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Standard And Poor’s Should Be Embarrassed

The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.

The Standard & Poor’s rating firm should be embarrassed. If there is any political judgment at work here, it is S&P. falling for politically motivated scare mongering. But given its track record with mortgage securities and collateralized debt obligations, why should we be surprised to see a rating agency relying on conventional wisdom rather than analysis?

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

Every time Japan tried to lower its public-debt-to-gross-domestic-product ratio by cutting spending, the resulting drop in economic activity actually made that ratio worse. We are seeing the same results in Ireland and Latvia. The United Kingdom tried the same experiment 10 times in the last 100 years, and every time it got the same results: cutting spending to reduce budget deficits results in a fall in G.D.P. that makes the debt burden worse, not better.

The remedy should be to get private sector debt loads down via encouraging debt restructuring and write-offs, and using well targeted fiscal stimulus to offset the impact of those efforts. But S&P instead would have us do the economic equivalent of trying to cure an infection by using leeches.

Misguided cures killed a lot of patients and are killing a lot of economies.

By: Yves Smith, Writer for Naked Capitalism. Original article appeared in The New York Times, April 18, 2011

April 19, 2011 - Posted by raemd95 | Capitalism, Congress, Conservatives, Corporations, Debt Ceiling, Debt Crisis, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Ideology, Lawmakers, Lobbyists, Media, Mortgages, Politics, Pundits, Standard and Poor's | Debt, Debt Default, Financial Institutions, Financial Ratings, GDP, Inflation, Japan, Markets, Private Sector Debt, Securities, United Kingdom