United States loses AAA credit rating from S&P • Hacker News Board

Re: United States loses AAA credit rating from S&P

#61

Post by TomOfTTB » Sat, Aug 06, 2011, 1:26 AM UTC

mbreese wrote: post #59

TomOfTTB wrote: post #55

Earlier quoted context omitted.

Again this is based on the same logic that people will treat the U.S. Government the same way they'd treat any other person and that's just not going to happen. If the U.S. falls back into recession we'll take everyone with us. Other countries know this. Banks know this. Institutional Investors know this. Increase the interest rate on the U.S. and you'll trigger an increase on the U.S. consumer while exacerbating the…

Some institutions are obligated (by charter or contract) to only buy AAA rated bonds. That's why it's a big deal... Now that being said, I have no idea how this would work in practice.

I'm sorry but that's bull. Anything can be changed. Contracts can be revised and even charters can be updated by a Board of Directors. If you hold a significant amount of U.S. Bonds you aren't going to ditch them on S&P's say so. You're going to call a meeting of the Board of Directors or Trustees or whoever and decide based on your own judgement.

The whole point of a rating agency is to provide you with research that you couldn't get based on your available resources. But every economist in the world is a resource on the U.S. Government's viability. You can turn on CNBC and get 24 hour coverage of it.

So the U.S. is a special case and the ratings agencies don't mean all that much in regards to it.

Re: United States loses AAA credit rating from S&P

#62

Post by jpdoctor » Sat, Aug 06, 2011, 1:26 AM UTC

TomOfTTB wrote: post #55

latch wrote: post #46

For those who aren't sure why this matters there are two things to note. First, interest will go up. US Bonds are now considered riskier than they were before. This means investors in US Bonds will expect to collect more interest due to the greater risk they are taking. Instead of paying China and Japan 3% (for example) on $1 trilion (each), the US will now have to pay 3.5% (and climbing). Of course, the higher the i…

Again this is based on the same logic that people will treat the U.S. Government the same way they'd treat any other person and that's just not going to happen. If the U.S. falls back into recession we'll take everyone with us. Other countries know this. Banks know this. Institutional Investors know this. Increase the interest rate on the U.S. and you'll trigger an increase on the U.S. consumer while exacerbating the…

> Again this is based on the same logic that people will treat the U.S. Government the same way they'd treat any other person and that's just not going to happen.

It's not a matter of how "people" treat it. Many funds are prohibited from holding anything other than AAA. Those folks will now be selling bonds.

For those that haven't looked at the math of bonds: When the price of a bond goes down (as it does when there are many sellers), the yield goes up. That yield is what the US Govt will be paying on future issued bonds, more or less.

Good luck to us all. We're gonna need it.

Re: United States loses AAA credit rating from S&P

#63

Post by quandrum » Sat, Aug 06, 2011, 1:26 AM UTC

geuis wrote: post #52

(Reference: http://www.federalbudget.com/ ) Steps to recovery: 1) End all offensive military actions overseas. Finish winding down Iraq and abandon Afghanistan wholesale. These actions have cost several trillion dollars over the last 10 years. We can't get that money back, but we can stop spending more. 2) Defense spending is in the top 3 highest budget expenditures. Cut it by 1 third across the board. Maintain impor…

Why would you cut Social Security? It's in no danger.

And frankly, medicare wouldn't be if we killed the payroll tax cap. I never understood why it's ok for payroll taxes to be regressive.

Re: United States loses AAA credit rating from S&P

#64

Post by joezydeco » Sat, Aug 06, 2011, 1:28 AM UTC

wtallis wrote: post #35

chailatte wrote: post #30

Took those lazy rating agencies a while. - 1.6 Trillion budget deficit - 14 Trillion national debt - 55 Trillion US total debt - 115 Trillion Unfunded liabilities - 17% U6 unemployment - 45.8 Million Americans on Food Stamps - 52 Million Americans without health insurance - 1/2 of mortgages are underwater - 63% labor participation rate, lowest since early 80s - -5% in Real medium household income in the last 10 years…

The S&P rating is only an assessment of risk in the US Treasury bonds, not a general rating of entire US economy.

Listen to the Planet Money podcast. Lots of factors are considered, including political ones.

Re: United States loses AAA credit rating from S&P

#65

Post by pitdesi » Sat, Aug 06, 2011, 1:28 AM UTC

An answer to the question we're all wondering- "What happens now" answered well in a planet money from a couple of weeks ago: http://www.npr.org/2011/07/18/138164761/what-happens-if-u-s-...

TL;DR - "I'm not sure it will have any impact. When you look at the bond market — 10-year U.S. Treasuries, for example — where is it today? In the light of all this hype about debt ceilings and possible defaults, it's at 2.93 today, so this is an extremely low interest rate in both nominal and real terms. It means that everyone in the world is willing to hold these bonds and is not the least bit worried about the possibility of a default. So, investors haven't changed their view of the creditworthiness of the United States at all, and I don't think they're likely to in the foreseeable future." -Mark Weisbrot, co-director of the Center for Economic and Policy Research

Re: United States loses AAA credit rating from S&P

#66

Post by mdda » Sat, Aug 06, 2011, 1:32 AM UTC

silverlight wrote: post #11

If the government that produces the reserve currency can't hold up a AAA rating, what can? The idea that anything else should have a AAA rating if the US gov't doesn't seems a little ridiculous to me on face value.

The implication is really the other way around. The USD was the reserve currency in part because of the credibility of the US government's financials (and also because of amount of trade, etc). But obviously, the US has taken a huge beating credibility-wise recently.

After all, Sterling used to be the world's reserve currency : things change.

Re: United States loses AAA credit rating from S&P

#67

Post by Alex3917 » Sat, Aug 06, 2011, 1:32 AM UTC

latch wrote: post #46

For those who aren't sure why this matters there are two things to note. First, interest will go up. US Bonds are now considered riskier than they were before. This means investors in US Bonds will expect to collect more interest due to the greater risk they are taking. Instead of paying China and Japan 3% (for example) on $1 trilion (each), the US will now have to pay 3.5% (and climbing). Of course, the higher the i…

This also triggers the automatic review of the debt rating for various states and hundreds of small towns across America. A lot of cities across the US are going to lose their ability to borrow cheap money because of this, not just the federal government.

Re: United States loses AAA credit rating from S&P

#68

Post by grourk » Sat, Aug 06, 2011, 1:34 AM UTC

thematt wrote: post #29

fletchowns wrote: post #18

Didn't S&P maintain that Lehman Brothers had a favorable rating up until they collapsed? And in the subsequent congressional hearings the rating agencies simply responded that the rating is their opinion. Why do people put so much faith in these ratings when they have proven to be not very useful in evaluating the risk associated with investing in an institution?

People put faith in them because not everyone can hire an army of experts to evaluate all possible investments. S&P supplies their ratings to life insurance companies, pensions funds and even municipal governments. These entities don't have the resources to employ that expertise in-house, so they rely on companies like S&P and Moody's to give them guidance.

S&P and Moody's don't exactly employ an "army of experts" either. It's a few analysts making a rather subjective judgment and voting. (Literally, a few).

And the investors who are actually buying US debt don't rely on ratings agencies to give them guidance, and do in fact have expertise in-house to evaluate these things.

As has been mentioned elsewhere on this thread, institutional investors don't treat US bonds like any other, subject to triggers and rules like AAA-only. It's an exceptional case that is treated differently than the others, and one rating agency's opinion is not going to make as big an impact as people seem to think.

It comes down to this: where else would they put their money?

Re: United States loses AAA credit rating from S&P

#69

Post by aaronbrethorst » Sat, Aug 06, 2011, 1:34 AM UTC

winestock wrote: post #9

So it begins. A quote: "The outlook on the new U.S. credit rating is negative, S&P said in a statement, a sign that another downgrade is possible in the next 12 to 18 months." I.e., things are going to get a lot worse before they get worse. Time to bring this back to a hacker's perspective. Is there any way to "hack" the system so as to get government finances to within commuting distance of sanity? Or have recent ev…

Letting the Bush tax cuts expire next year, and winding down operations in Iraq and Afghanistan would go a long way to balancing the Federal budget.

As far as reducing the deficit goes, I have less insight into this. Except that making the Federal government's budget revenue-neutral is a critical first step.

Re: United States loses AAA credit rating from S&P

#70

Post by usaar333 » Sat, Aug 06, 2011, 1:34 AM UTC

latch wrote: post #46

For those who aren't sure why this matters there are two things to note. First, interest will go up. US Bonds are now considered riskier than they were before. This means investors in US Bonds will expect to collect more interest due to the greater risk they are taking. Instead of paying China and Japan 3% (for example) on $1 trilion (each), the US will now have to pay 3.5% (and climbing). Of course, the higher the i…

I doubt it will be that significant. Japan has been at AA- from all rating agencies forever (and has vastly higher debt) and pays lower rates than the US. Besides, as you pointed out there are so few large countries with AAA from all agencies.

Besides, there's no new information released today, other than what some analysts at S&P think.