mykeystrokes.com

"Do or Do not. There is no try."

Standard And Poor’s Attempt To Influence The Political Debate

In what appears to be an attempt to influence the political debate in Washington over federal government deficits, Standards & Poor’s rating firm downgraded U.S. debt to negative from stable. Yes, the raters who blessed virtually every toxic waste subprime security they saw with AAA ratings now see problems with sovereign government debt.

The best thing to do is to ignore the raters — as markets usually do when sovereign debt gets downgraded — but this time stock indexes fell, probably because of the uncertain prospects concerning government budgeting. After all, we barely avoided a government shutdown earlier this month, and with S&P. joining the fray who knows whether the government will continue to pay its bills?

Mind you, this has nothing to do with economics, government solvency or involuntary default. A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.
Similarly Chairman Alan Greenspan said that Social Security can never go broke because government can meet all its obligations by “creating money.”

Instead, sovereign government spending is constrained by budgeting procedure and by Congressionally imposed debt limits. In other words, by self-imposed constraints rather than by market constraints.

Government needs to be concerned about pressures on inflation and the exchange rate should its spending become excessive. And it should avoid “crowding out” private initiative by moving too many resources to our public sector. However, with high unemployment and idle plant and equipment, no one can reasonably argue that these dangers are imminent.

Strangely enough, the ratings agencies recognized long ago that sovereign currency-issuing governments do not really face solvency constraints. A decade ago Moody’s downgraded Japan to Aaa3, generating a sharp reaction from the government. The raters back-tracked and said they were not rating ability to pay, but rather the prospects for inflation and currency depreciation. After 10 more years of running deficits, Japan’s debt-to-gross-domestic-product ratio is 200 percent, it borrows at nearly zero interest rates, it makes every payment that comes due, its yen remains strong and deflation reigns.

While I certainly hope we do not repeat Japan’s economic experience of the past two decades, I think the impact of downgrades by raters of U.S. sovereign debt will have a similar impact here: zip.

By: L. Randall Wray, The New York Times, April 18, 2011

April 19, 2011 Posted by | Bankruptcy, Banks, Congress, Debt Ceiling, Debt Crisis, Deficits, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Ideology, Politics, Social Security, Standard and Poor's | , , , , , , , , , , , | Leave a comment

Standard And Poor’s Is The Broker Who Lost All Your Money: There Is No Real Risk Of Default

What does Standard & Poor’s action lowering the U.S. outlook to “negative” mean? What are the likely ramifications of the U.S. deficit and debt? I do not want to conflate two completely different issues, so let’s take each in turn.

First, I have stopped paying any attention to anything that S&P says or does. Its performance over the past decade has revealed it to be incompetent and corrupt – it sold its AAA ratings to the highest bidder. It is the broker who lost all your money, the girlfriend who cheated on you, the partner who stole from you. Since the portfolios we run never rely on its judgment or analysis, we simply do not care what it says about credit ratings.

But big bond managers like Bill Gross of Pimco do matter – he invests hundreds of billions of dollars. We pay close attention when smart managers like him announce they are out of the Treasury market, which he did last month.

Many people misunderstand the U.S. deficit. First, it is stimulative to both the economy and the markets. Look at what happened under Reagan and Obama and most of Bush II – the economy recovered from recession and the markets rose along with the deficit.

Second, Social Security is fine. Sure, the retirement age will go higher, there will be means testing, and the income cutoff for contributions ($106,000) will likely double. But it will remain solvent. Medicare is much trickier, as the United States pays two times what most countries pay for health care but gets lesser care.

The current debate about deficits looks like more politics. Look at the voting records of those posturing about the debt. The “deficit peacocks” voted for new entitlements (the prescription drug benefit — Medicare Part D), went along with a trillion-dollar war of choice in Iraq, and supported (for the first time in U.S. history) a major tax cut during wartime. I find it hard to take their deficit noise as a bona fide fiscal concern.

After Standard & Poor’s missed the greatest collapse in history – indeed, they helped create it by rating junk mortgage backed securities Triple AAA – they are now over-compensating. As I mentioned on The Big Picture, there is an old Wall Street joke about analysts: “You don’t need them in a Bull Market, and you don’t want them in a Bear Market.” That especially seems apt with regard to S&P.

The deficit has been with us for a long time. Since investors are continuing to lend money to Uncle Sam at exceedingly low rates, there does not appear to be any real fear of a default. That is what matters most to bond buyers — and it’s why I never care what S&P thinks on this.

By: Barry Ritholtz, The New York Times, April 18, 2011

April 19, 2011 Posted by | Congress, Consumers, Debt Ceiling, Debt Crisis, Economic Recovery, Economy, Federal Budget, Financial Institutions, Financial Reform, Government, Government Shut Down, Lawmakers, Medicare, Politics, Social Security, Standard and Poor's, Wall Street | , , , , , , , , , , | Leave a comment

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 | 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 | , , , , , , , , , , | Leave a comment

   

%d bloggers like this: