Tuesday, August 09, 2011

No Standard and Poorly Executed

Finally someone with balls and brains to put one and one together. SP could be fried for this. The central thesis is that on being told that there was a $2 trillion error, they went ahead with the downgrade. Now, $2 trillion is a lot of money. Its 1 with twelve zeros ... $2,000,000,000,000. One thousand billion dollars equal 1 trillion. Call it a rounding up error, but SP basically just brushed off that miscalculation and went ahead with the downgrade.


Two, you put USA on a possible downgrade prior to the debt ceiling vote, which would have lowered long term debt of the US. What would have happened if there was no agreement on the debt ceiling? Would SP have gone ahead and down it to single A??? Yet, after the debt vote was passed, SP went ahead with the downgrade, why? What kind of watching brief did you guys have? If things did not look better with the vote, then you should have done it months back.

S&P maintained its AAA rating on the U.S. during George W. Bush’s presidency as the national debt grew to pay for wars in Afghanistan and Iraq, tax cuts in 2001 and 2003, Medicare prescription drug benefits and the bailout of Wall Street. Together, those costs added $3.4 trillion to the national debt.

Obama’s stimulus package will total JUST $830 billion by 2019, according to a May 2011 Congressional Budget Office report, half the cost of the Bush tax cuts and less than two-thirds of what has been spent on the wars in Iraq and Afghanistan. The U.S. went from budget surpluses averaging $139.7 billion from 1998 through 2001 to a deficit of $1.29 trillion last year, Bloomberg data show. The shortfall peaked at $1.42 trillion in 2009, the first year of Obama’s presidency.

“Clearly the ratings downgrade was a ‘political decision’ in the sense that the politics explained the timing of this, because the numbers have been irrefutable for a decade,” said Robert Litan, vice president for research and policy at the Kauffman Foundation in Kansas City, Missouri. “It gives an enormous amount of ammunition to the Tea Party. They said the deal didn’t go far enough and they’ll say ‘see.’”

Guess who was among the first to laud SP's downgrade? Bill Gross of PIMCO, the world's largest bond fund. Gross said in an interview March 11 this year that he eliminated government-related debt from his Total Return Fund in February because investors aren’t being adequately compensated for the risk of quickening inflation. Gross had cut the holdings of government-related debt to 12 percent of assets in January, down from 63 percent in June, the highest since the fund held an equal amount in October 2009, according to data on the company’s website. Prior to the cuts, Pimco’s $237 billion Total Return Fund last held zero government-related debt in January 2009. 


Was there knowledge by Bill that he knew of SP impending ratings downgrade? Strangely, since he sold Treasuries, bond prices have been going downhill. However, in July, he reverses ... the world’s biggest bond fund boosted its Treasury positions to 10% of the fund at the end of July, up from 8% at the end of June. 

It is a dangerous mix, the biggest bond fund manager would definitely have good links with all ratings agencies. Maybe the US government should look a lot closer to the ties that bind. Of course, its still hypothetical, but SP's determined move brings forth a lot more questions than clarity that the downgrade was supposed to do.... And guess what happened after the downgrade... Treasuries surged!


On the S&P Downgrade
by Dean Baker
The decision by Standard & Poor's to downgrade U.S. government debt reflects its own failings as a credit rating agency.  It says nothing about the creditworthiness of the U.S. government.

The Treasury Department revealed that S&P's decision was initially based on a $2 trillion error in accounting.  However, even after this enormous error was corrected, S&P went ahead with the downgrade.  This suggests that S&P had made the decision to downgrade independent of the evidence.

It would be difficult to find any basis for questioning whether the United States will be able to repay its debt.  With investors willing to hold trillions of dollars in long-term U.S. debt at interest rates well below 3.0 percent, the financial markets certainly do not seem to share S&P's concern.  It is also noteworthy that interest rates fell in the wake of S&P's decision, providing further evidence that the markets do not take S&P's assessment seriously.

It is also striking that the downgrade comes in the wake of an agreement that would actually lower the country's projected debt burden.  If S&P was actually looking at the prospects for the U.S. debt it seems that the more obvious point at which to have made the downgrade would have been last December when Congress and the president agreed to extend the Bush tax cuts.  It is difficult to understand how a decision to increase indebtedness does not lead to a downgrade, while a decision eight months later to reduce indebtedness does.

The country's long-term budget projections do show excessive deficits.  However these are driven in large part by projections of explosive growth in private sector health care costs.  The Congressional Budget Office's projections imply that in 2030 the cost of providing care in the private sector for an 85-year old will be more than $40,000 a year (in 2011 dollars).  Health care costs of this size would impose a crushing burden on the economy regardless of how they are divided between the public and private sector.  Remarkably, S&P never mentioned health care costs as a concern in its lengthy downgrade statement.

Of course, since U.S. debt is payable in dollars, and the U.S. government controls the printing of dollars, it is not clear what a downgrade could even mean.  As long as the U.S. government knows how to print dollars, it will always be able to make the interest and principal payments on its debt.

Clearly the S&P downgrade was not based on the economics of the country's debt.  S&P has a horrible track record of incompetence in the housing bubble years -- they gave Lehman Bros. AAA rating just before its collapse -- and the accounting scandals of the stock bubble years.  This downgrade should be seen in this light.  It is not a serious assessment of the nation's fiscal condition.

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C.  He is the author of several books, including False Profits: Recovering from the Bubble Economy.  The statement above was issued by CEPR


James said...

about time too. One can't print his way to prosperity, if that is the case, Zimbabwe is probably the richest country in the world.

SureWin said...

I always wonder y d whole world is dictated by a group of idiots from S&P.

I also always think that some sort of conspiracy theories are working behind the scene by these idiots for thier own benefits. They can just short and long the markets before their "judgement day" and hence they will always be able to see the silver lining in crisis..