AAA and going down

[knight66]

There are several here who understand this kind of issue. I have been listening to and watching the news and one issue that no one has explained is this. Only one agency has downgraded the US credit rating.....there is no discussion of whether this automatically means a universal acceptance of that move or whether or not the other agencies will always fall into line with one another.

Also: how many agencies are there anyway?

So far the UK Gov is claiming that it retains its AAA rating due to its plans to cut public expenditure. But I get the impression that the financial 'deciders' are simply picking off different countries in turns, Ireland, Greece, Portugal, now Italy and Spain and the USA. Could be the UK when they decide to turn on us.

There seems to be an intent to simply graze across the various economies almost one by one. I realise the AAA system stands somewhat aside from the various borrowing mechanisms, but whereas yesterday the newscasters were saying it was utterly inconceivable that the USA would ever default; with this one agency decision in 24 hours the language has changed from the same news outlets who say that it is now slightly more likely that the USA may default at some point.

Mike

[Lethevich]

I think that the US was a unique case due to the last minute "discussions" on their financial solvency. Markets dislike uncertainty and this is a fair reflection of that. Lenders love countries in huge amounts of debt and still able to pay, and the US and even more so the UK fit that bill, so the only reason for the downgrade was due to the unique stupidity of the US government's debt cap "discussion".

I think that of the countries being "picked off", half were seen as not the most reliable even before the bubble.

[knight66]

Well, I assume it plays into the camp of the Tea Party as both China and India are publically calling for the USA to do something about its debt position. I wonder what they have to do to get the AAA rating back?

The Italian promise of action is smoke and mirrors, Berlusconi is incapable of convincing the International Markets that he means business or could do the business. He would probably have been better keeping quiet.

Mike

[Todd]

Also: how many agencies are there anyway?

There are three main ratings agencies - S&P, Moody's, and Fitch - though there are others.  The ratings are based on perceived ability to pay, and S&P is the only one of the big three to downgrade US sovereign debt.  The other two have already decided to hold fast, though they attached negative outlooks.  The publicly stated reason for the downgrade is that the budget deal that passed is insufficient to address long-term fiscal issues, which is true.  Since only one agency downgraded US sovereign debt, rates will likely not rise substantially, though they will most certainly rise, increasing debt servicing expense going forward.  State, municipality, and GSE debt ratings may also end up being affected negatively in the near future.  In other words, the fiscal situation may end up getting worse before it gets better.

The way to get the AAA rating back is for the US Congress to put together a viable medium- and long-term budget framework that raises taxes and cuts spending, especially in "entitlements."  Of course, any deal that comes up is subject to change each year as the US "budget" is actually a series of separate finance and appropriations bills, and even with overarching budgetary rules, there are loopholes, but the basic requirement is to reduce the deficit and debt to GDP ratio.  Ideally, from my perspective, the government would increase direct expenditures over the next 12-24 months to increase aggregate demand, in tandem with increased Fed debt purchases, to get employment up, followed by a multi-year restructuring of federal tax and expenditure policies, including big changes to Social Security and Medicare, which basically means cuts.  That's political poison, though.  It's also a good time to approach tax reform, knocking out some tax loopholes and subsidies.

The next big country to watch in terms of ratings is France.  The repercussions of a French downgrade, were it to occur, would be big. 

Incidentally, loss of AAA status is not the end of the world.  Japan lost its coveted rating, yet it still borrows at low rates. 

How funny is it that ExxonMobil is now considered safer than the US federal government?   

[Bogey]

so the only reason for the downgrade was due to the unique stupidity of the US government's debt cap "discussion".

BINGO!

[knight66]

Thanks Todd I was hoping you would drop in. Thanks for that.

In most countries in the West the politicians have about 12 months, then they need to start fighting the next election. It makes for short termism and encourages promises that cannot or ought not to be kept.

The public colludes in this of course.

In the UK, prior to the last election we kept being told it would be terrible and there was need of cuts; but no one had the courage to tell us what that meant. We are starting to find out. But it is only a start and what is not owned up to is that we are likely in for what in my lifetime is a permanent drop in living standards for a great many people.

On a somewhat different tack:

As a government worker: we were told that our pensions were to be restructured. Seemingly this remains under negotiation, though the unions and newspapers seem to be sure it is false consultation. Partly in order to obtain strike action, my union issued a calculator showing I would be £95 a month worse off in additional pension contributions...which is no joke when we are in year one of a two year pay freeze and inflation is about 5%.

The Gov has now just released a calculator. Using it, I become £27 worse off!

The unions are just as untrustworthy as is the government.

Mike

[Coopmv]

The rating cut was not totally unexpected.  It was just a matter of time.  Japan was cut from triple A to double A when its debt to GDP ratio went over 100% and the US is inching toward that 100% very rapidly.

The US government must cut spending and raise revenues simultaneously.  It is pure lunacy to think spending cut alone will achieve balanced budget.  It must cut the entitlements programs in order to rein in their exponential growth rates.  It needs to lower the corporate tax rates while closing all tax loopholes so Corporate America will start creating more jobs stateside than creating jobs overseas. 

[Herman]

There are three main ratings agencies - S&P, Moody's, and Fitch - though there are others. 

The USA had in fact been downgraded before by the Chinese agency Gadong.

This has gone largely unnoticed (in the USA) because Americans are not aware of the outside world.

Not even if the outside world (i.e. China and India) holds a major share in the USA.

If China dumps the US, the US is a 3d world country.

Just last week Congress made the wrong decision  -  cut spending, rather than try to create jobs  -  basically this is the end of USA hegemony.

China's up next, and that's not very good news.

[Todd]

the US is inching toward that 100% very rapidly.

The US has already exceeded 100%.

The USA had in fact been downgraded before by the Chinese agency Gadong.
This has gone largely unnoticed (in the USA) because Americans are not aware of the outside world.
Not even if the outside world (i.e. China and India) holds a major share in the USA.
If China dumps the US, the US is a 3d world country.
Just last week Congress made the wrong decision  -  cut spending, rather than try to create jobs  -  basically this is the end of USA hegemony.
China's up next, and that's not very good news.

Yes, the standard doom and gloom scenario, but it won't happen.  Worst case scenarios never do.  First, to ratings, the US ratings agencies are the ones that move markets for the time being, so what the Chinese company does, free of political interference no doubt, is less important.  Second, the Chinese and the Japanese are the two biggest owners of US sovereign debt by far, with India a not particularly large player, so I'm not quite sure why you mentioned them.  I'm not sure what constitutes a "share" of the US, either, particularly when one views all assets in the US.  Third, China cannot dump the US, by which I assume you mean dump treasuries.  That would depress prices, weakening the Chinese reserve position.  China needs to do something with its capital inflow, and even now the US dollar is more attractive as a reserve currency than the Yen or Euro, though the best reserve policy is to have a mix.  Fourth, the decision Congress made last week is an interim decision.  The big decisions will be forthcoming.  They're still playing small ball.  I fear not the notion of Chinese hegemony, because the reality of the world is a bit more complex than that.

[knight66]

I imagine that the India and China mentions were reference to my earlier posts as on our news their criticisms; the first open ones of which we have been aware, do sound quite stark and basically demanding in the terms put over the airwaves.

I agree htat China is not in a position to bail, but I guess it is like being major shareholders in USA Ltd and feeling it can call the shots.

Mike

[Todd]

I agree that China is not in a position to bail, but I guess it is like being major shareholders in USA Ltd and feeling it can call the shots.

Except that it cannot call the shots.  Owning sovereign debt is not like owning voting shares or even senior debt in a corporation.  The US has policy options that no company has.  For instance, the US government could, if it wanted, fully monetize the debt and print the problem away.  That would cause inflation and be harmful, but it can be done.  The Fed and Treasury can intervene in bond markets, coordinating purchases or sales with the Japanese, British (who, when combined with the Japanese, own more debt than the Chinese), and other countries, thus mitigating effects of Chinese actions.  Or it can pursue fiscal policies to bring the debt down, as it did after World War II, when the debt was larger yet.  The end is not nigh.

[DavidW]

BINGO!

Well actually no.  In an interview on cnn a representative of s&p made it clear that it was due to the poor handling of the dept over the past two administrations, and the decision was made largely due to their forecast of the increase in the ratio of debt to gdp in the long term.  The recent crisis was merely the feather that broke the camel's back.

I think this is much ado about nothing though, US dollar is still the best form of currency and the US will keep trading at low interest rates.

[Todd]

I think this is much ado about nothing though, US dollar is still the best form of currency and the US will keep trading at low interest rates.

Indeed, just as the Japanese, with lower ratings than anything the US is facing, continues to borrow at low rates.

From a purely selfish standpoint, I must admit that I'm anxious to see how markets react next week.  I assume they will drop, which makes for a good buying opportunity.  I've got too much cash sitting on the sidelines, so I'm hoping for some panic. 

[Herman]

The US has already exceeded 100%.

Yes, the standard doom and gloom scenario, but it won't happen.  Worst case scenarios never do.  First, to ratings, the US ratings agencies are the ones that move markets for the time being, so what the Chinese company does, free of political interference no doubt, is less important.  Second, the Chinese and the Japanese are the two biggest owners of US sovereign debt by far, with India a not particularly large player, so I'm not quite sure why you mentioned them.  I'm not sure what constitutes a "share" of the US, either, particularly when one views all assets in the US.  Third, China cannot dump the US, by which I assume you mean dump treasuries.  That would depress prices, weakening the Chinese reserve position.  China needs to do something with its capital inflow, and even now the US dollar is more attractive as a reserve currency than the Yen or Euro, though the best reserve policy is to have a mix.  Fourth, the decision Congress made last week is an interim decision.  The big decisions will be forthcoming.  They're still playing small ball.  I fear not the notion of Chinese hegemony, because the reality of the world is a bit more complex than that.

Todd, consistently your comments indicate that there are no problems whatsoever, that all is well; all the bad news that has been acccumulating over the years is of no account at all, the bad numbers are cooked, the good numbers are solid, and there is no need to worry.

There is vast political interference with the US statistics, too, which virtually halves the unemployment numbers, for instance.

I'm glad you and your family are doing so well. But it is a rather surreal story you're putting out. The gloom and doom story is happening as your saying no it won't.

[Marc]

The USA had in fact been downgraded before by the Chinese agency Gadong.

This has gone largely unnoticed (in the USA) because Americans are not aware of the outside world.

Not even if the outside world (i.e. China and India) holds a major share in the USA.

If China dumps the US, the US is a 3d world country.

Just last week Congress made the wrong decision  -  cut spending, rather than try to create jobs  -  basically this is the end of USA hegemony.

China's up next, and that's not very good news.

Yes, the standard doom and gloom scenario, but it won't happen. Worst case scenarios never do.

From a purely selfish standpoint, I must admit that I'm anxious to see how markets react next week. I assume they will drop, which makes for a good buying opportunity. I've got too much cash sitting on the sidelines, so I'm hoping for some panic.

Yes, the standard purely selfish scenario, and it might happen (again ....).
Which eventually will make the doom and gloom worst case scenario a real possibility.

Fingers crossed for panic on the financial markets and our very own increasing buying opportunities!

[Herman]

I think this is much ado about nothing though

for a man of your intelligence this is stunning

[Lethevich]

Well actually no.  In an interview on cnn a representative of s&p made it clear that it was due to the poor handling of the dept over the past two administrations, and the decision was made largely due to their forecast of the increase in the ratio of debt to gdp in the long term.  The recent crisis was merely the feather that broke the camel's back.

Why not the UK first? It's debt per capita is 3x more or something ridiculous, and I believe it rocketed during the 90s (during the same period).

[Todd]

Todd, consistently your comments indicate that there are no problems whatsoever, that all is well; all the bad news that has been acccumulating over the years is of no account at all, the bad numbers are cooked, the good numbers are solid, and there is no need to worry.

One little problem with this response is that it is nonsense.  Please point out where I have stated there are no problems, or that bad numbers are cooked.  One instance, please.  You shan't find any such statements because I have never stated any such thing.  Rather, I am pointing out the glaringly obvious: worst case scenarios do not occur, and a downgrade of US sovereign debt by one of the big three ratings agencies is not the end of the world.  There are policy options at the disposal of the US government for dealing with the situation, China is not going to become a global hegemon in the next few months or years, though its power will increase markedly over the coming decades.  (There is nothing that any nation can do to stop it.)  I am very well aware of the fiscal, political, and economic situation facing the US – more than you, based on your overexcited response to events – I just don't confuse chaos and negativity in economic downturns with a new, permanent reality.  People change behaviors, government policies change, and things move forward.  The US has many immense advantages it can leverage to deal with this situation, which isn't remotely close to the worst crisis in its history. 

Fingers crossed for panic on the financial markets and our very own increasing buying opportunities!

Now you're getting it.  Market actors often act irrationally, and that's the best time to take advantage them.  There is no reason to panic, but I wouldn't doubt if some people do.

Why not the UK first? It's debt per capita is 3x more or something ridiculous, and I believe it rocketed during the 90s (during the same period).

Debt per capita is not the best figure to use.  A good number of countries have higher debt per capita and a higher debt to GDP ratio than the US.  Other factors are at work as well.

[Herman]

One little problem with this response is that it is nonsense.  Please point out where I have stated there are no problems, or that bad numbers are cooked.  One instance, please.  You shan't find any such statements because I have never stated any such thing.  Rather, I am pointing out the glaringly obvious: worst case scenarios do not occur, and a downgrade of US sovereign debt by one of the big three ratings agencies is not the end of the world.  There are policy options at the disposal of the US government for dealing with the situation, China is not going to become a global hegemon in the next few months or years, though its power will increase markedly over the coming decades.  (There is nothing that any nation can do to stop it.)  I am very well aware of the fiscal, political, and economic situation facing the US – more than you, based on your overexcited response to events – I just don't confuse chaos and negativity in economic downturns with a new, permanent reality.  People change behaviors, government policies change, and things move forward.  The US has many immense advantages it can leverage to deal with this situation, which isn't remotely close to the worst crisis in its history. 

I'm not saying China will take over as of September, nor is the S&P downgrade as big a deal as people are making it, if only because the Gadong had already downgraded the USA. At the least since Bush started two interminable wars without specifying any means how to pay for them while the general population kept borrowing too, it has been glaryingly obvious the US is on a collision course with reality. Since then the domestic polical situation has worsened into a kind of permanent gridlock which renders the options to take responsible action and use the considerable leverage the US still has internationally pretty much moot. S&P is one of many wake up calls that the USA are sliding. If people can't at least acknowledge that and start to take responsibility, rather than respond (1) in the kneejerk US fashion: we're the greatest country and (2) let's see if there's a profit to be made, the slide will be irreversible.

And I'm writing this in Europe, which isn't too great shape either. I'm in the prosperous, plus corner of the continent, but I'm under no illusion that details like that will make a lot of difference. We're at a point now that the evidence that the market is not the solution for all problems is overwhelming. Tragically (or comically, if you're very rich) the generation that is now making the decisions in a lot of governments grew up during the market boom years, and these people in their hearts still believe the market is the solution. And in a cynical, destructive way that's true. Some business corporations have become so globally powerful, they are bigger than some governments, and this includes the US where business interests basically write the legislation.

[Marc]

From a purely selfish standpoint, I must admit that I'm anxious to see how markets react next week.  I assume they will drop, which makes for a good buying opportunity.  I've got too much cash sitting on the sidelines, so I'm hoping for some panic.

Market actors often act irrationally, and that's the best time to take advantage them. There is no reason to panic, but I wouldn't doubt if some people do.

IMHO, you still live in dreams of the (recent) past.

Irrational reactions on financial markets might be irrational indeed, but the results can be rather disastrous and cause a giant domino effect. And we haven't even survived the last crisis yet.
Check the newspapers and read what's going on in the world (and not just in the US of A, and not just in a pure financial-economical way, and not just the oneliner articles).
You'd do better to look at all the international developments with a less short term vision.

Here's my - of course ignorant - advice: right now, save your cash and earnings.
This is no longer the time for opportunistic and coincidental buying and consumption. And if you really want to buy: buy gold (or silver).