In the heady, bubblicious days leading up to the financial crisis, the major credit-rating agencies were asleep on the job — which is exactly what one would expect from a federally protected cartel. They are neither the brightest lights nor most conscientious souls in the financial universe.
So when Moody’s and Standard & Poor start making panicky noises about U.S. public finances — as both did today — then it is time to fire up the klaxons of alarm across the fruited plain. If it’s bad enough to get the attention of these incompetents, it’s bad. From the WSJ:
Moody’s said the U.S., Germany, France and the U.K. still have debt metrics, including the debt affordability, compatible with their triple-A ratings at Moody’s. But all four countries must bring the future costs arising from pension and healthcare subsidies under control if they “are to maintain long-term stability in their debt burden credit metrics,” Moody’s said in its regular triple-A Sovereign Monitor report.
Moody’s noted that measures were recommended by the U.S. National Commission on Fiscal Responsibility and Reform, appointed by President Obama, to achieve a balanced primary budget by 2015, but that there was insufficient support to trigger consideration of those recommendations by the full Congress.
If you think the 2008 financial crisis was bad, ask yourself this: Who is big enough to bail out the United States? Answer: Nobody.
Note to Washington: If you thought the Tea Party looked like an angry mob, wait until you see what happens when Social Security checks start bouncing.
Social Security checks will never bounce... they will just eventually be cashed for paper currency that is worthless.
Reply to this commentLinkReport AbuseWhat are you worrying about? We have this thing called a printing press. If no one will lend us money, we will simply print the money. That will make their bonds worthless. To avoid that, they will keep lending us money right up to the last dollar if necessary.
Reply to this commentLinkReport AbuseZman, the printing press causes food and energy inflation to be much greater than wage inflation or CPI inflation.
Granny will be eating Alpo and burning phone books in the winter.
Reply to this commentLinkReport AbuseWhat we need is some sort of bond rating technique with a smaller granularity. Say for example 100-90=AAA, 89.9-90=AA, and so on. Since the downgrading of AAA bonds to AA is such a huge step that can make-or-break countries and companies, allowing a rating agency to change a rating from 95.1 to 94 would show their reduction in confidence in that bond without all the "Theatre" that goes on with an announcement such as this.
This would not fix the currently broken system where rating agencies were passing off pure (censored) as AAA, but it would be a start.
Reply to this commentLinkReport AbuseIf we keep borrowing, the interest payments on the bonds will exponentiate until we can't pay interest on the bonds without printing money. You're trading a hard problem for an impossible one a few years down the road.
Reply to this commentLinkReport AbuseOr just see what happens when China cashes the check.
Britain, too, used to dominate global trade and finance. When sterling fell, it was swift, hard and painful.
Reply to this commentLinkReport AbuseNormally, I would agree with you about Moody's being behind the curve. Typically the damage is long done by the time the rating agencies get around to a downgrade. Sub-prime MBS were trading at distressed levels before they lost their AAA ratings. In the case of the US and other AAA sovereigns, however, their debt is still trading at AAA levels. Moody's is arguably way ahead of the curve this time around.
The fact that Moody's runs the risk of raising the ire of its cartel sugardaddy does support you argument though. For Moody's to take a risk by doing the right thing, the US must be in a dire financial situation.
Reply to this commentLinkReport AbuseNormally, I would agree with you about Moody's being behind the curve. Typically the damage is long done by the time the rating agencies get around to a downgrade. Sub-prime MBS were trading at distressed levels before they lost their AAA ratings. In the case of the US and other AAA sovereigns, however, their debt is still trading at AAA levels. Moody's is arguably way ahead of the curve this time around.
The fact that Moody's runs the risk of raising the ire of its cartel sugardaddy does support you argument though. For Moody's to risk its self-preservation by doing the right thing, the US must be in a dire financial situation.
Reply to this commentLinkReport AbuseA blanced Federal budget is to conservatives what global warming is to liberals, something with very little basis in theory and none in fact.
The obvious difference between the U.S. and Germany and France is that the U.S. has it's own currency while Germany and France operate under a currency over which they have no control. In that sense Germany and France are more like California than the U.S.
There is as much possibility of the U.S. going bankrupt as there is of National Review running out of periods, commas, and exclamation marks. It cannot happen. A Federal debt is a piece of paper printed by the Federal government paid off with another piece of paper printed by the Federal government. They are essentially identical.
The real question we should be asking is, who profits from a balanced U.S. budget? The answer, I think, are creditors, i.e. people who are owed dollars. A balanced budget deflates the currency thus increasing the value of debts denominated in dollars. An inflated currency, caused by the Federal Government spending in excess of what it takes in and then some to offset economic growth, reduces the value of debts denominated in dollars.
So list for me the names of the entities who benefit from a balanced Federal budget, I'll start you off: China, Goldman Sachs…
Reply to this commentLinkReport AbuseInteresting theory you have there, Goyo. If it were true, there would never be a sovereign default, restructuring, or hyperinflation from monetizing debts. As it turns out . . .
That money-supply-doesn't-matter approach did not play out so well in Zimbabwe.
Reply to this commentLinkReport AbuseWorry warts. Haven't you heard?
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Reply to this commentLinkReport Abuse@The Zman:
That argument has a false assumption, that there is no alternative to holding your assets except the US dollar.
People will stop lending to the US and shift their assets in commodities, gold, other currencies, long before the US reaches the point of bond default or cranking up the printing presses to the point of hyperinflation.
In fact, that's starting now, just look at the price inflation in food and oil.
Reply to this commentLinkReport Abuse"In the heady, bubblicious days leading up to the financial crisis, the major credit-rating agencies were asleep on the job — which is exactly what one would expect from a federally protected cartel"
Actually they weren't asleep. The rating agencies were paid by the securitizers, so they had very strong short term incentives to say nice things about the CDOs they rated.
Reply to this commentLinkReport AbuseIf some country tries to drop our rating, just park an aircraft carrier off their coast until they reconsider. The only problem with my plan is that it won't work with China.
Reply to this commentLinkReport AbuseTo echo dmt117 its not that the SS checks will bounce... they will just not be worth the paper they're printed on.
Reply to this commentLinkReport AbuseHard rain a-comin'? Let them eat brioche!
Reply to this commentLinkReport AbuseOur country is in debt to who? how are they going to collect? as for social security checks beign worthless, yea sure, want to see a new revolution? If we stop giving money to foreign countries and wasteful spending our so called debt would disappear. governement is a waste of time when it comes to money. As someone said, park a couple air craft carries in front of the country that is causing financial problems... problem solved.
Reply to this commentLinkReport Abuse@GoyoMarquez: "There is as much possibility of the U.S. going bankrupt as there is of National Review running out of periods, commas, and exclamation marks."
What we're worried about is the Fed NOT running out of commas. NR knows when to stop.
Reply to this commentLinkReport AbuseTime to start calling in all of the "foreign loans" we've made over the past. In fact, I'm sure countries such as Irag, S. Korea, et al as well as those from WWII owe quite a bit. (what ever happened to the "oil for blood" accusations hurled at the US - to my knowledge, we never received a gallon without paying an arm-and-a-leg for it). Time to start collecting. And, so what if we "default" on our debt to China? What are they going to do...try to "foreclose" on us? Or, will they merely refuse to keep selling inferior junk laden with lead paint and heavy metals?
Reply to this commentLinkReport AbuseIf you had see what I did in Nam, then this whole debt thing would be pointless! Don't you see that this "announcement" was put out by the same gov't lackys that allowed the US to get in this position? The gov't wants the ratings to collapse so the "people in the know" can make money off of the fall-out. It's all about the benjis.
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