Just the Facts: S&P's $2 Trillion Mistake • Hacker News Board

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

#151

Post by marcamillion » Sun, Aug 07, 2011, 9:59 PM UTC

encoderer wrote: post #42

bahman2000 wrote: post #14

I continue to be amazed at how much credibility we seem to give this (and other) rating agency after they rated subprime-backed derivatives as safe, rated AIG & Lehman as safe. Is our collective short-term memory non-existent?

You're right, but the good thing is that nobody is really giving S&P that much credit here. Yields on new gov't debt haven't risen significantly. Sure, people say if Fitch and Moody's raise them then it'll trigger sell-offs from institutional investors. Thing is though, the institutional investors who have policies of holding x% AAA debt can always change those rules. Because there's only so much AAA debt out there -…

>You're right, but the good thing is that nobody is really giving S&P that much credit here. Yields on new gov't debt haven't risen significantly. Sure, people say if Fitch and Moody's raise them then it'll trigger sell-offs from institutional investors.

I think it's still too early to tell. S&P downgraded after the markets closed on Friday.

The real test should be this evening when the Asia session opens and into the morning.

Let's see how it plays out.

>Thing is though, the institutional investors who have policies of holding x% AAA debt can always change those rules. Because there's only so much AAA debt out there -- that's why it would be kinda bad for everybody if the US Gov't didn't carry ANY public debt.

The institutions themselves can't just change the rules. They have to work with regulators - who then can change the rules and allow them to change their portfolio allocation. It's not as easy as flipping a switch.

What's for sure though, every single financial regulator in America is working overtime this weekend.

>Suppose you're a fund manager of a huge fund with $40bn under management. A full 1/4 is T-bills. Your mandate is to hold 1/4 of your fund in AAA debts. Well -- where do you put than 10 billion?

That's simple for a hedge fund, or a private equity fund. But pension funds, mutual funds, insurance companies - the real section of the financial industry that accounts for hundreds of billions, if not trillions of AAA assets, have to abide by regulations.

Take social security - legally, social security has to be invested in AAA gov't paper. I am not sure if the Treasury can change this rule easily - I imagine it can have some sway here, but there are other financial institutions that hold significant amounts of AAA gov't debt (central banks for instance) that are legally required to do so - by their respective legal jurisdictions.

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

#152

Post by antidaily » Sun, Aug 07, 2011, 10:01 PM UTC

DanielBMarkham wrote: post #99

I understand that government departments are led by political appointees. There's a very good reason for it. When we elect somebody as president we expect them to make an imprint on the rest of the federal government. So I'm cool with Treasury running it's own PR game and responding to other news items. What I'm confused about is why the Treasury Department feels a need to get into a pissing contest with S&P. Nobody…

Buffet said if there was a AAAA rating, he would give it to the US. The S&P downgrade is bullshit and everyone knows it. So who cares if the Treasury responded negatively?

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

#153

Post by antidaily » Sun, Aug 07, 2011, 10:04 PM UTC

hugh3 wrote: post #7

toddh wrote: post #2

Mistake or deliberate market manipulation?

Uhh, neither. The Treasury claims it was a "mistake", but personally I can't see how anyone could possibly still consider US bonds to have the highest possible rating. However, if for some reason you did think that, then Hanlon's Razor would apply.

If we pay our bills, we're not a credit risk. that's what the rating is based on. and we always pay our bills.

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

#154

Post by jerf » Sun, Aug 07, 2011, 10:26 PM UTC

jandevos wrote: post #143

jerf wrote: post #104

Earlier quoted context omitted.

It isn't our current debts that have people concerned. It's the combination of current debts and unsustainable future obligations, which are so large that they in fact can't be paid down by just raising taxes. Barring an adjustment in what they are, they grow to the point that they eventually consume 100% of the economy in something like 40 years in conjunction with interest payments, but of course they become comple…

Well, there is, technically, which is that some amazing breakthrough in technology suddenly makes us all a lot wealthier very quickly, which is such a long shot it's hardly worth talking about. Wealth? Is there really a lack of wealth in the US? I though the problem was not a lack of wealth, but more a lack of those in the US that possess it in abundance to share it with those who don't (e.g., by paying taxes). Even…

In this debate in particular, I think it's critically important to distinguish between "dollars", a currency controlled by the US government, and "wealth", the real things those dollars can buy. As has been pointed out, nobody denies that technically the US can spin up the printing presses and make as many dollars as it wants. However, even ignoring the other catastrophic consequences that would have, there's also the considerations of the real wealth consequences we're committing to. It isn't just "lots of money", it's also things like committing real people to build real facilities so that other real people will take care of the real old people living in those facilities for years at a time on the government's dime. To exaggerate for clarity, we can't afford to have an economy in which everybody is dedicated either to caring for old people, treating old people, or supporting those who do. Somebody's actually got to be able to produce something to feed the economy. Obviously we can't get to this point, but it's not clear how much of our real economy can actually be dedicated to these things, because the support networks can end up being a lot deeper than surface intuition would expect. Studying modern military logistics can be very helpful; in particular, look for the statistics about how many support personnel there are per front-line soldier doing the "actual" military work, and apply the lessons to the "real" economy.

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

#155

Post by _delirium » Sun, Aug 07, 2011, 10:43 PM UTC

alnayyir wrote: post #117

lucisferre wrote: post #100

Earlier quoted context omitted.

Hate to just post a +1, me too, but this, it seems, just isn't be said or recognized enough. The US, with one of the lowest tax burdens in the western world ( the lowest?) can easily afford to pay down it's debts but without any support for raising taxes in the slightest, not just amongst republicans but from what it seems are a vocal and loud minority (majority?) of Americans, no one can really act surprised by S&P'…

Our tax burdens are not the lowest by any means. My total tax rate partially due to living in California (although it is mostly Federal) is ~40%. There are plenty of countries in Europe that would be happy to tax me less. My buddy in Singapore pays about 8% all told and he's in the same income range. The temptation to become an expat gets stronger as I earn more money. My sin is not being a fat cat living off capital…

How do you manage to get an effective 40% tax rate in California? I could see that as a marginal rate on the last few dollars, but you'd have to make in the millions to get there for your overall tax rate.

For example, if you make $100k and take only the standard deduction, you'll pay $19k in federal taxes (19%) and $6k in California taxes (6%), for 25% total. If you include payroll taxes, that's another ~7.5%, so 32.5%. Of course, many people take much larger deductions than the standard deduction, so pay considerably less.

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

#156

Post by alnayyir » Sun, Aug 07, 2011, 11:03 PM UTC

_delirium wrote: post #155

alnayyir wrote: post #117

Earlier quoted context omitted.

Our tax burdens are not the lowest by any means. My total tax rate partially due to living in California (although it is mostly Federal) is ~40%. There are plenty of countries in Europe that would be happy to tax me less. My buddy in Singapore pays about 8% all told and he's in the same income range. The temptation to become an expat gets stronger as I earn more money. My sin is not being a fat cat living off capital…

How do you manage to get an effective 40% tax rate in California? I could see that as a marginal rate on the last few dollars, but you'd have to make in the millions to get there for your overall tax rate. For example, if you make $100k and take only the standard deduction, you'll pay $19k in federal taxes (19%) and $6k in California taxes (6%), for 25% total. If you include payroll taxes, that's another ~7.5%, so 32…

>And San Francisco applies its city payroll tax to income from self-employment. [1]

>[1] http://taxes.about.com/od/income/a/Self-Employment-Income.ht...

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

#157

Post by mynegation » Sun, Aug 07, 2011, 11:14 PM UTC

katovatzschyn wrote: post #126

From Naomi Klein's The Shock Doctrine: In February 1993, Canada was in the midst of financial catastrophe, or so one would have concluded by reading the newspapers and watching TV. “Debt Crisis Looms,” screamed a banner front-page headline in the national newspaper, the Globe and Mail. A major national television special reported that “economists are predicting that sometime in the next year, maybe two years, the dep…

Please have my upvote (like you need one). I will definitely include "the shock doctrine" into my "To read" list.

I wonder if there's an opportunity for "open source" credit ratings. Numbers like GDP, trade deficit or proficit, exchange rates, national debt etc are available and someone could creates a method that software or website could use to calculate all that into credit rating.

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

#158

Post by gnaritas » Sun, Aug 07, 2011, 11:15 PM UTC

CWuestefeld wrote: post #48

bubbleRefuge wrote: post #37

Earlier quoted context omitted.

Modern Monetary Theory reveals the entire premise of this issue to be false. The private sector does not fund the public sector in the way that most people believe. Non-convertible floating FX currency regimes (ie fiat money) such as the US,UK, and Japan can meet any and all financial obligations by issuing currency. Thus: 1) Taxes do not fund government. ( they 'back' the currency) 2) Treasury securities do not fund…

Sure, if you choose to look at it that way. But if you're going to make "Non-convertible floating FX currency regimes (ie fiat money) ... can meet any and all financial obligations by issuing currency", then you've got to consider that entire reference frame. Issuing currency is identically equal to inflation, which is itself nothing more than a tax levied against those holding assets denominated in that currency. Us…

> Issuing currency is identically equal to inflation

That simply isn't true, not even close to true.

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

#159

Post by pessimizer » Sun, Aug 07, 2011, 11:48 PM UTC

jerf wrote: post #154

jandevos wrote: post #143

Earlier quoted context omitted.

Well, there is, technically, which is that some amazing breakthrough in technology suddenly makes us all a lot wealthier very quickly, which is such a long shot it's hardly worth talking about. Wealth? Is there really a lack of wealth in the US? I though the problem was not a lack of wealth, but more a lack of those in the US that possess it in abundance to share it with those who don't (e.g., by paying taxes). Even…

In this debate in particular, I think it's critically important to distinguish between "dollars", a currency controlled by the US government, and "wealth", the real things those dollars can buy. As has been pointed out, nobody denies that technically the US can spin up the printing presses and make as many dollars as it wants. However, even ignoring the other catastrophic consequences that would have, there's also th…

I agree. "Wealth" is what is lost when workers who want to work sit idle because the fed decides that protecting the value of "dollars" is a more important mandate than full employment.

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

#160

Post by jeffreymcmanus » Sun, Aug 07, 2011, 11:52 PM UTC

_delirium wrote: post #155

alnayyir wrote: post #117

Earlier quoted context omitted.

Our tax burdens are not the lowest by any means. My total tax rate partially due to living in California (although it is mostly Federal) is ~40%. There are plenty of countries in Europe that would be happy to tax me less. My buddy in Singapore pays about 8% all told and he's in the same income range. The temptation to become an expat gets stronger as I earn more money. My sin is not being a fat cat living off capital…

How do you manage to get an effective 40% tax rate in California? I could see that as a marginal rate on the last few dollars, but you'd have to make in the millions to get there for your overall tax rate. For example, if you make $100k and take only the standard deduction, you'll pay $19k in federal taxes (19%) and $6k in California taxes (6%), for 25% total. If you include payroll taxes, that's another ~7.5%, so 32…

Unless he's a multi-millionaire who has one of the worst tax preparers in history, he doesn't have a 40% tax rate.

The reason why he thinks his tax rate is 40% is because he's making the mistake that common among financial illiterates, which is confusing the maximum tax rate with the marginal (i.e., actual) tax rate.

The highest Federal tax rate is currently 35%. That bracket applies to people who earn $379,150 or more. But if you earn $379,151, that means that only one of the many dollars you earned is actually taxed at the 35% rate.

Similarly, the highest California tax bracket is currently 11%, for people who earn a million bucks a year or more. But again, only the income that's above $1 million is taxed at that rate. Your first $47,000 in income is going to be taxed at the rate of 0 percent to 10 percent.

And that doesn't even factor in deductions. So even if your income is a million bucks a year, it doesn't mean that your combined state and federal tax rate is 40%.