Standard and Poor's downgrade of U.S. government debt captured headlines across the country and around the world. It is a newsworthy event, but primarily as another colossal failure by a major credit rating agency.
First, it is worth mentioning the important background here. S&P, along with the other credit rating agencies, rated hundreds of billions of dollars of subprime mortgage backed securities as investment grade. They were paid tens of millions of dollar by the investment banks for these ratings. We know that concerns were raised by their own people about the quality of many of these issues. This was at the least astoundingly incompetent. It was quite possibly criminal.
This raises the question of whether S&P fears an investigation and possible prosecution. In such circumstances the desire to curry favor with powerful politicians could certainly influence their credit rating decisions. There are also rules affecting the credit rating agencies in the Dodd-Frank financial reform bill. The desire to have these rules written in a favorable way could affect the credit rating agencies' decisions. It would be nice if we could just assume that the credit rating agencies make their rulings on an objective assessment of the evidence, but we can't.
Let's look at the evidence. S&P made a big point of citing the fact that the debt deal did almost nothing to slow the growth of Medicare and other entitlements, obviously alluding to Social Security. S&P surely knows that Medicare's cost growth is driven by projections of explosive growth in private sector health care costs. The projections it relies upon from the Congressional Budget Office show that the cost of providing health care to an average 65 year-old in the private sector will be almost $20,000 (in 2011 dollars) a year by 2030. Of course, this will make Medicare unaffordable if it proves true, but this projected explosion in health care costs will be devastating for the U.S. economy even if we eliminated Medicare and other public sector health care programs altogether.
If S&P were being honest, it would have written about the need to fix the U.S. health care system. Instead it talked about the need to cut Medicare. Of course, if U.S. health care costs were comparable to those in any other country in the world, then we would be looking at massive surpluses in the long-term, not deficits.
The reference to Social Security also cannot be supported. The program is financed by its own designated tax. Under the law, if benefits exceed the money raised by the tax, then they are not paid. If S&P assumes that Social Security will add to the deficit in future years, then they are assuming that Congress will change the law in a way that no one is now proposing.
It is also worth noting that the projected increase in Social Security as a share of GDP over the next 30 years is 1.6 percent. This is roughly the same as the increase in the annual military budget since the days before September 11th. An unbiased credit rating agency would not be highlighting one increase while ignoring the other.
There are other problems with the S&P downgrade. U.S. government debt and its derivatives (e.g. the $5 trillion of mortgage backed securities issued by Fannie Mae and Freddie Mac) are the backbone of the U.S. financial system and indeed the world financial system. If U.S. debt is in fact less creditworthy, then all the banks and financial companies that rely on its value should also be less creditworthy. Yet, we didn't hear of J.P. Morgan, Goldman Sachs and the rest being put on the watch list for a downgrade. Why not? Perhaps this is because S&P doesn't take its own rating seriously.
Finally, what does the risk of default on U.S. government debt mean? The debt is issued in dollars. That means it is payable in dollars. The U.S. government prints dollars. This means that if for some reason the government was unable to tax or borrow to raise the money to pay its debt then it could always print it. This may carry a risk of inflation, but S&P is not in the business of making inflation predictions, they are in the business of assessing the likelihood that debt will be repaid. (Of course if they are worried that inflation will erode the value of U.S. debt, S&P would also have to downgrade all debt denominated in dollars everywhere in the world.)
In short, there is no coherent explanation that can be given for S&P's downgrade. This downgrade was not made based on the economics. We can only speculate about the true motive.
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Robert Kuttner: Triple-A Idiots
Jeff Reeves: Don't Panic: The U.S. Credit Downgrade Changes Nothing
S&P downgrades US credit rating from AAA - Yahoo! Finance
S&P downgrades U.S. debt - CBS News
S&P Downgrades US to AA | The Big Picture
S.&P. Downgrades Debt Rating of U.S. For the First Time - NYTimes.com
S&P's reasoning itself was not flawed, there is a real problem in Washington. America cannot operate with a significant portion of our lawmakers saying "no" to what should be a procedural vote turned into economic brink of disaster. However there are many ways the US could get by to pay our debt (cough*14th Amendment*cough) even without a straight debt ceiling raise; granted they aren't pretty, but we pay our debts. S&P's reasoning showed serious anxiety surrounding our political system, but no actual logic to increasing our riskiness of not paying our debt.
Our economy needs stability right now, and neither the Tea Party nor S&P is working with the rest of the adults in the room to provide that.
Yes the US could coast for a short period of time, maybe, but the financial picture will not get any better, and likely much, much more difficult.
There needs to be whole change on spending priorities, on revenue sources along with political will to do the things that are necessary to get America back in the black.
Clearly the President of the US does not have a clue on what to do, and it appears the Congress is still stuck in a time when America did not have a problem. But the issue is even more challenging when one considers the financial status of some of the US States, which also needs major re-focus.
In general, I think the S&P rating is absolutely correct. It appears however that the political climate is so polarized that really nothing will be solved, except for the United States to continue its slide.
http://www.plewto.com/#crumble - A shady company making world changing decisions, gee what does that sound like?
Oh this - http://www.plewto.com/#domination that is what it sounds like. Why do people eat up everything they see and hear? Why does everyone want to see this country and this president fail? Don't they realize that it will have consequences on them since they LIVE in America? I am so tired of these scare tactics from the media. It is old, it is time to report truthful reports and the positive ones.
I would favor declaring S&P irrelevant and go about hammering down some strict regulations regarding their slanted field of endeavor. Fat chance (for now). It is quite probable elements of congress willingly invited and anticipated this development by one or more rating businesses to likewise further socially devastating agendas in the on-going effort to plunder what remains of national assets and feed the engorging fires of financial houses that will only be content when all is drained.
In the Summary of the 2011 Annual Reports (http://www.ssa.gov/oact/trsum/index.html), the Social Security Boards of Trustees refers to the "$49 billion deficit last year [2010] (excluding interest income) and $46 billion projected deficit in 2011". The key point is the "interest income" that the Trustees note. Earlier SS surpluses are invested in Treasuries. Treasuries are government debt. The interest that the SS earns on its Treasuries is added to government debt. SS tax revenue not immediately distributed constitutes a triple tax:
- the original tax
- taxes to pay for the interest received on the Treasuries in the SS Trusts
- taxes to redeem any Treasuries cashed from the SS Trust
S&P isn't there to fix the health care system either. They analyze the projected costs of Medicare and see the program will go broke. They look at Social Security, which the author fails to mention is now paying out MORE than they take in, and see the problem with that. Yes, the US Government can print money to pay the debt - further devaluing the dollar and the value of a long term investment in US Treasuries.
S&P are ANALYSTS - you can disagree with their analysis all you like. Whether YOU like it or not, there are people out there that pay them for their recommendations and will invest money accordingly.
Here is an iron law of economics: Anything that can't go on, won't go on. You can argue with that law all you like. The law won't care.
Next, if Congress is serious, let the Bush tax cuts lapse. Get that revenue in while cutting programs. Maybe the federal government has to re-examine what it has gotten into. But you know as well as I do, when the cuts come to special programs and paying of those crony private contractors well you just can't let go of those.