# S&P downgrades US Debt
**URL:** https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838
**Category:** Great Debates
**Created:** [April 18, 2011, 3:10pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838 "2011-04-18T15:10:31Z")
**Posts on this page:** 20
**Page:** 3
### Author:  [@wmfellows](https://boards.straightdope.com/u/wmfellows)
#### Post date: [April 18, 2011, 9:45pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/41 "2011-04-18T21:45:49Z")
A close out on the Japan sidelight, I think these three arties that I dug up are sufficient to wrap up the idea the Japan case says anything about the US case:
[Japanese bond holding differance, domestic stable](http://seekingalpha.com/article/219008-why-japan-should-sell-government-bonds-to-acquire-foreign-assets)
[domination of postal bank in holdings](http://www.bondsmansion.com/general-news/why-the-japanese-government-can-afford-to-rebuild-it-owns-the-largest-depository-bank-in-the-world/)
[Bond market thumbnail for japan debt financing](http://www.forbes.com/2009/06/29/japan-debt-financing-business-oxford-analytica-japan.html)
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### Author:  [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)
#### Post date: [April 18, 2011, 9:50pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/42 "2011-04-18T21:50:42Z")
> [@humanafterall](#):
>
> I think China should stop giving us money, because we clearly can’t be trusted to pay it back.
Except that we clearly can be trusted to pay it back. We’ve been paying it back on schedule, with interest, for ~200 years.
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### Author:  [@Gray\_Ghost](https://boards.straightdope.com/u/Gray_Ghost)
#### Post date: [April 18, 2011, 10:34pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/43 "2011-04-18T22:34:44Z")
> [@Really\_Not\_All\_That\_Bright](#):
>
> Except that we clearly can be trusted to pay it back. We’ve been paying it back on schedule, with interest, for ~200 years.
While this is true, this degree of current indebtedness coupled with U.S. domestic political questions about the amount of government spending and taxation does make one wonder _how_ the U.S. Gov’t will pay back the debt. If they pay it back with [inflated dollars](http://research.stlouisfed.org/fred2/series/BASE), won’t future bondholders want a higher amount of interest to compensate? Further, if the debt were actually downgraded—from AAA to say AAA- or God forbid, AA—won’t that trigger sales of current debt from institutions that require a certain percentage of their capital be held in AAA investments, depressing demand for U.S. debt, and therefore also requiring greater interest for subsequent debt offerings?
In 2010, [debt service was ~4.5% of the U.S. budget](http://en.wikipedia.org/wiki/File:Fy2010_spending_by_category.jpg), with rates around what? 0.5%? (have a look at the federal reserve historical rates [here.](http://www.federalreserve.gov/releases/h15/data.htm)) They simply cannot go much lower. And if they start getting higher, with older debt being rolled over to new, higher interest debt…that 4.5% figure will get a lot bigger.
So yes, I think it is a problem. S&P’s rating might be a lagging indicator in this case.
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### Author:  [@Gray\_Ghost](https://boards.straightdope.com/u/Gray_Ghost)
#### Post date: [April 18, 2011, 10:40pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/44 "2011-04-18T22:40:19Z")
> [@wmfellows](#):
>
> …There is clearly no lack of CAPACITY to pay - other nations have paid down far heavier debt burdens as percent of GDP and at higher interest rates. The worry is politically driven lack of WILL to pay. That is in many ways more dangerous as it is less predictable…
Can you expand on these comments? I had thought the current ratio of U.S. GDP to Debt was previously only seen during the Second World War. And I’ve no doubt that other nations have paid down heavier debt burdens; what were those burdens and did they require institution of external austerity measures or a repricing of their debt/other workout measures? I’m just curious about which examples you have and how well they translate to the current U.S. economic situation.
Thanks.
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### Author:  [@Captain\_Amazing](https://boards.straightdope.com/u/Captain_Amazing)
#### Post date: [April 18, 2011, 10:46pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/45 "2011-04-18T22:46:45Z")
Right…other services would be cut before debt payments, I’d think.
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### Author:  [@Jas09](https://boards.straightdope.com/u/Jas09)
#### Post date: [April 18, 2011, 10:56pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/46 "2011-04-18T22:56:01Z")
> [@Captain\_Amazing](#):
>
> Right…other services would be cut before debt payments, I’d think.
Possibly. Even more likely once the first SS check doesn’t get cut the debt ceiling is raised the same day.
There is a question, however, as to what is legally required. Since nobody has ever had the courage(?) to refuse to raise the debt ceiling I’m not sure there is a factual answer about which payment has precedence - the contractual debt repayment or the legislatively mandated SS payment.
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### Author:  [@Captain\_Amazing](https://boards.straightdope.com/u/Captain_Amazing)
#### Post date: [April 18, 2011, 11:11pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/47 "2011-04-18T23:11:10Z")
Well, the debt repayment is constitutional, so I’d think it would trump the legislatively mandated SS payment (14th amendment):
> [@](#):
>
> The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.
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### Author:  [@wmfellows](https://boards.straightdope.com/u/wmfellows)
#### Post date: [April 18, 2011, 11:37pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/48 "2011-04-18T23:37:20Z")
> [@Gray\_Ghost](#):
>
> Can you expand on these comments?
Uh, why? It’s not particularly insightful.
> [@](#):
>
> I had thought the current ratio of U.S. GDP to Debt was previously only seen during the Second World War.
Not as far as I can tell.
See here: [Government Debt as Percentage of GDP 1990-2009: USA, Japan, Germany, China… at Curious Cat Investing and Economics Blog](http://investing.curiouscatblog.net/2010/10/18/government-debt-as-percentage-of-gdp-1990-2009-usa-japan-germany-china%E2%80%A6/)
> [@](#):
>
> And I’ve no doubt that other nations have paid down heavier debt burdens; what were those burdens and did they require institution of external austerity measures or a repricing of their debt/other workout measures? I’m just curious about which examples you have and how well they translate to the current U.S. economic situation.
US debt is quite ordinary as compared to ongoing debt burdens of W. industrialised nations. Belgium has paid down worse without either crushing austerity or restructuring.
There is simply no objective reason to think the US does not have the ability to fairly easily pay down its debt, should it so desire.
> [@Gray\_Ghost](#):
>
> If they pay it back with [inflated dollars](http://research.stlouisfed.org/fred2/series/BASE), won’t future bondholders want a higher amount of interest to compensate?
As there is no sign of hyperinflation or out of the ordinary inflation, no. Not yet.
> [@](#):
>
> S&P’s rating might be a lagging indicator in this case.
Err, no.
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### Author:  [@Jas09](https://boards.straightdope.com/u/Jas09)
#### Post date: [April 18, 2011, 11:39pm UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/49 "2011-04-18T23:39:37Z")
Perhaps. But this is not what I would consider settled law in any way.
It obviously behooves certain parties to make claims about what will and will not be paid first for political reasons. In the end the Fed probably gets to make the call - at which point the lawsuits start.
Here’s hoping sanity prevails and we never have to find out.
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### Author:  [@Snowboarder\_Bo](https://boards.straightdope.com/u/Snowboarder_Bo)
#### Post date: [April 19, 2011, 1:49am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/50 "2011-04-19T01:49:12Z")
> [@wmfellows](#):
>
> 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.
In other words, there’s nothing the film got wrong, so you’ll instead result to puerile insults and characterizations.
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### Author:  [@furt](https://boards.straightdope.com/u/furt)
#### Post date: [April 19, 2011, 2:06am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/51 "2011-04-19T02:06:23Z")
> [@Snowboarder\_Bo](#):
>
> In other words, there’s nothing the film got wrong, so you’ll instead result to puerile insults and characterizations.
It doesn’t matter how awesome the movie is – most of us haven’t seen it, and we’re not going to rush out this very minute to do so. If you have an argument to make, please do. Just saying that some film you liked said bad things about S&P isn’t very impressive.
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### Author:  [@Snowboarder\_Bo](https://boards.straightdope.com/u/Snowboarder_Bo)
#### Post date: [April 19, 2011, 2:28am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/52 "2011-04-19T02:28:19Z")
> [@furt](#):
>
> It doesn’t matter how awesome the movie is – most of us haven’t seen it, and we’re not going to rush out this very minute to do so. If you have an argument to make, please do. Just saying that some film you liked said bad things about S&P isn’t very impressive.
I’m not trying to impress anyone. I’m calling out **wmfellows** , who seems to think the film was incorrect in some of the information it provided.
I’d like to know what was incorrect, and how, so I can form a better opinion of both the recent collapse and the current state of S&P’s business operations, and how they relate to their current rating re: the US debt.
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### Author:  [@China\_Guy](https://boards.straightdope.com/u/China_Guy)
#### Post date: [April 19, 2011, 2:59am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/53 "2011-04-19T02:59:11Z")
SB, I’d be happy to rip the S&P but I can’t be bothered to watch the movie. Is there a transcript or something that lays out the facts?
As pointed out earlier, S&P has put the debt on credit watch, which is a reversable step in ther downgrade process and not an actual downgrade.
Secondly, S&P looks at credit differently than the average Joe. This is a key point. S&P and the other rating agencies don’t really look at credit worthiness. Rather they look at the ability to repay debt within the timeframe of the debt. This is really an important distinction. The majority of rating companies are rating whether or not debt will be repayed within a timeframe and not whether the company is credit worthy. Eg, it might be a giant ponzi scheme but the likelihood is that your debt will be repaid before the house of cards collapses therefore ipso facto the debt we are rating is good (but the entire company or economy is a pestilent riddled POS). The rating companies are careful to never mention the part in brackets.
Now S&P and all the other rating agencies and all of the investment bank credit people got it horribly wrong a few years ago. And it was certainly obvious that they were just taking money to make a narrowly defined investment grade rating to skirt the system and make their fees. I would take any rating agency rating with a GIANT grain of salt.
And the rating agencies have zero enforcement ability. Sure, in the US they are widely followed and plenty of covenents ab out what a fund can investment in based on the rating. But as pointed out upthread, that pretty much means jack squat in Japan, and less so in China, etc.
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### Author:  [@RTFirefly](https://boards.straightdope.com/u/RTFirefly)
#### Post date: [April 19, 2011, 3:20am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/54 "2011-04-19T03:20:03Z")
> [@wmfellows](#):
>
> I suppose someone or myself if I get motivated can dig up the holdings data. But I’m not so motivated at this instant.
Well, that’s pretty much at the heart of your argument. If you’re too lazy to make it, then there’s no argument.
> [@wmfellows](#):
>
> A close out on the Japan sidelight, I think these three arties that I dug up are sufficient to wrap up the idea the Japan case says anything about the US case:
> [Japanese bond holding differance, domestic stable](http://seekingalpha.com/article/219008-why-japan-should-sell-government-bonds-to-acquire-foreign-assets)
> [domination of postal bank in holdings](http://www.bondsmansion.com/general-news/why-the-japanese-government-can-afford-to-rebuild-it-owns-the-largest-depository-bank-in-the-world/)
> [Bond market thumbnail for japan debt financing](http://www.forbes.com/2009/06/29/japan-debt-financing-business-oxford-analytica-japan.html)
That’s nice, sweetie, but we’re not going to do your work for you. Make an argument, or not. But don’t just throw up a bunch of links, saying in effect, “somewhere in these links is a great argument for my position.”
Because you know what? There’s no way to win that game. I can go in, come up with my best assessment of what that argument is (doing your work for you), completely demolish said argument, and then be told that that wasn’t really the argument you meant at all.
So make an argument, or not. I’m not going to waste my time rebutting something that isn’t actually there.
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### Author:  [@Magiver](https://boards.straightdope.com/u/Magiver)
#### Post date: [April 19, 2011, 3:55am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/55 "2011-04-19T03:55:22Z")
regardless of how anyone feels about the S&P statement there is a growing trend to abandon the US dollar and sell off it’s bonds. Japan’s crisis may force them to cash them in. The inflation rate is rising.
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### Author:  [@elucidator](https://boards.straightdope.com/u/elucidator)
#### Post date: [April 19, 2011, 4:10am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/56 "2011-04-19T04:10:41Z")
Winter is coming.
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### Author:  [@wmfellows](https://boards.straightdope.com/u/wmfellows)
#### Post date: [April 19, 2011, 7:17am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/57 "2011-04-19T07:17:42Z")
> [@Snowboarder\_Bo](#):
>
> In other words, there’s nothing the film got wrong, so you’ll instead result to puerile insults and characterizations.
No in other words the film is a hijack.
> [@RTFirefly](#):
>
> Well, that’s pretty much at the heart of your argument. If you’re too lazy to make it, then there’s no argument.
See the fucking articles mate, they show the data.
> [@](#):
>
> That’s nice, sweetie, but we’re not going to do your work for you. Make an argument, or not. But don’t just throw up a bunch of links, saying in effect, “somewhere in these links is a great argument for my position.”
One page arties showing the fucking holdings isn’t too much work for you, now is it?
Save the snide " lesson" on argumentation for when there’s a point to defend.
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### Author:  [@Koxinga](https://boards.straightdope.com/u/Koxinga)
#### Post date: [April 19, 2011, 7:43am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/58 "2011-04-19T07:43:12Z")
Seems to me this thread is a bit of a microcosm of how we got to this state . . .
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### Author:  [@wmfellows](https://boards.straightdope.com/u/wmfellows)
#### Post date: [April 19, 2011, 10:12am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/59 "2011-04-19T10:12:07Z")
> [@Magiver](#):
>
> …there is a growing trend to abandon the US dollar and sell off it’s bonds. Japan’s crisis may force them to cash them in.
Where is the trend to sale of US treasuries? What data is this based on?
> [@](#):
>
> The inflation rate is rising.
Where? What data is this based on? Last I saw EU had larger issues.
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### Author:  [@Steve\_MB](https://boards.straightdope.com/u/Steve_MB)
#### Post date: [April 19, 2011, 11:34am UTC](https://boards.straightdope.com/t/s-p-downgrades-us-debt/578838/60 "2011-04-19T11:34:54Z")
> [@Really\_Not\_All\_That\_Bright](#):
>
> 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.
I think it’s basically a political message to the Tea Party firebreathers (“Step out of the china shop with your horns up”).
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