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

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

#71

Post by mdda » Sat, Aug 06, 2011, 1:37 AM UTC

localhost3000 wrote: post #26

These are the same guys who rated subprime mortgage backed bonds AAA. How the rating agencies still have any credibility is completely incomprehensible to me. I hope someone in the press has the wherewithal to make this point.

So are you saying that the US shouldn't have been AAA? Or that S&P should be regulated so that its hands are tied behind its back?

While the {S&P, Moodys, Fitch} sub-prime department obviously got completely ahead of itself modelling-wise, the corporate and sovereign departments have a lot of credibility : partly because they haven't been trying to assign values to 'a whole new way of doing things (this time it's different, etc)'.

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

#72

Post by winestock » Sat, Aug 06, 2011, 1:38 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…

You're more liberal than conservative. I'm more conservative than liberal. Bless your heart, I agree with all of your points. At the end of the Cold War, other conservatives were making the same noises that you're making now. For their pains, their careers were destroyed by the people who run the current mainstream conservative movement. Let's take a look at those points of yours.

Points 1 & 2. Cut defense spending and all of the cool people will call you an isolationist. Sure, argue rationally all you want; the name will stick. Also, remember that the United States is bound by treaty to defend more than two dozen nations. That includes keeping bases in some of those nations. Those treaties will have to be renegotiated. Those nations will have to increase their own defense spending. Many of those nations have budget problems of their own. Have fun.

Point 3. Touch social spending and the cool people will call you a heartless bastard who cackles at the sight of starving widows in between gulps of baby orphan blood. Sure, argue rationally all you want; the charge will stick. Of course, this doesn't solve the money problem. Iceberg? What iceberg?

Point 4. Social Security is the third rail of American politics: If you touch it, you will die. Sure, argue rationally all you want. It will help as much as it ever has.

Long story short, the bureaucracy rules us. The administration of administrators who administer the other administers who supervise the people in charge of those who actually get real work done cannot make any concessions to reality. It would be like Gorbachev loosening the grip of Communism; one exit through the Iron Curtain and it's all over.

The Cool People will double down. They will continue to double down until it is physically impossible for them to continue doing so.

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

#73

Post by ohyes » Sat, Aug 06, 2011, 1:39 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…

Don't think it this really matters. The US still has the strongest economy of pretty much anyone (even with recession).

There isn't going to be a massive dumping of US bonds.

The AAA credit rating is helpful, but is only used by certain investors, and those big enough to make a real difference have their own assessors of risk.

I think the cutoff for the smaller guys to be legal to invest in is something like AA-. We aren't in danger of that. We'll probably be like AA+ or something.

Hopefully the US will quit spending so much on military and raise taxes on the ultra-rich to even things out, but who knows.

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

#74

Post by cma » Sat, Aug 06, 2011, 1:40 AM UTC

augustflanagan wrote: post #57

thematt wrote: post #23

Earlier quoted context omitted.

That's because Japanese debt (up to this point) has been primarily financed by its own citizens, life insurance and pension funds. These are more likely to accept sub-AAA rated bonds and support their own government than external investors are.

Isn't most of the US debt also financed by its own citizens?

Yes, about 70% of it.

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

#75

Post by ericd » Sat, Aug 06, 2011, 1:42 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…

One thing to note, I think the strength of our currency is at least partly based on the large amount of military power behind it, and the promise of stability that it brings.

Basically, it went from being backed by gold to being backed by power and promise of restraint in printing more. I guess we've largely given up on the restraint side, though.

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

#76

Post by bmelton » Sat, Aug 06, 2011, 1:42 AM UTC

_delirium wrote: post #36

seldo wrote: post #16

Earlier quoted context omitted.

This is by far the biggest problem. I don't think anybody realizes how huge a sell-off that's going to be if the institutions apply their rules about AAA debt to US bonds (a big if, as others have noted). A sell-off of bonds would make it more expensive for the government to borrow money, which would further accelerate the expansion of the deficit. The deficit is the primary driver of the downgrade, so an acceleratio…

Treasuries act as a money store for large institutions that I think would be hard for them to replace in practice. They use T-bills in particular as more or less a jumbo-sized version of an FDIC-insured bank account. Where would they move that money to? I.e., who else provides a similarly safe account where you can deposit $50 billion? Can't be to a bank account, because all the major banks have even lower ratings. T…

You could, for example, move your money to Canadian treasuries, which are AAA rated, couldn't you?

I am admittedly learning much of this as I read, but it seems to me that a large concern would be the amount of money that might simply shift out of our economy to economies with better (safer) credit ratings.

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

#77

Post by scott_s » Sat, Aug 06, 2011, 1:42 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.

Ratings are a factor in financial-industry regulations and in internal policies at financial institutions. But almost all of these regulations and policies treat a AAA rating the same as a AA rating. So a downgrade from AAA to AA would trigger little or no forced selling, Arora said. An official at Vanguard, the big mutual fund company, told me this week that "a downgrade from AAA would not trigger any events inside our funds."

From Planet Money's blog, http://www.npr.org/blogs/money/2011/07/27/138738198/3-reason...

The full podcast, "Would a downgrade matter?", is an excellent listen: http://www.npr.org/blogs/money/2011/07/28/138721364/the-tues...

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

#78

Post by pyoung » Sat, Aug 06, 2011, 1:42 AM UTC

jpdoctor wrote: post #62

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…

> 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…

It's a little more complicated than that. Treasury bonds are actively traded on secondary markets. The 'price goes down, yield goes up' generally refers to secondary markets. The concern for the U.S. govt isn't the secondary market. It is the primary market where they auction off bonds to raise money to fund operations. In the primary market, the U.S. treasury issues a certain number of bonds in order to raise a specified amount of money. Investors bid on the bonds, and the best bid (i.e. lowest interest rate) wins. With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.

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

#79

Post by imcqueen » Sat, Aug 06, 2011, 1:42 AM UTC

I just got a NYTimes news alert that S&P is in fact holding off on downgrading the US based on the math error that was discovered.

Did anyone else see that come through? Is NYT just behind a little?

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

#80

Post by j_hightower » Sat, Aug 06, 2011, 1:43 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…

"Given China's rise, its wise long-term to keep a presence in the region."

Why?

China will surpass the United States in soft and hard power eventually. This is demographically and economically inevitable. Even sooner, if not already, China will become an unshakable hegemon over all of Asia. So why fight it in the most expensive and futile ways possible, i.e., by maintaining the fiction that we will be able to exercise any sort of long-term military power in Asia?

It's time we focused on our economic power, and not our military power. The former is a necessary precondition of the latter, and we're acting as though it's not.