I wrote this article Tuesday after midnight, but decided to hold up on publication while I got some opinions from others about whether this concern was real, even as I worried that it might be a bad idea to wait. Well, I now regret waiting and am going ahead with my remarks on this since already today, after the markets closed, The Guardian is reporting that Moody's warned that the United States may lose its AAA credit rating, and the markets are reacting negatively.
This something that should come as no surprise. The International Monetary Fund (IMF) warned a couple of weeks ago of “severe shock” to the global economy if the debt ceiling is not raised “soon enough.” This is a concern we need to think about now, not later.
August 2, 2011 is the deadline that all these debt negotiations are up against.
Yet, the theory goes, you can't surprise the market. Of course, no one knows the outcome of the negotiation since there is none yet. But what I mean is that it won't come down to 11:59pm on the night before the deadline and suddenly trading will begin. Rather, at some point, someone will think it's too close to the time and they'll make their best guess. Or someone, worried that will happen, will make a guess a little earlier. And so on. So things will happen at an unexpected time and rate, with people trying to outguess people who are trying to outguess people who are trying to ... well, you get the idea.
Or some credit agency could decide that it's just time to suddenly lower our nation's credit rating. These things can happen. And there's some reason to believe that some people out there might think that such a push is necessary to getting us to collectively see sense.
The bottom line is that we don't actually know when the deadline is. We only know the date the money stops flowing in our treasury. But that's not the real deadline. The real deadline is that we have to fix the problem before the market loses confidence that there will be a solution.
It's an amazing tribute to the belief by people around the world that the United States is a good and honorable country and will pay its debt and have been willing to wait even this long before panicking. And yet, the verbiage coming out of these negotiations is not good and there is increasing evidence that it will take a market panic for the Republicans to understand the stakes.
I say the Republicans because all that's needed to avert an international financial catastrophe is to vote a one-sentence bill that simply changes the number of the debt ceiling. The Bush administration made this adjust seven times. And the Democrats would vote to raise the ceiling tomorrow. It's the Republicans who are making a fuss, and not because any calamity will ensue if they do. They are merely exploiting the political leverage they have to force social changes they've long wanted “because they can.”
It's a risk, you see. They think they can push this to the deadline, but I've argued the deadline isn't known. The global spiral into economic depression could happen tomorrow. It doesn't have to wait. They can't predict when that will happen. If the world loses faith in the US to resolve its issues, it's not clear that merely going ahead and passing the increase will fix it. We could suddenly find our credit rating lessened and the cost of borrowing money could go higher. And what would be the motivation of anyone to reduce that rate.
Ironically, it is again Republican policies that have set the standard for that. Attempts have been made by Democrats over the years to cap interest rates on credit cards, for example, identifying high rates as usury. The typical response from Republicans has been that this is a matter best left to the free market. Well, soon, we as a nation may be victim of higher rates, and if anyone in the US objects, it will be easy for those lending us the money to point to our own laws and say that they're just following our lead.
It's said that you should be nice to people on your way up the ladder of success because you may meet those same people on your way down.
But the question really is this: The Republicans are taking onto the nation a gigantic amount of financial risk. They're placing a bet. And that bet could go radically wrong. (Some of it may have already gone wrong this evening.) Literally tomorrow, it would seem to me, we could find out that our standard of living was going to drop precipitously as a result of Republican gaming around. Shall we hold them accountable if their deliberate, opportunistic, and unnecessary gaming messes things up? If so, how? Such problems are forseeable and avoidable, and they're not doing much about that. That seems irresponsible, and I'd like to see some serious accountability.
They claim to be big on accountability. They wanted credit for the great things they imagined would come of their actions. Will they be as quick to claim credit for any problems that have resulted or may yet result? How would they even possibly make amends?
I have friends who say their punishment should be to not be re-elected. I think that's a little like saying to a bank robber that you're going to punish him by not funding his next attempt to rob a bank. Personally, I think there needs to be a stronger disincentive.
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Great analysis by you in this post.
If the two sides want to make a game of seeing who will blink first all hell will break out soon enough as you have detailed here.
Our nation's debt is serious business. The repercussions and fallout can harm us all.
Great great article here.
Then he bought a big chunk of Goldman Sachs and after years of pointing out that the investment banks were a huge drag on the economy, he suddenly became Goldman's biggest fan.
He bought Moody's and Moody's accidentally rated subprime mortgage-backed securities as AAA when they should have been rated junk quality. (All it would have taken, frankly, was a random sample of 1,200 mortgages, comparing the monthly payment with the mortgagee's monthly income to realize how low-quality those were. Apparently "rating" a security doesn't involve actually understanding the underlying security.)
I've heard it said that some people are honest and upstanding so that when one finally does a dastardly deed, no one will be on guard. It sure seems like Warren has been taking that strategy in his older age.
And now Moody's is considering rating America as below AAA quality. But our constitution GUARANTEES we will pay our debts. It's written into our highest document, which Congress CAN NOT OVERRULE. So even if we suddenly stop borrowing, we can't stop repaying our debts. So the underlying truth of the USA is that our debt is AAA quality, because we guarantee repayment at the highest level of law.
Again, Moody's omits understanding the actual situation from their rating. If it were up to me, they'd be shut down. Their demonstrated incompetence almost tanked the global economy and cost us trillions of dollars. And yet they're still the gold standard of valuation? Sad. But I'd expect nothing more from the financial sector, at this point.
Of course the Repubs are being recklessly irresponsible. But you can be sure they'll be backed up by Fox. And too many will take the plague on both houses attitude. Yet another self-created problem for which no achievable remedy is in sight.
This, too, is a concern of mine. I recently watched the documentary, "Inside Job." What an eye opener. Sure, I've watched all sorts of "conspiracy" type documentaries and such, but this one, well -- it's pretty scary when you get right down to it.
And we have had Republicans exercising their "political might" since the mid days of Reagan's first Administration. When the scariest person in the Republican Party was Newt Gingrich and the scariest person in Reagan's Cabinet was Alexander Haig ("I'm in charge! I'm in charge!" remember that?)
Now we have Karl Rove, still floating behind the scenes, whispering, whispering and not getting in any trouble at all. We have folks like Michelle Bachmann, Orrin Hatch (who has shown he no longer has the mental capacity to think rationally) and Mike "The Huckster" Huckabee riding shotgun with "Shooter" Cheney and trading gun oil with Sarah Palin. It's a real mess, it is.
And this is the group that's holding our Nation hostage in order to get what they want or they'll let go the wheel and let the ship of state run aground. (I wonder how many thousands of gallons of oil that will leave slicked over the economies of the world?)
Sadly, I fear your analysis may be the most apt. The Republican Party has completely lost it's mind. The Democrats need to find a backbone before they can do anything as a unified group and the President is telling them they're going to have to eat their peas now or eat something worse later?
Who, exactly is going to have to eat all this unsavory food? I'll tell you, it won't be any elected representatives. It's going to be, once again, We the People who will have to fall on another economic grenade, hoping we don't lose our homes, our jobs and the rest of what's left of our savings.
I said it in one of my pieces earlier, "As goes the US economy, so goes the world." Sure, China's catching up as an economic power, but right now, Euro power aside and yuan or yen neck and neck, the mighty dollar still manages to gain center ring in this worldwide circus of finance. If the Nation's credit rating falls, then it will be completely on the shoulders of those defenders of Marriage and Family Values distractors currently known as the Republican Party.
What amazes me is that there are still a good many lower income folks who will continue to vote Republican and believe that it's all because of those damn illegal aliens, homosexuals and terrorists.
Well, maybe the terrorists are to be concerned over, but let's not look to Middle Eastern States. We simply have to round up all the Republicans and jail them as Terrorists of the State. They are holding the nation hostage, they are making illegal demands and they are threatening grave harm to the entire nation if they don't have their demands met.
Sounds like terrorists to me.
They should not only not get re-elected, they should lose all their government priviliges and incomes by forfeit for failing to uphold their oath of office to: "Protect and Defend the Constitution from all threats, foreign and domestic." Dereliction of duty and failure to honor their agreements would be at least a courts martial offense in the military. I say we should send them packing and use their now forfeit benefits to help pay down the debt or fund government programs.
Thanks, Ken for once again being salient and on point.
Mission, while I'm of the opinion this is dire, it's also artificial and could be fixed. Financial meltdown really isn't upon us, the Republicans just are willing to make it seem so. Our situation needs to be addressed, but we are not Greece. And, in fact, it's Republican policies—which specifically say “leave it to corporations”—that are the problem. Capitalism is not an all-intelligent beast. It is an optimization engine that responds to constraints, and the constraints must dictate the ethics. Even Adam Smith, author of The Wealth of Nations, knew this. But the Republicans are too greedy to acknowledge it even while all the while trying to pretend to be the party of morality.
Abrawang, that everyone knows the US will make good may not matter. Consider that some may figure out that if they were to exploit the situation to, for example, raise our borrowing rate, then (a) we would still be good for it (and that might be too tempting to resist) and (b) they might think we'd been arrogant for long enough that they could soothe their conscience in doing (a) by thinking they were teaching us some humility.
As I've noted on a number of occasions and will write about more in the future, credit rates are rated more “because they can” than because an honest proof has been done that it is required. This is why credit card rates are so high on the poor. Quite surely, some people don't pay their bills. But a great many of the poor are willing to work harder to make good on every dime of debt than are many of the rich, who might rush to bankruptcy as an ordinary solution to getting in over their head. As an expedience, companies that lend money and perhaps countries that lend money may just not care. It's simpler to them to just say “I have the right, the conditions have been met, I have political cover, and I will therefore do it.” Fairness may not really enter in, nor may have ever been the goal.
It's about an hour before sunrise here where I live and I've so far had only 4 hours sleep. Just now found an e-mailed "heads up" from Kent about this post in which he said he thought these were issues it's hard to get people "fired up about".
Hoo boy. I sure hope, Kent, that you're wrong about that! Me, I've long been thinking (feeling) pretty much exactly what you've been expressing here ... not only about the financial reasoning (or failure thereof) but also about the Republican party's current role and motivations in what could indeed quite quickly become a vast catastrophe -- not just for us in the U.S. but for the interconnected global economy of which we're a part.
I sure hope you and everyone reading this will do whatever we can find to do to help avert the catastrophe. I confess I hadn't been feeling very hopeful but this fine article and all the comments so far are giving me at least a "smidgen" (sp?) of hope.
Thanks everyone!
bastille day podunkmarte
[R]
The unfortunate fact is Kent, you are still preaching to the choir like the rest of us. These people will never accept the fact that they are so dead wrong. Even if the economy goes into total collapse, they will blame the left!
"What amazes me is that there are still a good many lower income folks who will continue to vote Republican and believe that it's all because of those damn illegal aliens, homosexuals and terrorists."
This unfortunately would be the sad result. Just yesterday I had the misfortune to read an editorial in one of our local papers that put the blame solely on "Obama, and the spending spree of the Democrats".
The tea party unfortunately is not just composed of old fogeys, it is also home to a large portion of uneducated younger flag wavers!
The Republicans, if they want it, have an opportunity to further their agenda.
Obama is willing to anger his base to do the grand deal.
They will never get a better deal.
That assumes they really want one.
The real kicker is that the Bush Tax Cuts expire in 2012, so Obama doesn't have to raise rates now. All he need is to get reelected.
Personally, I love the McConnell proposal for its raw cynicism.
A vote to allow Obama to do whatever he wants as long as Republicans don't have to vote for it.
It's inherently idiotic but also brilliant. I think it would backfire on Republicans.
The key thing is that it shows the idiocy of the entire 'threat.'
The US isn't going to default on any of its debts.
Obama is floating the notion that he will delay Social Security Payments.
If one Tea Partier gets their check one day late, there will be hell to pay.
But back to your main point.
Congress is adding risk to the financial system for no financial payoff.
It is more or less axiomatic that in finance, you get paid for financial risk.
It's inherently stupid.
No one really wants to downgrade US Government Debt because, among other reasons, it doesn't make much sense.
We still have a system where people can easily place insanely leveraged bets via derivatives -- like credit default swaps.
The US Government could and probably should put the rating agencies out of business.
The are NRSRO's -- Recognized by the US government and ratings are part of financial regulation.
Right now, US Government debt is considered to have de minimis risk.
If the 4 trillion deal gets done (unlikely), the default risk would return to de minimis.
There has to be a 10 year plan to align revenues and expenses.
The thing is, once something happens or is considered more than a remote possibility -- it could be impossible to get back to the current axiomatic de minimis risk status of US debt.
Kenny, I think Republicans have gotten used to their spin machines to the point that they think they can just say things and have that make it true. But things like Climate Change and the economy have objective processes involved that are impervious to spin.
Mary, always happy to see you stop in. I agree it's something that calls for people to work extra hard to breathe calmly.
america will pay its foreign debts first. without credit overseas, the nation would collapse in weeks. but if necessary, domestic entitlements would be curtailed. the army would be paid, so they could defend the government while social security, medicare, and medicaid are halved.
sounds like a republican plan to me...
Anna, I think the problem is that they see Europe as different. And it is. Even Greece is different than Italy. But certainly Italy is like Greece in some ways, and we are like both of them. There are differences, but also similarities. Simile is often improperly dismissed for its failure to make a literal equivalence. We should learn from the things that are the same and be somewhat reassured but not overly comfortable by the things that are different. And times can change, with it being hard to see the change as it's going on. We must beware—we are not immune. A kind of Ship of Theseus effect....
What's odd is that it's these very things that make us different than Europe that invalidate the Republican claim that there is an instant crisis. To say that we must solve this problem today is to say we are Greece, or at least Italy. Since we are more robust than that, we have time. And all this pressure to solve things all at once in shocking fashion is quite clearly contrived.
But internal consistency has never been something their spin machine has really worried about. I think they're confident that the anti-science / anti-education people that are in their base are not really doing that kind of detailed analysis of what they say. I hate to be so cynical. I haven't always been this way. But their recent actions leave me little alternative. In spite of all, I will continue to look for ways to bridge the rift between Left and Right. I think there is good that can come of two parties and I have no urge to see single party rule. But right now the Right is just not putting out any intellectual product worth using.
As I've said before, the Republicans are having a shit fit and are eating their young as they realize that they've gotten themselves into a box canyon of "no new taxes for private yacht and jet owners". Somehow, giving blow jobs to billionaires seems somehow passe.
Lefty, it's odd that they didn't make a way to compromise, but it's a monument to the arrogance of a poker player who thinks that all there is to poker is what's in your hand. It's almost as if, if you look around the country, the Republicans made a deliberate gamble to just shoot for the moon on this particular administration, no longer being political but simpy trying to grab for all they can get. They probably figured they'd get most of it and could tolerate the loss of the rest, but they didn't calculate in collateral damage. Shameful. If you haven't seen the ALEC exposé, check that out. It illustrates the degree of organization and boldness. Scary.
Moody's and S&P are largely responsible for the financial problems we're facing. As someone here points out, they were the ones who rated the mortgage backed securities that dumped us into this mess. They encouraged the expansion of the real estate bubble, and they were responsible for its collapse. No one else. Without those ratings, no one would have bought those bonds and the whole thing simply would never have happened.
Beyond that, there's a huge fallacy in this entire budget debate. Bonds are constantly being bought, sold, retired and re-issued.
Just one step that could change the entire picture for the forseeable future would be to issue 40 years bonds to replace the 30 year bonds that we are currently selling, and simply discontinue the really short term or increase the minimum term from 4 weeks to 12 weeks, increasing the other by the same proportions.
Re-imagine the other Treasury instruments in the same manner, offer discounted deals for people who are willing to sell back their 30 year bonds in exchange for 40 year bonds, increase the yield by two percent and this whole problem goes away for the foreseeable future.
NO ONE would be hurt by this....except for the bond traders, but fuck them any way.
Doing this, and this alone, would reduce the debt service burden significantly
Do we have to re-balance the economy? Absolutely, but not with a Republican blunderbuss to our heads. What's going on right now is neither diplomacy, nor politics. It's blackmail, er, extortion, pure and simple.
Remember, you asked.
I have pondered the question of whether anyone would believe them if they did lower the rating, especially early. Maybe it would only create a useful talking point, though maybe it would precipitate something catastrophic. That's the thing: We're utterly reliant on market confidence here, and we don't really know for sure what makes a market confident. It could be stable now because everyone's trusting or because no one wants to go first. If someone did start something moving, would others rush in or would level heads prevail? With automated trading, it's easy to have things run out of control.
So I agree with you they're perhaps not the best people to look to for this, and yet at the same time, there's no requirement that investors the world over look to any particular piece of data. They might reason, as you have, that the info is tainted or self-serving or something. Or they might just say “if even an American company dependent on the US says things are bad, things must be really bad.” That is, they might super credibility since a vote by them is a “statement against interest” as they say in the law. (Such statements are often regarded as especially believable when made in court.)
It's all just pointless and unnecessary. And yes, I did ask. Thanks for chiming in.
Nothing. Absolutely nothing. The government still collects 1/12 of its annual revenues each month through payroll deductions. Self-payers still kick in with their quarterly payments. The government will spend what it has to spend to keep vital services alive and eventually the debt ceiling will raised.
The reason is simple. There's nowhere else for the money to go. China, Japan, the UK and our other major creditors simply have nowhere else to put that money....or it would be there already.
China isn't keeping its money in US Treasuries because they like us. They are doing it, first of all, because there's no other economy and therefore no other currency that can absorb that much liquidity....not even their own. Especially not their own. The same is true for our other creditors. They aren't invested here because they like us. They are invested here because their money is safe here. The capital, not the interest, and its the capital they are interested in, no pun intended.
The Euro can't absorb the excess liquidity because the Euro isn't tied to any one country's GDP and is therefore an economic fiction, destined to collapse within the next five years. England will pull out first.
The Chinese can't afford to bring that liquidity home because it would drive their inflation rate through the roof. They would have to print billions upon billions of Yuan to absorb that much liquidity. Domestic prices would skyrocket and their foreign trade balances would have to collapse because their single biggest customer - us - would not be buying from the them any more.
Yes, for sure, this is a house of cards....but it's a house we all built together, and it's a house we all have to maintain despite the crumbling foundation and the leaking roof
Sounds like my place.
I can't resist one final point. One of the reasons the Treasury was able to sell so many bonds over the past five years was the flight to quality from the stock market in general, and mortgage backed securities in particular. With the uncertainty over the Treasury market, liquidity will flee in the opposite direction, which makes it hard for me to believe any doomsday scenarios.
The long term doomsday scenario is a different matter. Attempts to make significant cuts in the federal budget will inevitably result in reiterations of the boom and bust cycle.
Cut Medicare, and the medical system goes into cardiac arrest. Crimp Social Security, and every single company in America will feel the crimp because these dollars go right through the economy like shit through a goose. Medicare covers the overhead for the entire medical establishment. Off-loading medical insurance to the private sector will shred private insurance companies as an aging population overloads their actuarial dynamics.
What the budget cutters never seem to get is that we have been on this seesaw for more than 150 years, boom and bust cycles repeating themselves over and over again for only one reason
http://www.salon.com/technology/how_the_world_works/2011/07/15/what_happens_if_the_debt_ceiling_bomb_explodes/index.html
Briefly, August revenue will be about $172 B. Outstandings bills will be $307 B. About $134 B will go unpaid.
Of the $307 B, $29 B is interest payments on T-bills. No one is suggesting that be skipped.
About $99 B is due for Social Security, Medicare and Medicaid. With the interest payments, that comprises $128 B of the incoming $134 B.
Other commits with claims on the remaining $6 B are military and veterans' pay (about $3 B each) and Unemployment benefits ($13 B).
Defense supplier payments would be $32 B. And as Leonard puts it, "And what have we left out? How about all federal salaries, food stamps, the Justice Department, Homeland Security, air traffic control, the Centers for Disease Control, NASA, the EPA, and highway funding, for starters. And there's much, much more."
And it reminds me of a number of problems: In the end, Obama will have to do something to maintain the status quo. When he does, the various Tea Partiers who are claiming that nothing bad will happen when Aug 2nd rolls around will start trumpeting that they were right. That's the “lucky” outcome—that they become emboldened in their claims that there was no crisis looming. The “unlucky” outcome is that we're able to show them wrong, because the cost of that showing is too great. Terrible choices.
First, thanks, Kent, not only for starting this thread but for keeping it open. The first comment here, by Dr. Spudman said the American people lacked awareness how serious all of this is and I think it was one of your comments that lamented generalised discussion. On that score I'd just like to remark that the few sources I'm in touch with daily have been discussing these matters constantly -- sometimes on a rather trivial (not to mention acrimonious) level but often not.
For the substantantive issues especially as you and Alan got into battings back and forth my especial thanks. I'm not going to offer an opinion on your slightly differing slants partly because I only just this minute finished reading them; partly because I promised a "short post".
However much it does or doesn't "shake down" (resolve or go to hell); at what rate of course none of us knows yet but I must say I relish the current partnership in so many ways between the US and China (for whatever reasons and with whichever motives) if for no other reason than that we seem to be "partners" in the sense of the 'curse' of the Chinjese saying: "may you live in interesting times". [Hope that's not too offbeat or obscure].
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