AAA and going down

[Gurn Blanston]

The same fuzziness is present on the other side of the aisle, when you come down to it:  the folks who support Big Government domestically are the same folks who vehemently protest anything that reminds them of Big Military.  If you don't mind the government sticking its nose into everything at home, why should you mind the government sticking its nose into everything abroad?  (And vice versa.)

Me, being a libertarian,  am against government sticking its nose into almost anything, at home or abroad.

"We're running three or more wars on credit, we have $14T in debt, we have $60T in unfunded liabilities for social programs,
and our citizens both refuse to give up anything nor tax themselves to pay for it. But trust us, we're a great credit risk" - GB

Sara, I too am a moderate. I am equally f*cked. Absolutely no one has the balls to admit that they represent my views. I think the aphorism above sums up America at a glance in 2011...

[drogulus]

Who needs to negotiate when you can simply blow the fuck out of them?

     They do. *

     _{* It doesn't always work, so you need a big military for when it doesn't. Historically, the maritime power hasn't always had a big military. The Dutch didn't, the British had a huge expensive navy with a little army as an expeditionary force. That was a bit deceptive since the colonials provided the numbers, and mostly at their own expense. The U.S. has a big multiservice military because it can do it, and because the free riders are happy to ride freely. I don't blame them, really. The worst thing is not that free riders don't provide substantial help beyond token levels. It's that they forget that they are free riders, and think their virtue protects them. The U.S. is not protected by a big power, it is a big power, so it behaves like one.}

[Herman]

The same fuzziness is present on the other side of the aisle, when you come down to it:  the folks who support Big Government domestically are the same folks who vehemently protest anything that reminds them of Big Military.  If you don't mind the government sticking its nose into everything at home, why should you mind the government sticking its nose into everything abroad?  (And vice versa.)

well, that's simple comme bonjour isn't it? Those people abroad didn't get to vote for your government. That's why countries have borders.

[drogulus]

     Oohh, oohh...

     I just read this at

The biggest risk of a Treasury downgrade was the possibility that interest rates would rise. That could add trillions to future federal borrowing costs and stifled economic growth.

But interest rates didn't rise at all after the downgrade. In fact, they've plunged. Monday turned out to be the eighth best day for 10-year Treasuries in modern history. The biggest irony of downgrading Treasuries is that it instantly increased global demand for ... Treasuries. One blogger, mocking the stereotypical investor, quipped: "Treasuries were downgraded? Wow! Sell my entire stock portfolio and get me into Treasuries!"

How do you explain that? It's simple. The risk that led to the downgrade was political. But financially, Treasuries are still the safest, most liquid assets in the world . And the U.S. still has the means to pay its bills. That isn't a question. Investors still flock to Treasuries whenever there's a panic. It's where they feel safe. Incredibly, the Treasury can borrow money for 10 years today at less than half the interest rate offered a decade ago, when the government ran surpluses.

     Is there an echo in here?

[Todd]

Who in their right mind thought Treasuries would tank as a result of the downgrade?  What is a safer investment?  (This is directed to people who are not goldbugs.)  I would not be surprised if rates rise from what they were before the downgrade once the flight to quality subsides, and in fact I rather expect it, but there will not be a spike in rates, at least based on one downgrade. 

[drogulus]

     

What is a safer investment?

     Well yeah, that's the way I see it, and that's the way people with money see it (more money than me). So, if I was so spooked as to sell stocks I'd be comfortable parking money in a relatively safe place like Treasuries. But 1) I'm not spooked about stocks, and 2) I like receiving dividends, some of which are reinvested in stocks. When the price of a stock goes down, I automatically buy more shares. When stocks are expensive, I buy fewer. Since this is done by automated DRIP (Dividend Reinvestment Plan) for a few companies that provide for it, there's no arcane market voodoo to consult. But what if the chosen stocks tank for good? I guess I'm screwed. No plan is perfect.

[drogulus]

"We're running three or more wars on credit, we have $14T in debt, we have $60T in unfunded liabilities for social programs,
and our citizens both refuse to give up anything nor tax themselves to pay for it. But trust us, we're a great credit risk" - GB

Sara, I too am a moderate. I am equally f*cked. Absolutely no one has the balls to admit that they represent my views. I think the aphorism above sums up America at a glance in 2011...

     A good credit risk is someone who will pay the money back. You can only judge based on history and ability to pay. What else is there that matters as much as that? So, by this standard the U.S. government is, even now, the best credit risk in the world. We did not default during the Great Depression, we ran a truly colossal debt to GDP ratio during WWII and while Great Britain came out of the war pauperized the U.S. came out ruling the world (yes, with a giant debt and a 91% top tax rate for individuals). There is something very, very wrong with the notion that you balance budgets to achieve prosperity.  This is what's wrong with it: there is no evidence that it has ever been true. But it's a really intriguing idea, right? Let's call it that.

[springrite]

I keep my money in my sock. Fortunately, they still fit. Stink a bit, but they do fit nicely.

[eyeresist]

What most of them don't realize is that the Constitution of 1787 was essentially a slow motion coup organized by the portion of the Founding Fathers who felt we needed a bigger, more centralized national government and weaker state government.

And then there are those folks who argue that while (for instance) it's the height of tyranny for the federal government to mandate certain things, it's perfectly proper and reasonable for a state government to mandate the same things--that while the federal government has strictly limited powers, state governments have unlimited powers.

I assume you are saying the "slow motion coup" was a bad thing? But the balancing of state and federal powers is a good thing.

I agree about State's Rightists - if the wrong state government gets in, its wah wah wah to the federal court of appeal.

[drogulus]

     From a few days ago, here's Paul "Exploding Head" Krugman:

Aaauuuggghhh! Market Commentary Edition


Carnage in stock markets as I write — and all of the headlines I see attribute it to S&P's downgrade.

They really are trying to make my head explode, aren't they?

Once again: S&P declared that US debt is no longer a safe investment; yet investors are piling into US debt, not out of it, driving the 10-year interest rate below 2.4%. This amounts to a massive market rejection of S&P's concerns.

The "signature" of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions. And that's normally the signature of concerns about a weak economy and deflation risk (see Japan, decline of).

What triggered economy fears? To some extent I think this is a Wile E. Coyote moment, with investors suddenly noticing just how weak the fundamentals are. Also, the mess in Europe.

And maybe, maybe there is an S&P story — but not the one you think. Arguably, that downgrade will bully policy makers into even more deflationary, contractionary policies than they would have undertaken otherwise, which has the perverse effect of making US debt more attractive, since the alternatives are worse.

But all the Very Serious People, having totally misdiagnosed our problems so far, will probably double down on that wrong diagnosis as markets fall.

     So far Krugman is right that the pilots of the plane are trying to climb out of a stall (if the plane stalls you dive, not climb. That's correct but counterintuitive, so you will crash and die). Our problem is a weak economy which needs a boost in demand. Since money is cheap we can boost to our hearts content, but with a big debt it's scary, like diving out of a stall. So we'll climb and then die.

[drogulus]

      Market up 500 pts.

      Happy days are here again!!
     
     

[eyeresist]

The "signature" of debt concerns should be stock and bond prices both falling; what we actually see is those prices moving in opposite directions. And that's normally the signature of concerns about a weak economy and deflation risk

Why can't it be both?

[kishnevi]

Why can't it be both?

The nature of bonds is the reason why.  If interest rates rise, bond prices fall, and vice versa. 
Now, a bond is a debt.  If you're concerned that the debt won't be paid in the long term, meaning you're risking whatever money you pay for the bond, you will want to pay less for that bond to minimize the potential loss.  You'll also expect a higher interest rate because of the increased risk. (That's why people with good credit histories get lower interest rates on car loans and mortgages than people with bad credit histories.)

All of which means that if investors were actually concerned about whether the US debt will eventually be repaid (the alleged point of the S&P downgrade), they would pay less for bonds and demand higher interest rates--meaning that US bond prices would fall and there would less demand for them.  What's actually happening now is that that people are buying US bonds and the price is rising (and interest rate falling, as much as it can fall when it's already as low it is now), which would indicate investors are not really concerned about US debt. 

Of course, investor are also looking for a relatively safe investment--meaning something that doesn't go down sharply one day, go up sharply the next, down sharply the next, up sharply the next like the US stock markent has  been doing this week.  You can get whiplash just watching the Dow Jones move up and down.   Bonds are a traditional investment to make when people are looking for something safer than the stock market.  So that's also having an impact in keeping bond prices higher. 

But overall, if bonds don't fall, then you can assume that people are not as concerned about debt as they are other things (like an economy which can't seem to generate jobs). 

[eyeresist]

Thanks Jeffrey, this may make more sense once I've had something to eat. 

[drogulus]

     Krugman again:

     Check out the opinion page of any major newspaper, or listen to any news-discussion program, and you're likely to encounter some self-proclaimed centrist declaring that there are no short-run fixes for our economic difficulties, that the responsible thing is to focus on long-run solutions and, in particular, on "entitlement reform" — that is, cuts in Social Security and Medicare. And when you do encounter such a person, you should be aware that people like that are a major reason we're in so much trouble.

For the fact is that right now the economy desperately needs a short-run fix. When you're bleeding profusely from an open wound, you want a doctor who binds that wound up, not a doctor who lectures you on the importance of maintaining a healthy lifestyle as you get older. When millions of willing and able workers are unemployed, and economic potential is going to waste to the tune of almost $1 trillion a year, you want policy makers who work on a fast recovery, not people who lecture you on the need for long-run fiscal sustainability.

Unfortunately, giving lectures on long-run fiscal sustainability is a fashionable Washington pastime; it's what people who want to sound serious do to demonstrate their seriousness. So when the crisis struck and led to big budget deficits — because that's what happens when the economy shrinks and revenue plunges — many members of our policy elite were all too eager to seize on those deficits as an excuse to change the subject from jobs to their favorite hobbyhorse. And the economy continued to bleed.

What would a real response to our problems involve? First of all, it would involve more, not less, government spending for the time being — with mass unemployment and incredibly low borrowing costs, we should be rebuilding our schools, our roads, our water systems and more. It would involve aggressive moves to reduce household debt via mortgage forgiveness and refinancing. And it would involve an all-out effort by the Federal Reserve to get the economy moving, with the deliberate goal of generating higher inflation to help alleviate debt problems.

The usual suspects will, of course, denounce such ideas as irresponsible. But you know what's really irresponsible? Hijacking the debate over a crisis to push for the same things you were advocating before the crisis, and letting the economy continue to bleed.

     It's been pointed out that even Krugman has warned about the terrible effects of not "addressing the debt crisis", though when he did he neglected to say what the terrible consequences would be. I think he was just trying to sound reasonable rather than be reasonable. Being reasonable involves a high level of skepticism about projecting current trends into the indefinite future. The history of warnings about long term debt is quite interesting. The British financed decades of war with France in the 18th and 19th centuries with a frightening level of debt, all the while undergoing an industrial revolution that made repayment fairly easy. They grew into their debt, just as the U.S. has done and will do again if it chooses to. That involves rejecting the advice of the contractionists of the right and middle, who tend to form an alliance of convenience. So, the Tea Party is wrong, the centrist Concord Coalition is wrong, and the liberals like Krugman are right. History supports them. What it says is if you pursue contractionary policies to reduce debt you impair your future ability to repay, and that is worse, far worse than any additional debt you incur in the process of tackling the immediate problem of a weak economy and high unemployment.

     From  :

     Stop Panicking About Our Long-Term Deficit Problem. We Don't Have One.

     James K. Galbraith

[Todd]

Oh no!  France got downgraded, too.  Good thing the whole shebang ends 12/21.