S&P downgrades US Debt

So today, the Washington Post is reporting that Standard and Poors has moved US debt from ‘Stable’ to ‘Negative’. They further say that there’s a 1 in 3 chance that the US Debt rating will be cut in 2 years.

Ouch. This has all sort of implications. From the end of deficit spending through forced reductions to the loss of the dollar as the reserve currency. None of it particularly good for the US or the world.

S&P Downgrades US Debt

I think I agree with them that our current leaders aren’t serious about straightening out the current imbalance. Further, I think they haven’t been serious in the last 30 years. I think the political system discourages this in all forms by imposing a 2 year election cycle horizon to the decision making process.

I don’t blame the system as much as we the people; a 2 year turnover worked fine for the first couple of centuries. We’ve pretty much chosen to be lied to.

I’d like to hear some of the more financially-astute Dopers weigh in on what this does or doesn’t mean. (Scylla, please pick up the white courtesy phone.)

Dear God, what have you* done*!?

It means S&P are talking out of their collective arses. There is still no entity less likely to default that the US federal government.

Isn’t Standard & Poors one of the debt rating agencies that was rating mortgage debt a terrific investment even as they themselves were betting against people paying off the mortgages, as detailed in the film Inside Job?

Their CRA operations (which publish the ratings) weren’t doing that, but yes, the company as a whole was.

Yes, but that doesn’t change the fact that people still listen to them.

Well technically they are signalling that there is a negative watch, not a downgrade.

Snowboarder, leaving aside movies, which are typically staggeringly poor places to educate oneself about … pretty much anything after one passes 12 yrs old, S&P and the others screwed up on complex securities. Bonds, plain old vanilla bonds, are their bread and butter and no reason to doubt their skills in that area.

I would say they have a legit point - and certainly from looking at the lack of realism in political discussion in the US congress, I feel less comfortable about the asertion " no entity is less likely to default than the US federal government." There seems to be a real, if small, chance for a political default. As insanely stupid as that would be, it seems to be a chance.

Sure, but there is effectively zero chance of an involuntary default, and the small chance of a political default is surely dwarfed by the chance of any other state that matters defaulting.

Well, what’s the difference between ‘involuntary default’ and ‘voluntary default because there’s no real motivation to fix the problem’?

I just don’t see a means by which the US gets things under control without higher interest rates forcing a curtailing of borrowing.

First, that movie is going to be more widely seen than any book about finance you can name. So referring to it is going to be something that more people will know about, versus an arcane tome written by an investment banker. Second, your assumption that it’s the only thing I know about the banking scandals and crises is ridiculous and has no basis in fact. Third, hi Opal.

And S&P didn’t “screw up”; they were lying and gaming the system for their own benefit (and their peers benefit) over the welfare of the individuals that were paying them for honest, non-biased, non-conflicted advice.

In light of that, I can’t see why what they say with regards to the US debt matters, especially not when it just happens to coincide with and possibly help further the goals of their wealthy patrons and political allies.

My question is: why are they downgrading the bonds? Is it because of the incredible debt the US is racking up and that the plans to correct it put forward by the various parties don’t look realistic? Or is it they are reacting to the threats to not increase the debt limit?

The latter looks most likely to me,

Ummm, no.

There is most assuredly a smaller chance of Germany, UK, France, Canada, Australia, etc defaulting than the US of A right now; any of those in a default would most certainly matter.

I don’t know if the second clause is true. I hope not.

And? More people have read Winnie the Poo than Brealey & Meyers. Doesn’t make it convincing.

That’s one interpretation. I see it more as a screw up - and in any case, their bonds division is not the same as their structured finance one.

Wealthy patrons and political allies… yes, I’d say the movie tells me a lot.

They are not downgrading the bonds, which are still AAA. They downgraded the outlook.
A thought I had on hearing this news. Republicans don’t want to eliminate the Bush tax cuts supposedly to maintain money for investments. However, the loss in wealth of the richest 1% of Americans from an actual bond downgrade would be much, much greater than any loss of wealth from a small tax increase. Risking a larger problem to prevent a smaller one seems a bit irrational to me.

Higher interest rates would just exacerbate the problem, because it would substantially increase the amount of interest we’d have to pay on the debt we’ve already accumulated. Kinda like trying to cure a headache by taking a 2x4 and hitting yourself over the head with it.

Besides, as Annie Lowrey points out, there’s a very simple way we can ‘get things under control’ in the medium term: do nothing. It’s impossible to filibuster!

In the long run (beyond 2025), of course, we have to bring medical costs under control. The PPACA is a good first step in that direction.

That has to be one of the most inept attempt to analogize that I’ve ever seen. Do you do any other tricks besides trying to insinuate that I’m a child?

Feel free to point out the errors in the film. I’ll wait right here.

I have no desire for a pointless hijack re a 2nd rate film. Suffice it to note, the obsession with Glass Steagal, the moralising about lending w/o real connective evidence, the simple mindedness about business all are quite indictments enough. I can’t muster the desire to rebut superficial film makers. Your inanity regarding wealthy patrons merely confirms its audience.

Regarding the actual subject, Voyager notes,

I find this rather indicative, but then again reading the S&P note as quoted in the reports, it rather seems that their move to negative watch is driven by the conclusion that some substantial portion of the US congress is feckless enough to ignore this in some strange quest to mark points against " The Liberals" / Obama the Man they think is a Kenyan…

Re Chance and the higher rates, I think he was arguing that the higher rates would render further borrowing unsupportable and thus provoke action, although at steep cost. Sometimes the plank upside the head is the only thing that gets attention.

Well, conventional wisdom is that there’s no safer investment, but the people who have to put their money where their mouth is for a living aren’t so sure. There are numerous corporate bonds with lower yields, and have been for a while now.

This article is over a year old:


This was last month:

I don’t know how much of that is directly tied to default fears per se, but there are certainly a lot of concerns in the marketplace that Treasury bills are not as safe as people think.

Which is, indeed, what I intended to say. An actual downgrade would lead to higher rates which further limits borrowing power (or willingness to buy bonds, at least) which causes higher rates and so forth ad infinitum.

But at some point that curve hits a level at which there is simply no more borrowing capacity. At that point the options are to highly inflate the currency or finally stop spending future money.

Ahh, thanks for that bit of information. That sounds extremely plausible - certainly for the immediate future the only plausible threat of a default for any bonds would be the Tea Party congressmen and their scared lackeys blocking an increase of the debt ceiling.
This seems a classic case of “we have met the enemy, and he is us.” It comes from the current Republican strategy of incompetence in ruling, and then claiming government doesn’t work because incompetents run it.