free markets”?
A free market is the place you spend free money.
Isn’t it?
Free money isn’t worth usually worth much, though.
It is questionable how much of the furor surrounding the downgrade is ideological and how much is really a misunderstanding (an “innocent fraud” in the words of John Kenneth Galbraith).
My understanding of what JKG was saying is that “innocent fraud” results from being ideological.
Is government issuing so much debt that it is causing interest rates to skyrocket? Not in the slightest. Rates have actually gone NEGATIVE in term yields under 12 months over the past few weeks (so much for the notion that the end of QE2 would drive rates sky-high).
You’re mixing two incompatible thoughts. As you know, QE involves no debt issuance, so why are you talking about it in a paragraph whose topic is debt issuance? Also, why are you talking about a 12 month horizon when QE2 did not last 12 months? And which yields are you looking at? 10 year and 30 year yields did go up because they were not monetized as part of QE2. The yields of treasuries that were subject to Fed purchases under QE2 did go down, which was to be expected.
I’m actually a big fan, Mr. Auerback. Please don’t mar the validity of what you (and MMT) have to say by overplaying your hand, as most MMTers seem wont to do.
Governments around the world have been led to believe that they need to issue bonds and collect taxes to finance government spending, and that good policies should be judged by their ability to enforce fiscal austerity.
Very interesting phrasing. Governments “have been led,” but who did the leading? Neoclassical economists? And who led the neoclassical economists to that conclusion? Is everybody a victim of some unseen and overwhelming intellectual force?
Can’t you just attack the fallacy of privately-controlled debt-based money head on? Why excuse the priests of that religion as being misled? Don’t they have a responsibility for continuing to insist upon immoral (even criminal) policies when they are clearly so? To accurately call somebody out for doing evil is not the same thing as accusing them of being evil. Criminal, yes. Evil, no.
The longer you apologize for them, the longer they will persist in doing evil deeds. As an enabler, you are an accomplice.
Sure, but the bigger question is why other people are listening to them, not why they are spouting their crap. This is the point Klein misses to some degree in The Shock Doctrine, even though it follows from the story she tells there. Yes, top-down imposition of Chicago Boy economic policy happened because dictators or small elites forced this upon a population that had no clue what was going on, but in more ‘democratic’ countries (with a free — for sale? — press) they first needed to sway public opinion, and make them receptive to these theories. Perhaps this was facilitated by forcing everyone to take economics 101 classes, including the journalists? Lord knows reading capital with them would’ve made them less receptive to that crap..
Oh well.
they first needed to sway public opinion, and make them receptive to these theories
They do very little swaying. They use newspeak and club the population over the head with the usual tools of fascism. There’s you, and there’s them, and we know what they do. We know what they will do to you…
I thought the Shock Doctrine hit all the high notes. It was never really refuted, either.
I think her book is great, it’s just that it seems to me that she puts slightly too much emphasis on Friedman’s (and later Sachs’s) role, and too little on the people asking for their ‘opinions’ (or the people forcing Sachs upon them).
Dear Foppe;
Journalists reading Das Kapital? Since when has a Liberal Education been a prerequisite for journalism? Next we know, they’ll have to start using dialecticalism to structure their ‘arguements!’
Also, how many universities teach ‘Classical’ Keynesianism, versus the Good Old Boy Chicago School? (I thought I read somewhere that attendance, even as a ‘drop in,’ at the LSE automatically disqualified one for employment at News Corp.)
If the US government, Treasury, and the Federal Reserve, capitulate to this outrageous act of economic extortion, it will effectively be sanctioning a beer hall putsch by the rentier class.
I don’t understand who’s the target audience for a lie like this. Even if you’re trying to educate people who still believe in the good faith of the government, so that you might want to be gradual in describing what kleptocracy really is, still how does it ever help to repeat the lie itself?
Tao,
I’m not conflating 2 thoughts. The only reason I cited the QE example is that I recall that many of the same “experts” who now give legitimacy to the S&P downgrade (not all, but many), also expressed absolute confidence that QE was a form of “financial repression” which, when concluded, would allow rates to return to a “natural”, “market oriented” level which in turn would be much higher. Bill Gross, in fact, made this point when the US 10 year was yielding 3.5%. The reasoning was based on a flawed understanding of monetary operations.
Likewise here with the S&P downgrade. And really, I didn’t invoke Modern Monetary Theory to make my point. The broader issue was the intellectual dishonesty of the S&P decision. SPENDING IS IN NO CASE OPERATIONALLY CONSTRAINED BY REVENUES OF ANY KIND. ANY CONSTRAINTS ON SPENDING ARE NECESSARILY SELF IMPOSED. THE QUESTION OF ABILITY TO PAY IS MOOT.
So why is the S&P then talking about $4 trillion in cuts as a means of enabling the US to retain its AAA rating? That’s besides the point. That was the main thrust of the argument.
As for the “free market” comments, I do have one “free market” idea – let’s abolish the ratings agencies and let everybody do their own private credit analysis. How’s that for a radical thought, especially for those of you who seem to think I’m a Marxist of some sort. :-)
Indeed, and it is a sad fact that you aren’t. ;) (Although I’m unsure why Marxists would want to allow privately owned agencies to have so much market influence, but I digress.)
… China and others buy US Treasury securities primarily to support the dollar versus their own currencies, and thereby drive exports to the US, and not because they are looking for safe investments per se. That is, it’s a consequence of their drive for ‘competitiveness’ and their desire to net save in US dollars
If the Chinese have the de facto fixed exchange rate system, how can Chinese Renmimbi appreciate in dollar terms if they choose not to park their dollar earnings in US Treasuries?
They’ve gone from a fixed rate to the dollar peg to a wider band v. a basket which is still IIRC 60% dollars. They made this change because they were at risk of having Congress insist that Treasury brand them as a currency manipulator, which would have caused all sorts of hell in the WTO. So they’ve allowed some appreciation to appease Congresscritters.
Basically, if they want to keep running a trade surplus with us, which they clearly do, they have to keep buying dollars.
Yves,
Congratulations on the Greenwald gig. The guy is a national treasure, and he obviously keeps like company.
Well, another way to look at this is that the downgrade is a first step on chucking the agencies out of the loop (as an important, rather than just a marginal, player). IIRC one of the first things various regulators did was to immediately take out the AAA provision on US debt. ECB played this game for a few years now, so I think it’s only a matter of time when the govts (who, ultimately, control the regulators) decide that the ratings shouldn’t be used in regulation (which never really made sense in the first place, for a number of various reasons).
Indeed, every government are going to write in their own legislation that being a recognised rating agency means they must rate the country’s bond as top notch. Otherwise, the “rating agency” is going lose its licence to operate and the full force of anti-terrorist measure going to be used against it? This seems like basically what the political elite in the US seems to believe they should act.
Even better – it would make them entirely ridiculous.
Rating agencies had some sense of purpose when they were rating (some) corporate debt.
They should have never been included in regulation at the scale they were – if indeed at all. Using a broad brush like AAA rating in Basel(1/2/3) for so disparate products like J&J debt, US sovereign debt and highly-structured note based on some vaporous assets (whateevr they might be at the time) just leads to investor laziness. Hey, it’s AAA, so why care? CYA. If it’s not embedded in regulation, people can decide how much to trust it and how much their own due dilligence to do. If it’s regulated, any investment theory will be modified by the impact of the ratings, any agreements rewarded, any disagreements punished – regardless of whether they are reality based or not.
It said the bipartisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings in the future.
Is this a deliberate misquoting going on? You missed the important phrase “in our (S&P’s) view …”. Now you might disagree with their view, but stating their view as an absolute fact you are erecting a straw-man and thus invalidating your entire argument.
Now China has 3 choices with what they can do with the money in their checking account. They could spend it and buy real assets in the US, which would be great for our economy, or they can put it into another currency (say, euros), in which case the dollar declines, which enhances our export position, or they can put it in another account at the Federal Reserve called a Treasury security, which is nothing more than a savings account. In other words, the bond purchase, if it occurs, comes at the end of the transaction and actually ‘funds’ nothing.
No! The first option was never there — remember China-Unocal deal anyone? The responsibility lie solely with the US in forcing China to take choice #3 (or #2 since there isn’t a choice #1).
Anyway, it is clear what is going on is that the debt is being monetrised, hence the downgrade from S&P is a non-news that should have happened a long time ago. Seriously, what actually is the AAA stand for? The only way to justify an AAA on US tresuries would be an instrument that is “safe” (as in no default risk) but is not “safe” (as in you lose money in real terms)?
Option 1 is there, but in a limited way.
For example, word is that the Chinese are buying farm lands in the U.S. But they’re buying it in smaller allotments — holdings that they may plan to integrate to some greater or lesser extent later — to avoid triggering native reaction.
That land strategy has already been executed in Australia and the natives are restless.
Does S&P’s downgrade signify the business class’s displeasure – lack of confidence – in the political class? We tend to equate the two but upon closer analysis they don’t always march in lockstep.
The BUSINESS CLASS: We wanted FOUR TRILLION DOLLARS in cuts and YOU didn’t deliver. What’s the problem?
The POLITICAL CLASS: Get real! There’s simply no way the American people, our constituents, will accept cuts in Social Security, Medicare etc to the tune of $4 trillion. At least not yet. Let this sleeping dog lie.
Besides what do you want to do, blowup everything? And then come running to US to bail your sorry asses out AGAIN. This time around it won’t be that easy – or haven’t you noticed?
Chill out. We’ll get there. It’s just going to take a bit more time. Simply doing nothing is the way to go. High unemployment will do the rest. And whipped up hysteria about the deficit makes any talk of stimulus DOA. Nobody is listening to the “functional finance” folks or MMTers. Hell, there’s only half a dozen or so in Congress who even know what it is… A few more years of this economic recovery and the American people will come around. You really don’t think they’re going to vote for “socialism” do you?
Americans want their government run like their households. Some cockamany idea about a balanced budget. Let’s keep it that way. Besides the interest on outstanding credit has got to be worth billions. Easy money if there ever was any… So don’t get impatient. It’s not like your hurting.
By the way, I’m up for reelection… You wouldn’t desert me now in “our” hour of need, would you? We’re in this together, right? It’s not a question of ends per se but the means… we can iron our differences out.
Cui bono? Could the real reason for the downgrade be a subtle attract against municipalities and pension funds thus forcing more tea party type cut backs in the states and creating a boom for the rentiers.
First, I’m glad that some entity called the lunacy in Washington what it is–and scored it accordingly–even if S&P is less than a perfect messenger.
Second, is “modern money” like the “new economy” of the 1990s?? We all know how well that worked.
It’s a sham: S&P’s whole analytical framework reflects ignorance about modern money.
‘Modern money,’ Lilguy, is like the ‘modern woman.’
A man who professes to understand either of them is a gold-plated fool.
It’s a two-fer: Pointess snark AND sexism!
Thanks; I’m honored!
The portmanteau neologism for the toxic combo is ‘snarcastic.’
AH HA HA HA …
“Beer hall putsch”?! Marshall’s problem is that he’s so damn mild-mannered. I wish for once he’d come out and really say what he means.
Marshall ‘Modern Money’ Auerback:
World’s largest bond manager:
http://www.bloomberg.com/news/2011-08-08/gross-praises-s-p-s-spine-as-buffett-says-rating-company-erred.html
WHO YOU GONNA CALL??
Bill Gross is a bond fund manager. Have you ever considered that he might be talking his own book?
Of course. And Gross’s remarks should be discounted accordingly.
On the other hand, half an hour ago CNN played a clip of A. Greenspan making the same point you did: ‘We can always print the money to service Treasury debt; therefore default is impossible.’
Whose book is Greenspan talking? Presumably, that of the bank cartel which he headed for 17 years.
In contrast to the 19th century, when banksters wanted to be repaid in specie of the same purchasing power they lent, today they’ve learnt to live with and thrive from inflation, which destroys the middle class.
I prefer Gross’s self-serving agenda over Greenspan’s, thanks.
So are TIPS still AAA rated?
I’d have thought that the word “credit” in the credit rating would be a sort of a givaway as to what risk they are meant to capture.
Leaving aside the “modern monetary” theoretical issues which many will disagree about and which won’t be resolved today, what I found outrageous is that instead of, say, advancing an argument about a debt to GDP ratio or some such measure, to be arrived at by whatever means we *democratically* (or, at least “democratically”), determine as a nation, they attempted to dictate $4 trillion in cuts” per se.
This is NOT an ostensible “rating” but transparent meddling in the national political process.
And not just the US national political process, but the political process of every other nation faced with similar issues which, thanks to S&P’s prior criminal collusion with mass fraud, is (or soon will be) pretty much all of them.
“Governments around the world have been led to believe that they need to issue bonds and collect taxes to finance government spending, and that good policies should be judged by their ability to enforce fiscal austerity.”
And the argument from some economists why politicians have to be fooled in this way is that they can’t be trusted with the fact that they don’t need to balance budgets and have to issue bonds, taxes and so on, they will start spending like drunken sailors.
I have a resistance to accept that, but the resent crises in USA and Europe at least have proved the point that our politicians are not very cleaver and it’s highly doubtful if they can be trusted. Now there is empirical evidence from the post war years that our politicians can act responsible and sane, there is hope, but the ones we have today is a sorry lot.
I wonder which (post-WWII) politician(s) you would regard as “can act responsible and sane”. There weren’t any off the top of my head — every one of them had some moments of insanity.
As I wrote elsewhere about this post, the putsch happened a long time ago. The top 10% own 90% of the stock and bond markets and 70% of the country. They own the politicians, and so the government. It was a slow but inexorable coup that has been going on for 35 years.
As I have said many times, kleptocrats don’t fear a crash. They fear revolution. A crash if anything extends the scope of their looting via bailouts and attacks on entitlements. It increases their wealth relative to everyone else’s. The S&P move is a sign of their confidence. The kleptocrats are becoming more overt in their activities because they know they can.
Marshall, I readily admit to being ignorant of most aspects of finance. However, you note that a currency crash would be one sign of excessive government borrowing. While it is a tad difficult to define a dollar crash in a globe of impaired currencies, isn’t the fact that the dollar index is currently around 74 (rebounded from 71 a week or so ago) a strong sign that currency debasement has in fact occurred? Of course this isn’t Zimbabwe or Wiemar, but bucky is hurtin. Personally, I consider the downgrade to be a bad joke – U.S. debt should have been downgraded as soon as the U.S. started buying junk to save the financial system, but in truth, this is all kabuki – the downgrade was pure politics. I hope the authors were all long equities and took a bath this morning.
Debasement of the US dollar?
A dollar goes farther in buying US residential real estate than it used to, so in that sense it has strengthened.
I guess you’re talking of metals which have no industrial use but which shine mighty purty.
And I hope that the authors were in cash.
I like to see people doing well, even if I’m not.