Credit Ratings and the Pricing of Sovereign Debt during the Euro Crisis by Joshua Aizenman, Mahir Binici, and Michael Hutchison.
Their abstract says that upgrades have a pronounced effect on sovereign debt prices. That’s interesting because it’s sometimes argued that credit bureaus don’t know anything that the market does with respect to governments. The abstract also states that behaviors after the start of the financial crisis were a lot different than behaviors before it. They continue:
So in general the effects of a AAA to AA+ downgrade would be expected to be smallish anyway, even if the economy in question wasn’t the largest in the world.
That’s a nice wall-o-text you got there. So what do you think it means? Let’s see if it actually means anything to you because I’m betting it doesn’t. I think the best you’ll be able to do is make some superficial observations that are already contained in the text you quoted and that’s about it.
But I’ll give you some hints - which you wouldn’t need if you’d been following this thread or even read a few of my other posts.
What is the relationship between the value of the dollar, the value of dollar equivalents such as treasuries and interest rates. IOW, if the value of the dollar falls, what happens to the rates on treasuries?
What happened to the rate on the 10 year back in June? Why didn’t the rebound in the dollar affect the price of treasuries (still depressed)?
What is it that investors fear most - uncertainty. Does the political situation contribute to that uncertainty or not? How does that affect the dollar?
If we are in an economic recovery and there is 2-3 trillion in excess reserves, what is the greatest danger that creates? Why? How will that affect the dollar?
Measure for Measure: Thank you for actually addressing the question. That the results might have been opposite of what would be expected is fascinating.
Real world economics have an unusual tendency to shear away from theoretical predictions. The last several times the minimum wage has been increased, the result has not been the decrease in employment that might be predicted from the simplest Econ. 101 cost-availibility curves.
I’ve actually got enough math to know what spline regressions are. I don’t have the knowledge to apply such a tool to the economics issues at hand. I have to depend on kind persons such as you to try to make things clear. The fact that the issue is incredibly complex doesn’t make that job any easier!
Oh good. Then maybe you can summarize his post for us. You see my contention is, that like so many people here, he thinks that quoting a few sources and tossing it in a post means something. In this case, it didn’t. But more than that, I’m fairly certain that neither of you can even translate any of that into language most people will understand since neither of you have any clue yourselves.
I have proved time after time after time that I know when people are simply pretending and I’ve demonstrated that every . . . single . . . time. Both of you are completely ignorant of anything that goes beyond the superficial meaning of those quotes and I’m calling both of you out.
I’m going to make both of you look like fools for even making the attempt and it starts by showing that you can’t even draw simple, econ 101 implications from anything that was said.
And since either both of you have the attention span of a garden slug or you never saw the first time, but I’ve already dealt with the issues raised mulitple times but neither of you know enough to even realize that. You are both so laughably ignorant it’s just a shame that no one else here has the training to appreciate what fools both of you are.
So. Hows that for throwing down the gauntlet. What are you going to do about it?
Holy Christ, deltasigma, could you possibly be more of a fucking dick in this thread? Damn dude. Even people who think you might be right don’t like you. That’s slightly impressive (in a train-wreck sort of way).
I sincerely hope you don’t rely on selling your ideas to people for a living, because you suck at it.
Don’t bother to answer 'cause I really don’t give a shit what you think about anything anymore.
Look asshole, do you mind if I call you asshole? You have no fucking idea what this thread is really about. It has nothing to do with the title you pathetic moron and if you’d read more than the 5 posts permitted by your insectoid attention span you’d realize that so don’t you even dare to think you have the right to say jack shit about my fucking behavior. You’re even more of a dipshit than the Olsen twins here since you don’t even know what they do and they know virtually nothing.
No one participating here has the slightest fucking interest in the issues. But if you can tell me what they are are interested in, I’ll get you some nice warm breast milk.
I’m afraid even the smartest professors and key economic policy-makers don’t know the answers either. :smack:
For one thing, an economics paradox (I forget the name; it’s superficially related to Heisenberg Uncertainty – to observe is to change) means that when policy-makers focus on controlling an indicating parameter (as Fed tries to control interest or inflation) that parameter ceases to be useful as an indicator. :smack:
Another problem, I think, is the sheer scale of interventions. One government agency (Treasury) issues a trillion dollars of debt; another agency (Federal Reserve) buys it up. Some of the first-order effects cancel, but, since a trillion dollars is a lot of money, the less-studied second-order effects can be important.
AFAICT, only deltasigma knows the answers. I sure hope he twitters the President’s advisers on a regular basis, 'cuz I’m not sure they know what they’re doing!
You idiot. You actually think that the Fed buys US paper from the Treasury? You’re not even at the level of a fucking circus monkey in terms of understanding this shit.
Un fucking believable. But you have the unmitigated gall to continue to pretend. Jesus this place is incapable of fighting ignorance. It’s a fucking carrier.
Let me guess. If the fruit vendor has to ask the ice cream guy to make change for my $20, then she didn’t get the $10 from me, she got it from the ice cream guy?
I retract any kind word I ever offered you. I’m sure there are Dopers with lower theoretical IQs than you, but when everything is factored in, you are by far the stupidest dip-shit turd that ever defecated on this message board.
Maybe I missed some previous part of your exchange – this thread was quiet for a while – but I really don’t think you give Martin Hyde a completely fair shake here, at least based on the context of the post you quoted.
You’re being fuzzy with cause and effect here.
If the deterioration in the fundamentals is already priced into the market before the downgrade, then it’s the deterioration of the fundamentals that is the cause of both the market price and also the downgrade. That would mean that the downgrade itself is not a bad thing, but merely one further indicator of the bad thing. The check engine light coming on isn’t a bad thing in and of itself. It’s an indicator that there’s a problem under the hood. And it’s a late indicator in this case if the market already took notice of the engine troubles and already took the effort of pricing those troubles. For a real car, the red light coming on might be an important indicator, but for a monster market like US Treasuries, it’s simply not relevant from an information standpoint. Everyone already has significant attention focused on this engine, and the light can’t possibly tell us anything new. The observers who flick the switch have no special view of this particular engine. Frankly, I think that’s what has already been explained in this thread. The one wrinkle is if some investors are contractually/legally obligated to hold AAA assets and nothing else. Then the downgrade could cause some issues around the edges, but I’m pretty sure Martin Hyde already specifically addressed such cases.
I don’t think he was summarily dismissing that possibility, just pointing out its unlikeliness.
I would make the further point that a downgrade wouldn’t lead investors to seek greener pastures in the case of US Treasuries, again because it’s a monster market that everyone already knows about. If there were an alternative, investors would be seeking it out even before the credit agencies reacted and turned on the red light.
I think you misread him here.
He specifically indicated the US Constitution in his explanation of why we “need” a debt ceiling. You respond with examples of foreign countries… that don’t use the US Constitution. They’re not relevant to his point. He was making the same point that the legal eagles here on the SDMB were making: the debt ceiling is necessary as far as US law goes. (Frankly, I don’t see anything limiting Congress from setting the limit at 250% of GDP, automatically recalculated annually, but that is another discussion.) So you’re basically repeating his point again for him: Regardless of the practical irrelevance of such a debt ceiling in the vast majority of other countries, the US can’t do without one for legal reasons.
I want to point out here that there’s a difference between measures that banks have direct control over, such as loan creation, and broader macroeconomic forces like nominal spending or inflation which can’t be manipulated in the same ways.
Possibly. You may note that he’s shifted to a rhetorical position whereupon he wants me to make his arguments for him. That’s rarely a good sign. At any rate, he’s not worth bothering worth, at least on this page. Hellestal provides some solid and informed analysis.
I may have misunderstood him.
I agree with this. I just think that there’s a real a risk that Congress will do something that a) causes the economy to shrink further and b) causes S&P to downgrade. The latter is a scandal IMHO (US credit quality should be unquestionable), but its direct economic effects are pretty manageable. The check engine light is a decent analogy, as it is an unreliable but still occasionally useful indicator of bad things.
Right. But if Congress screws the pooch, a credit downgrade would be an objective indicator that they’ve …screwed the pooch. Just not an especially reliable one.
I’m suggesting that while the OP may have been mangled, the exceptionally bad policy coming from the Republican Congress may do lasting damage. Though honestly I restarted this thread because the distinctions in my mind between the sequester, the default ceiling and the like were getting foggy in my mind and I wanted to review them. These distinctions matter. I’m trying to work out the rough magnitude of the damage next Fall’s antics could/will do. For example the sequester lowers aggregate demand, but it doesn’t actually mandate governmental default. Very different things. The latter is far worse.
Incidentally, we may also be witnessing bad policy driving out the good. Despite all the sequester drama, the Republican House has been unable to pass an appropriations bill (for HUD and Transport) that’s consistent with the budget cuts they passed in broad outline early this year. In a normally functioning democracy, that would cause them to lose face. My point is that these sorts of antics paper over all manner of legislative incompetence, in addition to making a large, timely and sensible infrastructure program a political nonstarter.
Well, I’d have to get into the weeds again with one of Ravenman’s posts. I know this is a dodge but the guy at Calculated Risk has called for the abolishment of the debt ceiling and I find it very hard to believe that a law couldn’t be written that would do that. If that’s not possible, I would call for the re-establishment of the Gephardt rule, which removed the issue from at least one of the two chambers. I’m basically expressing a form of simple disbelief which admittedly isn’t the strongest argument, though I maintain that’s it’s not de minimus in this instance.
As I said earlier, I debated this with Ravenman some time back and didn’t exactly emerge victorious. Still worth a revisit, if only to refresh my memory. I’d pull the cite, but we’re in the pit where standards are a little lower.
Actually what I’m doing is looking for some indication that you know virtually anything about economics, finance or even something tangentially related. I’ve been here for a week proving myself, you haven’t proved jack except that you can use the quote button. That IS impressive by the standards of this thread, but then again, not really.
Makes it tough on poor schlubs like me, when we get called upon to vote for a political party on the basis of their economic policies!
Still, I can’t comfortably vote for a party that deliberately shuts down the government by refusing to pay its bills. New Gingrich learned that lesson: there are a lot of people who don’t approve of that.
What’s particularly sad is that there are a few moderate Republicans who know this, and who did learn the lesson, and, although they outnumber the Tea-Heads, they’re afraid to speak up. When they do say something moderate – “Let’s not shut down the government” – they raise outrage from the extremists now outflanking them, and are forced to retract.
One thinks of Robespierre, eventually sent to his own guillotine.
No, you’ve been making assertions, and not backing them up. When asked for an explanation of an actual economic matter, you bluntly refused. As far as everyone else is concerned, you have bluntly disproven yourself. You are an expert only in your own mind. (Small subject.)
When you were linking to the volatility index as an example of indicators being reactionary vs predictive (kind of a tangent point), you hyperlinked your browser history instead of the intended link so… irony happens, I suppose.
The odd thing is that you would think that any ratings change for an OECD country wouldn’t make a difference at all. Yet the abstract of the working paper I quoted upthread indicates otherwise. If your sovereign credit rating is below A or above B-, changes in credit ratings have pronounced effects on bond prices. (Again, though, I haven’t read the paper).
Odder still, credit agencies usually telegraph their moves for months or years before they actually adjust the ratings. A rating change really should be a non-event. My tentative take is that such announcements jolt the market and crystallize the largest existing inchoate investor fear. So we might pause before making definitive predictions that abstract away from the particulars of a given time. A move from AAA to AA+ could precipitate (modest) changes in bond market prices in either direction.
Maybe. If you buy that hypothesis.
The post-2007 era certainly has been interesting. We used to think that risk-free securities were traded in the market: I’m no longer convinced of that. And yet I haven’t heard of any efforts to create an insured AAA alternative to US treasuries, even as a niche market. Unsurprising to most market participants I’d wager, but somewhat at odds with most intermediate financial texts.