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Just the Facts: S&P's $2 Trillion Mistake

treasury.gov

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Re: Just the Facts: S&P's $2 Trillion Mistake

#71

Post by btilly »

nextparadigms wrote: post #39
16s wrote: post #32

Earlier quoted context omitted.

They deserve to be called out. This isn't their only mistake . These clowns are the same bunch who kept giving AAA scores to complex mortgage-backed securities during the housing boom. http://www.bloomberg.com/news/2011-04-13/moody-s-s-p-caved-t...

By the same logic, why do all the other rating companies still give USA an AAA rating, when they shouldn't? Maybe S&P is the only one actually doing the right thing here, no matter how upset people get about it. Nobody likes to get downgraded. That doesn't mean it shouldn't happen if you're wasting your debt away.

The other 2 left the rating at AAA, but gave it a negative outlook. Which means that they anticipate better than even odds of a downgrade within a year or so.

Re: Just the Facts: S&P's $2 Trillion Mistake

#73

Post by btilly »

nhebb wrote: post #10

According to the CBO last week's budget agreement cuts $2.1-2.4T in spending [1]. S&P's guidance was that we cut $4T. So either the CBO is off as well, or this typical Washington budgetary spin. [1] http://cbo.gov/doc.cfm?index=12357

S&P's guidance was based on an analysis that made the $2.1T mistake. So $2T+ in cuts plus $2.1T error puts us exactly where we would have been if they were originally right and then we cut $4T.

Re: Just the Facts: S&P's $2 Trillion Mistake

#74

Post by heelhook »

fauigerzigerk wrote: post #50

S&P's mistake is certainly incredibly embarrassing but apart from that I'm asking myself a much more fundamental question: Why is the ability to pay considered at all when it comes to the US? A country that is indebted in its own currency can theoretically never default on its nominal obligations. Not due to inability to pay at least. I don't think that credit rating agencies even try to pass judgement on the likelyh…

Your suggestion that US would be able to print it's way out of debt is incorrect, the devaluation of the currency caused would be consider a default and lower the rating of the debt to junk status.

Your suggestion of fixating the rating of the dent to AAA is even immoral, I understand that you are basing that on the premise that US can pay all obligations through devaluing the currency, but even then, if a credit rating agency were to unilaterally decide to apply a good standard to ratings... well a new level of corruption would have been reached, that's for sure.

Re: Just the Facts: S&P's $2 Trillion Mistake

#75

Post by orijing »

fauigerzigerk wrote: post #50

S&P's mistake is certainly incredibly embarrassing but apart from that I'm asking myself a much more fundamental question: Why is the ability to pay considered at all when it comes to the US? A country that is indebted in its own currency can theoretically never default on its nominal obligations. Not due to inability to pay at least. I don't think that credit rating agencies even try to pass judgement on the likelyh…

"We can pay back our debt since it's denominated in dollars" is a meme thrown around online blogs, but it is misguided. If the way the debt is paid back is through currency devaluation, it's safe to say that the investors were not truly paid back--i.e. there was a loss of principal measured in purchasing power.

So while it's true that the US can always pay back the full dollar amount of how much it owes, it's less true that it'll pay back the total "purchasing power" that the bondholder gave up to buy US bonds. Therefore, there's additional risk even if you will get your money back.

However, in that light all dollar-denominated debts should be downgraded for the same reason that US treasury bonds are--for the additional currency risk should the government choose to "default" by devaluation.

Re: Just the Facts: S&P's $2 Trillion Mistake

#76

Post by ChuckMcM »

SoftwareMaven wrote: post #21
_delirium wrote: post #13

Earlier quoted context omitted.

Since the U.S. bonds are all denominated in the same money that it controls, and the federal government has huge assets and potential revenue streams, I'd put a risk of default quite low; low enough to get an AAA, anyway. The federal government pretty much can't default unless it actively chooses to, given the huge number of options for servicing debt at its disposal (cutting spending elsewhere, raising taxes, printi…

But that is exactly why they downgraded us. Given everything you listed, we still were within days of default, thanks to how paralyzed the political process has become in Washington.

Actually I don't think this is the case. The US uses treasury bonds like you or I would use a credit card, they sell bonds take the money and pay bills. They pay them off by exchanging them for cash at a later date. So essentially when we're at the debt ceiling we nominally can't sell any more t-bills so the only money the government has available is money from revenues coming in. Pretty much instantly forced to live without your credit card.

Now since the current budget actually spends more than is expected in receipts, that means things that were already approved and budgeted would not have the funding to pay for them. But in the unlikely event that the debt ceiling had not been raised the government would switch to a priority system of paying (effectively cutting spending).

Its my understanding that at no time has the US ever been at risk of 'default' in the sense that a bank wants its money and the holder of the note can't pay. But it might have been in danger of suddenly withdrawing from Iraq and Afghanistan. Since at 2 B$/day (one estimate I've heard) that is over 700B$/yr of money we would probably prioitize not to spend.

Re: Just the Facts: S&P's $2 Trillion Mistake

#77

Post by fauigerzigerk »

j_baker wrote: post #59
fauigerzigerk wrote: post #50

S&P's mistake is certainly incredibly embarrassing but apart from that I'm asking myself a much more fundamental question: Why is the ability to pay considered at all when it comes to the US? A country that is indebted in its own currency can theoretically never default on its nominal obligations. Not due to inability to pay at least. I don't think that credit rating agencies even try to pass judgement on the likelyh…

It's very rare that a sovreign nation defaults because of outright inability to pay. I mean if you think about it, we could probably pay down our debt by raising taxes to an exorbitantly high rate and limiting spending to just the military and police. One former Soviet nation that was deeply in debt got out by forcing its people to work slavishly for little pay. However, most well-intentioned leaders don't have the s…

I agree that it's always more a matter of willingness in the case of sovereigns. But willingness depends on the extent of hardship a government would have to ask their people to endure (as you correctly point out). So if a country can pay its debt by printing money that hardship is greatly reduced or spread over a much longer period of time.

Re: Just the Facts: S&P's $2 Trillion Mistake

#78

Post by dforeman »

The treasury's argument is fatally flawed.

"The baseline in which discretionary spending grows with nominal GDP is substantially higher because CBO assumes that nominal GDP grows by just under 5 percent a year on average, while inflation is around 2.5 percent a year on average."

GDP is not growing by nearly 5 percent a year and should not be projected to grow at that pace. Real GDP growth is significantly smaller. Additionally, with our monetary policy (QE 1,2,..,x), inflation is higher than 2.5%. The treasury's math is fictitious.

Re: Just the Facts: S&P's $2 Trillion Mistake

#79

Post by nostromo »

fauigerzigerk wrote: post #50

S&P's mistake is certainly incredibly embarrassing but apart from that I'm asking myself a much more fundamental question: Why is the ability to pay considered at all when it comes to the US? A country that is indebted in its own currency can theoretically never default on its nominal obligations. Not due to inability to pay at least. I don't think that credit rating agencies even try to pass judgement on the likelyh…

Yes, the likelihood of the US not paying its debt is basically 0 -- what they are really concerned about the US printing money (something that's already started under QE2).

Printing money is basically a way to default without calling it a default -- and as a bond holder it can be disastrous.

Re: Just the Facts: S&P's $2 Trillion Mistake

#80

Post by fauigerzigerk »

orijing wrote: post #75
fauigerzigerk wrote: post #50

S&P's mistake is certainly incredibly embarrassing but apart from that I'm asking myself a much more fundamental question: Why is the ability to pay considered at all when it comes to the US? A country that is indebted in its own currency can theoretically never default on its nominal obligations. Not due to inability to pay at least. I don't think that credit rating agencies even try to pass judgement on the likelyh…

"We can pay back our debt since it's denominated in dollars" is a meme thrown around online blogs, but it is misguided. If the way the debt is paid back is through currency devaluation, it's safe to say that the investors were not truly paid back--i.e. there was a loss of principal measured in purchasing power. So while it's true that the US can always pay back the full dollar amount of how much it owes, it's less tr…

That's exactly what I said. The keyword is "nominal obligations".
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