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Burning the Midnight Oil for a Brawny Recovery

"LQD" is an abbreviation I first encountered at EuroTrib: it means "Lazy Quote Diary".

The quote from Warren Mosler:

Credit ratings are based on ability to pay and willingness to pay.

David Beers of S&P knows this and has discussed this in the past.
...
So why then did David T. Beers decide to downgrade the US on ability to pay, and not explicitly on willingness to pay?

Sure looks like a case of intellectual dishonesty.
And I have no idea why.
So much for his legacy.

Well, its a very short post, so fair use restricts it to an even shorter quote.

But this is the gist of it: no issuer of its own currency is ever forced to default on debt issued in its own currency.

Think about it: if your family's IOU's were accepted by the bank to repay debts ... could you ever run short of the means to pay your debts?

What would an honest downgrade have said? Below the fold.

The argument for a downgrade is this:

The only credit risk is that the sovereign issuer of currency is unwilling to pay its debts, as Mosler says. An honest downgrade would be, "in voting down a clean extension of the credit ceiling, the majority in the House of Representatives of the United States demonstrated a willingness to consider defaulting on its debts as a bargaining ploy to get what it wants. This implies a risk of default greater than 0, and so US debt doesn't deserve the "absolutely no risk of default" rating of AAA.

The argument against a downgrade is this:

Even in the manufactured debt ceiling crisis, there was never any reason to believe that interest would not be paid on Treasury Debt nor that Treasury Debt that matured would be redeemed at its face value. What the Government would have done ~ for no good reason, since it has the legal authority to mint coinage with face values in the billions, which on deposit in the Fed would have allowed payment to have been cleared without requiring the issue of debt ~ would have been to miss appropriated payments which it was not legally bound to pay.

So as far as what S&P are rating, the actual payments on the actual Treasury bonds, bills and notes that Congress permitted the Treasury to issue ... there was no risk.

However, 10 years is a long time in politics, and 10 years of this bullshit, who can tell. So while its hard to make a case that bills and notes should be rated below AAA, AA+ for 10 year bonds may be a bit more plausible.

Conclusion

Bottom line, though, S&P is still lying to people when it pretends that the rating is about "ability to pay". Its only ever about willingness to pay for a government issuing debt in the currency it issues.


Midnight Oil ~ Read About It

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Comment Preferences

  •  Tip Jar (11+ / 0-)

    Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

    by BruceMcF on Sat Aug 06, 2011 at 09:21:13 AM PDT

  •  re: currency printing: (2+ / 0-)
    Recommended by:
    VClib, Tennessee Dave

    you note that we could just print more money to pay our debts ("no country that controls its own money will default on debt denominated in that currency").  That, of course, implicates inflation risk, which would seem to be the charybdis to credit risk's scylla, so to speak.  It would make sense that the ratings agencies would take both of those risks into account when it rates sovereign debt.  If they do, then the ability to inflate debt away doesn't mitigate the problem, it just shifts onto inflation risk and away from credit risk.

    •  I forgot to add the question...... (2+ / 0-)
      Recommended by:
      VClib, Tennessee Dave

      Do the ratings agencies take inflation risk into account when they rate sovereign debt?

      •  It looks like they do. (2+ / 0-)
        Recommended by:
        VClib, Tennessee Dave

        Some googling tells us they do, in fact, factor in inflation risk.

        •  They shouldn't... (3+ / 0-)

          ...because it means that their ratings have no comparability value between sovereign debt and non-sovereign debt.  They do not figure inflation risk into non-sovereign debt ratings.

          (Foreign exchange risk is another matter, they should always be paying attention to that.  That means that differing inflation rates between different countries would matter, but not domestic inflation rates.)

          Read pp. 1-7 of Krugman's _The Great Unraveling_ (available from Google Books). NOW.

          by neroden on Sat Aug 06, 2011 at 11:48:47 AM PDT

          [ Parent ]

      •  Its only relevant when there is ... (3+ / 0-)
        Recommended by:
        neroden, NY brit expat, TheMomCat

        ... foreign exchange risk on the returns, since differential inflation can drive foreign exchange movements.

        S&P is rating US debt for US investors, so its not relevant. Its up to the investor to decide whether the return offered in dollars meets their objectives: the rating is about the prospect of the prospective return actually forthcoming.

        Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

        by BruceMcF on Sat Aug 06, 2011 at 10:39:37 AM PDT

        [ Parent ]

    •  Why? (6+ / 0-)

      Whether we should or not is a question of economic policy. Obviously, under current economic conditions we should. Under a stronger economy with less unemployment of labor and equipment, we shouldn't.

      But then, under a stronger economy, we wouldn't have to.

      Like all questions of economic policy, it would be asburd to boil it down to some simple rule that ignores the level of economic activity.

      But can we? Yes, no matter what, we can.

      If we pursued sufficiently ill-advised economic policies, we might get to the point where the dollar was not accepted to buy some critical imports that we required ~ and for oil and other energy imports, requiring those imports is a direct demonstration that we have been pursuing ill-advised policies. In that case, we might have to issue debt denominated in other currencies, in which case inflation risk would have to be taken into account ~ that is the kind of debt that have led to hyperinflationary episodes from Confederate money to Germany after WWI to Brazil in the 1970's, Argentina at the turn of the century and Zimbabwe still more recently.

      But that's hypothetical: that's not what S&P is rating.

      The question that S&P claims to raise is ability to pay, and that is simply settled fact based on the rules of the game underlying a modern reserve banking system: if the government is willing to pay the debt, it can pay the debt.

      Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

      by BruceMcF on Sat Aug 06, 2011 at 10:55:38 AM PDT

      [ Parent ]

    •  Inflation risk is not included in bond ratings (0+ / 0-)

      Never has been never will be.  

      Bond ratings allow a buyer to compare different bonds, and inflation risk is not included in the ratings of corporate bonds or municipal bonds.  So in order to provide a fair comparison, it cannot be included in the rating of Treasury bonds either.

      Read pp. 1-7 of Krugman's _The Great Unraveling_ (available from Google Books). NOW.

      by neroden on Sat Aug 06, 2011 at 11:46:57 AM PDT

      [ Parent ]

  •  I dunno, if I were to rate anything (1+ / 0-)
    Recommended by:
    johnny wurster

    from the US Federal government that was due 30 years from now, based on the trends over the past 30 years, they'd be lucky to get a BB or maybe even a B rating . . .

    •  If you don't think the US dollar ... (4+ / 0-)
      Recommended by:
      neroden, sberel, NY brit expat, TheMomCat

      ... is going to be worth anything in 30yrs, then you shouldn't be in 30yr dollar denominated debt.

      That does not change the fact that as long as the USG is willing to pay, there is no default risk, and so if the issue is ability to pay, the debt should be rated AAA.

      Its only if its rated in terms of willingness to pay that it may be justified to rate it below AAA.

      Support Lesbian Creative Works with Yuri anime and manga from ALC Publishing

      by BruceMcF on Sat Aug 06, 2011 at 10:42:51 AM PDT

      [ Parent ]

  •  The whole thing puzzles me (1+ / 0-)
    Recommended by:
    neroden

    on the one hand, I agree with the observation (by s &p) that congress is seriously dysfunctional at the moment (paraphrase). On the other hand, who rates the raters? Wy does s&p have ANY credibility after their collusion in the economic crisis? why are they still in business?

    If new York state holds their charter, I wonder if it can be revoked. I also wonder what kind of game s&p is playing today. Why would adding fuel to the freaked out markets fire be to their advantage? There has to be money here for somebody . . .

    •  Yes, the charter can be revoked... (3+ / 0-)
      Recommended by:
      LordMike, NY brit expat, Abelia

      ...but that requires a rather more aggressive and radically populist New York State government.

      We have a corporatist governor in Andrew Cuomo and we're having to fight him just to keep hydrofracking from wrecking our water supply.  So go figure.

      Of course, S&P has no credibility among investors; neither does Moody's.  I only pay attention to ratings from Fitch, which refused to rate mortgage-backed securities it didn't understand.

      Read pp. 1-7 of Krugman's _The Great Unraveling_ (available from Google Books). NOW.

      by neroden on Sat Aug 06, 2011 at 11:50:54 AM PDT

      [ Parent ]

  •  Thank you for this Bruce McF, that is exactly (2+ / 0-)
    Recommended by:
    BruceMcF, TheMomCat

    the point; what this political theatre we have witnessed clearly demonstrated was a question of willingness to repay debt rather than ability to repay debt and for that the lowering of the rating is clear although their stated reasons did not match it.

    It is a separate point completely on the relationship between the bond markets as their extended interference in economic policy in Latin America (in the 80s) and in the eurozone now. The risk-ratings have enabled massive profits to be made by lending to states at high levels of interests which is one of the problems behind the debt-crisis in the eurozone. The demands for a neoliberal solution by the ECB, EU and IMF which ensure that these economies will never recover and the relationship of the bond markets to these bodies in setting international economic policy needs to be addressed. The final point that needs to be addressed is that the down-grading of the US will not have the results that have led to the debt spirals in Latin America and in the Eurozone as the exorbitant interest rates charges in these areas will not be charged on the US to avoid the collapse of the world economy. So while the US has joined the rest of the world, it is in many ways exempt from the implications of a downgrading of its bond ratings.

    "Hegel noticed somewhere that all great world history facts and people so to speak twice occur. He forgot to add: the one time as tragedy, the other time as farce" Karl Marx, The Eighteenth Brumaire of Louis Bonaparte .

    by NY brit expat on Sat Aug 06, 2011 at 01:06:57 PM PDT

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