I agree with RNATB. Could it be, though, that S&P is taking inflation into account? I.e., the outlook is downgraded not because of a risk of default but because of a risk of sufficent money-printing so as to significantly devalue the dollar and the bond returns? Or does the forecast not work that way?
(Note: not saying that that’s my prediction for the dollar; just asking if that might be what S&P is looking at).
Or to increase revenues via the taxing powers of the government.
It’s always dodgy to try to get inside someone else’s head but here’s Ezra Klein’s take on the move.
ETA: Of course, Jas09 is completely right. Though I’d be astonished if that was adopted over inflating the currency.
Very interesting happenings in the bond market. The world’s largest bond fund very recently sold all of their US Treasury holdings.
S&P specifically cites lack of a medium term fiscal strategy - that is political idiocy.
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.
I don’t see any rational worries about runaway inflation at present, most industrialised economies are just keeping their noses above deflation.
Actually this Klein fellow pretty much spot on summarises the S&P analysis:
I can’t see why that would be true. S&P’s ratings matter when they’re a substitute for your own understanding of the viability of the borrower. But the reality is that the ‘bond vigilantes,’ so to speak, would have just as good an understanding of the risks associated with T-bills as S&P would. No big bond investors are relying on S&P to tell them how good America’s debt is, or Great Britain’s, or Japan’s, or Germany’s.
In 2002, S&P actually downgraded Japan’s debt. And as Krugman notes, it didn’t seem to make much of a difference.
Doesn’t seem like the bond vigilantes are paying much attention to S&P’s announcement so far today.
S&P ratings are used by a large number of big institutionals, in part because they are so mandated, plus S&P and Moody have a long track record in good old fashioned bonds. so this statement appears false:
Since most buyers of Japan debt are domestic, that doesn’t actually tell us very much, given how most Japan assets are held domestically.
I see no reason to look to Krugman as a holy gospel. He’s not a specialist in this area in any case.
They weren’t betting against anything as investing in securities is not something that they do. They charge companies a fee to rate securities for them. It could certainly be argued that they have a conflict of interest because the company that is needing the rating is the one that pays for it as opposed to the people that will be using the rating. However, the claim you are making is not correct.
What would actually cause U.S treasury bond rates to increase is if the U.S. defaulted on its bond obligations. Which is why that outcome should be assiduously avoided. It’s weird to be on the same side of an issue as the U.S. Chamber of Commerce and Jaime Dimon, but those fuckers know that a U.S. default (which would happen if the GOP blocks an increase in the debt ceiling) would be bad for them, in addition to being bad for the U.S. government.
They’ve been going around, talking to freshman GOP congresscritters, telling them to kindly STFU about blocking a debt ceiling increase. Strange days indeed.
Could you give us a breakdown, and could you explain by what mechanism that should insulate the interest rates on Japanese bonds from jumping? That makes no sense to me. It’s like saying that if Saudi Arabia became our 51st state, U.S. gasoline prices would drop.
I cited Krugman as a secondary source for two facts: (1) that Japan’s interest rates didn’t suffer as a result of S&P’s downgrade, and (2) that U.S. interest rates haven’t suffered in the immediate wake of S&P’s announcement.
I don’t think Krugman needs to be an expert in anything to get those right.
I suppose someone or myself if I get motivated can dig up the holdings data. But I’m not so motivated at this instant.
Err, mate if domestic buyers are not tracking S&P and domestic buying is large enough to soak up issuances (and to an extent selling pressure from non domestics), then very simply they’re insulated. Given the role of Postal Bank and other domestic buyers that have no regulatory or other pressure to follow S&P, Japan is not a great point to build a case that S&P doesn’t matter to the US of A. Especially since so much of US paper is held by outsiders.
Of course a lot of that paper is bought for trade and strategic interests (ahem, China), so there is an alternate route to the Japan effect. I don’t know I’d want to bet on it though.
No, it is like saying that if Alaskan oil fields were capable of covering all American consumption, and USA had some quasi state firms that for non-economic reasons did not sell overseas, that US petrol prices would be effected.
Well since it was only today and it was only negative watch, seems rather early to draw conclusions. Of course I don’t think anyone is saying that negative watch is something that causes big interest rate moves.
I know how the avg. John Q. Public gets a credit score. First, he needs to generate credit, which is done by getting a credit card (a device used to trick banks, stores and other companies into believing you are richer than you really are), and paying off any debts he owes on it in a reasonable and timely manner. His credit score is hurt if he buys stuff using his credit, doesn’t pay enough of it back or he doesn’t make his payments on time, which in turn makes it hard for him to get a job (or lose the job he has), and he has a harder time getting loans due to his bad credit. The way it is fixed is by declaring bankruptcy, or by some how paying off all the debt he owes quickly. Now let us trade John Q. Public for the US Government. If a Credit Reporting Agency (CRA) were tasked with finding the score of the US Government, what would it look at? Since a Government can’t use a credit card, it clearly can’t make purchases on credit. But I think China should stop giving us money, because we clearly can’t be trusted to pay it back.
Since the US Government has never missed a payment and has a reasonable level of debt compared to it’s potential income (when considering it’s taxing authority), it’s credit rating is very good. In fact, traditionally, it’s the best-rated debt available and therefore has the lowest interest rates.
The only reason for this downgrade, IMO, is the political situation. The fact that the two parties have disagreements so intractable that it is conceivable that the debt limit won’t be raised is enough to cause these concerns.
Most buyers of American debt are domestic, too. Foreign entities only account for ~33% of US debt holdings.
Would blocking an increase in the debt ceiling actually lead to a US default? It would certainly be bad, and require cuts somewhere, but we still would have enough money coming in from revenues to cover the interest on the debt, right?
A third of your debt holdings by foreigners - taking that figure at face value - is a huge amount (the other side is what percent of final buyers are foreign). Japan as my memory serves is around 8% (that’s stock, not current buying).
Huge difference there.
ETA: Humandifference
Eh?? It most certainly can.
That is not entirely clear to me at all - I’m not sure there is any clear-cut precedent on the order of payees (i.e. who gets paid first - debt holders or SS recipients?).
More discussion here: The debt ceiling and default
Like I said, that’s not at all 100% clear. Federal revenue is certainly enough to pay interest, but then somebody else won’t get paid. I haven’t found any reference that says the government has to pay debt-interest before or after other expenditures (Congressional paychecks should be the first to be reneged, IMO).
At the very least you’re looking at a pretty severe government shutdown.