THE Reason for the Downgrade
Or, Barack Obama sucks at 11-dimensional chess.
On July 14, 2011, S&P was assuming that 2001 and 2003 tax fraud deferrals would expire at the end of 2012 [Update: link updated, via MG; PDF–see page 4].
It is no longer making that assumption, which is worth another $4T. Brad DeLong annotates/redlines the press release without comment on that part:
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.
English translation: even though extending the tax cuts would require an affirmative action of both houses of Congress and consent from President Obama (or veto override by vote of 2/3 of both houses), we don’t believe this will happen or we would have kept our innumerate mouths shut in the first place (or at least after Treasury called us on our McArdlesque calculations).
Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011
to 79% in 2015 and to 87% by 2021.to 77% in 2015 and to 78% by 2021. [redlining by BdL]
English translation: if we thought Barack Obama and his Administration both were serious and would be successful, we wouldn’t have left the U.S. on credit watch for possible downgrade. But we don’t, nyah, nyah, nyah.
As I noted earlier today, it’s not coincident that the twenty countries still rated AAA (with the possible exception of New Zealand) all either are tax havens, authoritarian “democracies” (Hong Kong and Singapore) or have Mandatory National Health Insurance.
If S&P on 14 July had said, “The U.S. needs to control its health care costs or we will downgrade it,” no one would have said a word of dissent. But the downgrade S&P presented is not based on the root issue; it is based on the belief that temporary blackmail does long-term damage.
It’s punditry, not analysis. Even Barack Obama deserves better.
At least until he fails 11-dimensional chess the way S&P believes he will.
So what they’re saying is the the Tea Party is more convincing when they say “We’ll destroy the full faith and credit of the US,” than Obama is when he says “I’ll veto the Bush tax cuts.” Considering what we’ve see so far out of both of them, who can really blam S&P for that assesment?
I have to agree with Jim and S&P. Obama failed last December and as a result everything that the tea baggers have done this year was enabled. The GOP is likely to control the Senate after the 2012 elections and if they do not self destruct with Bachmann, the White House. At that point deficits and debt will not matter again except that we have to gut social security and medicare.
Ken: “It’s punditry, not analysis. Even Barack Obama deserves better.”
I’m not sure that I agree with that statement. While I question that S&P should be issuing financial ratings opinions based on wither analysis or punditry, I do think that they’ve got the issue described correctly. That’s political analysis. Punditry is when the analysis and its conclusions go beyond the facts in evidence. So I’d say that S&P has the analysis done correctly, but they should, therefore, be writing an Op-Ed piece rather than issuing a ratings down grade. They do seem to be making an effort to be “fair and balanced” as they do cite the Republican’s as being the significant antagonist. Obama looks bad only in that he seems unable to respond effectively to Republican antagonism. Though maybe they have similar agendas and are only playing the good cop, bad cop routine for voter consumption.
Terry
I think you mean this, but just to be clear
Social Security has nothing to do with the deficit. As long as the United States still functions at all, there is no reason Social Security can’t continue to collect payroll “taxes” and pay benefits forever.
Linking Social Security to the deficits, past present or future, is the Big LIe.
Medicare is only different in that they have already turned it partially into a kind of welfare. It needs to be put back into a self funding insurance system. The people can afford to pay for it themselves, though when they see the price they may insist upon some price controls.
it is very unfortunate that so many people don’t understand how pay as you go financing works. these people think that “we pay” and “the old collect.” they can’t seem to understand that the old paid and that is why they are entitled to collect. and we pay so that we will be entitled to collect.
we all pay for what we will get. the nice thing about pay as you go is that as long as the economy is growing we all get “more than we paid for” just like collecting interest on our savings.
Ken – “As I noted earlier today, it’s not coincident that the twenty countries still rated AAA (with the possible exception of New Zealand) all either are tax havens, authoritarian “democracies” (Hong Kong and Singapore) or have Mandatory National Health Insurance.”
Close, very close. Sorry to point it out, but the number of S&P AAA sovereigns is nineteen, one of which is a SAR (special administrative region) of China.
Go to the Big Picture and scroll to 1130 today for comparisons on AAA/AA countries.
Check Barry’s posted cartoon of today.
Hi Ken:
The CBO notation of ~$900 billion reduction includes interest on debt.
Ken, the real reason may simply have been to send a message.
Following up on my comments on the 7 August open thread, I spoke to someone who, it turns out, had conducted an evaluation of the S&P methodology as applied to sovereign countries. He reached the same conclusions that I offered but he also reminded me that these ratings potentially influence subsequent countries’ policies by encouraging corrective action–something that the raters on the committee fully grasp. Because the small differences among the rating categories are highly subjective and not demonstrably valid in terms of default probabilities, the messaging value of selecting a rating easily can strongly influence the choice. Certainly it is a more important factor than a two trillion dollar mistake, for example, which can just get lost in the noise of a subjective methodology anyway.
S&P has been saying for months that Washington needs to get serious and address our economic (including budget) problems. Now they screamed this message. They’ve tried to avoid giving advice on precisely what to do, because of the partisan and political issues involved, but the most recent message does strongly hint at some actions. Unfortunately, politicians are very adept at reading messages in ways that confirm their existing political positions.
pjr
it’s not only politicians who manage to confirm their existing positions through selective attention to “facts.” that is a property of human brains, all brains.
meanwhile the “deficit problem” can be addressed… put on the path to solution… by ending the Bush tax cuts, and raising the payroll tax less than a dollar a week each year.
i don’t go further than that because, as you say, the rest is in the eye of the beholder. but this would be a simple, sane, beginning.
Jack
You are not thinking big enough. It’s not Obama or even the Democrats they are after.
Consider the following slightly paranoid conspiracy theory.
Someone in a position to know said the purpose of the Reagan deficits was to make the country ungovernable.. that is, you can’t spend on “social engineering” if you have too much debt.
Cheney said “deficits don’t matter” while Bush 2 was driving up the debt (while Greenspan was saying there was danger from “too little debt.”)
The current recession was caused by excesses by the bankers. Our policy in response to the recession was to give money to the bankers .. and to cut taxes… a stimulus of exactly the wrong kind.
Well, now the government can’t restore the economy by spending… but guess who can?
When the government is reduced to running the army, and buying defense goods, managing the police, and the other dirty jobs that private business doesn’t want, but can always blame “government” for the taxes and frustration they cause the people…. THEN the banks can provide their own stimulus by… lending money (that is, creating money)… and the economy will magically be restored, sort of, along strictly “free enterprise” lines. But now “free enterprise” will mean that the banks (that is, the people who own the banks) will be in charge. Really in charge. without a lot of bother with elections (we’ll still have them, but the won’t matter) or even buying congressmen.
You aren’t watching “politics as usual”, you are watching a coup by the people who understand money and “public relations.” No need to fire a shot.
coberly,
What is the difference between London Augsut and Arab Spring?
Calvinism rather than Islam.
S&P downgrade was substantiated yesterday in Dep Sec Lynn’s defense of keeping the F-35 squandering going.
The airplane is grounded indefinitely (like the F-22 has been since 3 May 11) for unknown mechanical issues related to propulsion (sole source P&W untested, unreliable engine) and kluged on electricity generators. It is way over run, $44B R&D now exceeding $56B, late to the minimal tests and needing a lot of “looking the other way” on test results.
There is a fallacy of economics called “throwing good money after bad……………..”
The pentagon, whether Rumsfeld or Panetta is guilty.
Lynn is making the case that we “cannot walk away from $56B”, implying the DoD needs a $1500B rat hole so he don’t say we walked away from a $56B mistake.
Good thing Lynn is on the way out. Maybe Dr Ashton Carter took Econ 101.
Oops…
S&P execs’ donations have favored Democrats in recent cycles
By Bob Cusack and Christopher Goins – 08/05/11 09:46 PM ET
http://thehill.com/blogs/on-the-money/801-economy/175739-sap-execs-have-favored-democrats-in-recent-cycles
Have you conducted a search on the FEC for Harold McGraw III or any of the corporate leaders of Standard & Poor’s?
Federal Election Commission (FEC) INDIVIDUAL SEARCH
http://www.fec.gov/finance/disclosure/norindsea.shtml
MG
thanks for the research. now how would you convince a skeptic like me that (either or both)
A) there are not other contributions not on the record.
B) buying access is a bipartisan enterprise.
ilsm
you may have noticed that Panetta, and the President. have said we need to cut Social Security in order to fund the Pentagon.
I guess I need to say again that Social Security has nothing to do with government spending. Social Security is paid for by the people who will get the benefits.
Except of course that the money the government owes Social Security would be hard to pay back without borrowing from someone else, or cutting defense.
It’s not paranoid. I will say it again. S&P’s downgrade is and will eventually be widely acknowledged to be a nakedly political act of aggression.
It’s not just dumb hick from kansas amateur socialist saying this. Roubini, Auerback, Krugman, Yves Smith have all said as much.
ilsm,
I am no fan of the F-35, but if the jet is supposedly grounded how do you explain the Marine Corps flight demonstration that was just conducted for the news media?
Last I heard, one or more of the F-35s prototypes were still flying in and out of Eglin AFB.
“The US has been led down a dark alley and strangled in what history may recognize as a financial coup d’etat, and a campaign of economic war against the common people.” – Jesse, Jesse’s Cafe Americain, August 7th 2011.
coberly,
Ask Jack. He made the claims. I provided the FEC record. Nothing there to back up his claims.
ilsm,
It wasn’t the engine. And everyone R or D thinks the second engine is a stupid move.
Linky: http://australianaviation.com.au/2011/08/f-35-grounding-explained/
BTW, that took all of 30 seconds…
Islam will change
The incident was last Thursday reported by AW&ST.
As well on earlybird. To last a while.
buffpilot,
Do post when the F-35 is back flying.
That took about 5 seconds.
Then tell me about why the F-100 (P&W) is not the only engine powering F-16’s, also when the USAF (might google engine wars) decided to go with the GE engine (F-110) and how many F-16’s expereinced Class A mishaps before the second engine was pursued.
I was in a TAC HQ dealing with the F-100 and F-16 way back when; you can tell us all the 5 year period.
It will take more than linking to an Aussie press release which government just established a fund to get “in country work” and US taxpayer funded technology, while the delayed Rand D is getting to where the Aussie government funds in expiring.
Someone is building a case for the Aussies to go down the F-35 rabbit hole.
Where were you when the 366TFW/DO lost an F-16 he was flying?
May take more than 30 sec.
I’m certainly not trying to defend Obama, a Republican in sheep’s clothing. I’m only pointing out that the S&P action is political in nature and the senior executives at McGraw-Hill are long term Republican Party supporters. I can’t say what their specific agenda may be. MG loves his long lists of data. I don’t know if those lists are comprehensive or not. But for MG to suggest that the McGraw family is bi-partisan in its approach is absurd.
Buff,
You can google Dep Sec Lynn’s 8 Aug letter to the senate.
buff
As far as electric generation and the engine core, and its QEC, there is a lot of engineering going into figuring out what gives.
The log engineers, who likely are scarce (logistics development money going to keep the R&D bill under 100% overrun) in LMCO look for all kinds of alphabet soup in these things.
Now it may have been the IPP alone, or it may be where the IPP gets “energy” or how or what.
You can also check any R numbers on the core, but the P&W folks will be whining about accessories etc.
There, that only too a few acronyms.
You want a lesson in fault tree?
MG
strictly speaking, you made an interesting point with your list. and it is possible Jack doesn’t have evidence to back up his claim… I wouldn’t know.
But my skeptical reply was to YOUR list. Because the point I keep trying to make with you and Buff is that believing what you want to believe on the basis of non compelling evidence at the least fails to convince anyone except the other people who want to believe what you want to believe.
Now, me, I don’t care much about that kind of evidence because, perhaps like you, I have been fairly close to politics once or twice in my life, and I know it’s … uh… not what it seems.
well, it may be as dishonest and insane as it seems, but there are no good guys, however much you want to believe.
coberly,
I recommend that you take your issue up with the Federal Elections Commission. Give them a call, send an email, or write a letter.
I provided FEC data that is available. It’s part of an official record. I am not going to waste time pretending that the FEC must have falsified or screwed up their official record.
If you have other source data, put it up. Or try doing some research.
Jack doesn’t know where to make his follow up, so I’ll move it back up here under my first response to his 9:12 AM post.
Here is his follow up:
” Jack
I’m certainly not trying to defend Obama, a Republican in sheep’s clothing. I’m only pointing out that the S&P action is political in nature and the senior executives at McGraw-Hill are long term Republican Party supporters. I can’t say what their specific agenda may be. MG loves his long lists of data. I don’t know if those lists are comprehensive or not. But for MG to suggest that the McGraw family is bi-partisan in its approach is absurd.
Today, 5:55:48 PM
MG,
Jack likely read the same article as I which said the McG H contributing was mixed, with the dems as targeted giving implying they were not ideologically aligned with the dems.
I won’t argue with S&P as I said the war plundering is a major cause of opportunity lost to the economy and I would be going closer to A with the way F-35 and F-22 are going as well as the congress talking austerity and passing an appropriation for 2012 which could be cust 70%, if the PACs were not defending scrap and rework in the districts.
When do they downgrade the Euro?
Jack,
I think you need to look at Transparency Data. This rolls up 2009-2010 campaign contributions data in considerable detail.
http://transparencydata.com/contributions/#Y3ljbGU9MjAxMCZvcmdhbml6YXRpb25fZnQ9TWNHcmF3LUhpbGw=
ilsm,
I believe it is pretty clear that Harold McGraw III is a Republican with strong ties to certain other Republicans. No big deal to me either way.
Jack’s primary issue appears to be his implication that Harold McGraw’s political ideology overshadows objective performance by Standard & Poor’s which is a subsidiary company of McGraw-Hill.
My opinion is neutral. I can’t prove it one way or the other. The campaign contributions records available from FEC and other sources appear to punch holes in Jack’s claims and arguments. It really doesn’t matter as Jack can never prove his primary claim. He can just run around talking about it. That’s pretty much all he can do.
MG
i think they have medication for obsessive compulsive disorder.
you failed completely to understand my point. there don’t need to be two of us citing volumes of beside-the-point data.
coberly,
It doesn’t matter to me if it’s you or someone else who doesn’t have faith in the FEC records. I can’t speak to the accuracy of FEC records.
Your original comment was based on your skepticism, not anyone else’s, so I assume that you are still questioning the FEC data. Is that true? Or are you now referring to Jack’s apparent skepticism? Or both now?
I do not believe that the FEC data is besides the point. It is but one part of the records available. I started with their records. I have moved on to other records as indicated on page 2 of this thread. Process of elimination.
MG,
Rating agencies are getting too much attention lately, I want the solvency issue in US banks (nationalize and liquidate, been postponed for 33 months) addressed, and less concern for whose printing presses are whirring out of control (since 1981).
I note, early this Thursday in August approaching the 97th anniversary of the commencement of the Great War, that France kept its AAA rating with a Euro on G7 life support.
Is it possible the Germans will stay with their Euro version of the von Schleiffen Plan?
Where does that end? How many CDS on PIIGS will it take to affect the solvency of the wall st gaming houses?
Will France’s AAA keep the US markets from going toward their natural bottom, which is not yet in sight?
Note for Jack,
When you see the word “bi partisan” be wary.
The military industry congress complex is “bi partisan” meaning both ideologies meet at pillaging SS for the war profiteers.
Bi partisan means there are things that both parties owe to the same select group of pillagers.
Now there will be a bi partisan group of bible thumpers, meaning there are rethugs and dims who believe that god made 90% of the population to be dirt poor.
While the elect need congress to enforce god’s will as determined by michele bachman.
Thomas Paine moved to London to write Age of Reason, did not sell in Boston.
If they can’t medicate the OCD it’s pretty simple to help with the process of elimination. Talk to your doctor about a daily fiber supplement. It might really help.
MG
i don’t mean to be beating up on you. I think your initial reply to Jack was perfectly called for, as was his answer below, and my, rather predictable, answer above. I always advocate skepticism… not of others so much as of oneself. Where we get into OCD [or, as I have been subsequently informed, OCPD] is in your replies to the the replies. Essentially massive data dumping, evidence of anger, and evidence of something like delusions of grandeur… and that is me not putting it quite right… you have a way of expressing yourself that seems to suggest you regard yourself as the ultimate authority on all things and entitled to judge, and judge contemptuously, other people when they differ from you. Since I have been accused of something like this myself, I ought to be a little tolerant when I see it in you. But there’s that eye of the beholder thing, and I think your arrogance is of a different quality that mine. I cannot judge you, but there is always the possibility that “would some power the giftie gie us to see ourselves as others see us…” could suggest a more effective way for you to get your point across…if not find some peace of mind.
I will say… and again we are all guilty of this, but your style seems to make it more obvious… your “logic” seems to me to be frozen into set forms that don’t allow you to recognize that your conclusions do not follow from the evidence you yourself bring to the table, and your reply to others is always to tell them that they need to do what it is that you do… after they have just told you that what you do is not convincing them.
enough on this… but again, my point is not to beat you up, but to first, try to express my own opinions in a blog, not a court of last resort before the One Judge, and to suggest… as is my wont… that you find a way to be skeptical of your own reasons and processes.
Jack, MG,
I don’t pay much attention to past donations except when there is a build up of advantage that is not explained by ideology (e.g. consistently voted for big oil but was ambivalent about or voted against big Pharma and had huge big oil donations but only moderate to low big Pharma donations).
I don’t know why people believe “rich” entities are smart and then, when it comes to campaign donations, the smart guys don’t exercise smart so much as love. If I were a business and if an election was apt to be too close, I would hedge my bets on future influence with both candidates unless I was desperate that agendas of one of the candidates were set in stone and harmful to me. If I saw that it was clear that one candidate had a better chance, I would still contribute to both but would tilt the amount to the probable winner. Assuming that donations reflect ideology as opposed to influence or advantage says that the “rich” entity is not so smart as we otherwise claim they are.
Then, having invested into having that influence, if I find that the investment is having no or negative returns, I would make sure that the candidate never wins again. That is if I am smart and want the bought influence to give me a place at the table.
Jack because MG has done a fair job of tossing data at you to undercut something you said, here’s some data to make you feel better: http://www.followthemoney.org/database/topcontributor.phtml?u=1671 (I can find more for you as well as plenty of data to support MG, too, but he’s done enough of that for himself.)
Your point about all the rhetoric failing to highlight jobs and income disparity is valid. I hope the media will give a little attention to this new bill, which is the first one in a LONG TIME that directly addresses the real problem: http://schakowsky.house.gov/index.php?option=com_content&view=article&id=2976:schakowsky-announces-bill-to-create-22-million-jobs&catid=22:2011-press-releases
PJR
Thanks for the support. I am not all that concerned about the data. As noted, the same data can be used to support both sides of an argument. The is especially so when the topic being “investigated” is social in nature and there is any element of subjectivity to the analysis of the data, which is always when it comes to the social sciences. That there is evidence of one type of behavior does not dispute that there is another, and possibly contradictory form, of behavior that there is no apparent evidence to refute or support. The key word there is apparent. There are many ways to support a position or the adherents of that position that do not require recording with the FEC or any other government office, or any tallying organization. Political support that may not be recorded does still exist.
We would all do well to take to heart the words of Richard Feynmen, now already nearly four decades old, when he warns us of the short sightedness of many scientists, both social and physical. Science and understanding go well beyond the raw data. His analysis is excellent and amusing all at the same time. http://calteches.library.caltech.edu/51/2/CargoCult.pdf
Posting real world facts and source data is arrogant? Right….
LOL.
Hi Jack:
MG is almost like Anne at Economist’s View. Any chance???? Nawww, she is polite. Here is a little tidbit for you:
“Harold McGraw Jr. sits on the national grant advisory and founding board of the Barbara Bush Foundation for Family Literacy. McGraw in turn received the highest literacy award from President Bush in the early 1990s, for his contributions to the cause of literacy. The McGraw Foundation awarded current Bush Education Secretary Rod Paige its highest educator’s award while Paige was Houston’s school chief; Paige, in turn, was the keynote speaker at McGraw-Hill’s “government initiatives” conference last spring. Harold McGraw III was selected as a member of President George W. Bush’s transition advisory team, along with McGraw-Hill board member Edward Rust Jr., the CEO of State Farm and an active member of the Business Roundtable on educational issues” http://www.thenation.com/article/reading-between-lines?page=full
and here: http://www.dailykos.com/story/2011/08/08/1004541/-Standard-s-CEO-Gives-$$$-to-Romney,-Bush,-GOP-Party
More to the point Congressman Dennis Kucinich is investigating S&P http://www.politicolnews.com/sps-conflict-of-interest-investigation/
Today’s chuckle from the BIG PICTURE
The latest on the F-35 scrap and rework project:
“The F-35 Lighting II fleet has been cleared to resume ground operations after a preliminary investigation found the cause of an electrical subsystem failure, but a Pentagon official refused to speculate when the next-generation fighters will be back in the air.”
http://www.defensenews.com/story.php?i=7358985&c=AME&s=AIR
The suspect subsystem fortunately has dedicated fire suppression.
“Investigators on Aug. 10 determined a malfunctioning control valve caused the integrated power package (IPP) of AF-4, the fourth conventional takeoff and landing version, to fail Aug. 2, said Joe DellaVedova, a spokesman for the F-35 program.
The IPP, built by Honeywell International, combines the functions that are performed by an auxiliary power unit, emergency power system and environmental controls.
In other words it is unique to F-35 and can both start the P&W engine, and take power from it to generate for operating the airplane.
It is interesting that the designers put 3 very dangerous failure modes in the same box.
Lightning was the name of a mule in a depression era comedy which was always depicted sitting on its haunches.
John Mc Cain, put this thing out of its msiery and use the money for jobs.
MG,
Off this idea line but I submmit the F-35 was cleared for ground operating on 10 Aug 11.
http://www.defensenews.com/story.php?i=7358985&c=AME&s=AIR
No word on resumimg flight ops.
MG
if this was just you and me, i’d say, “good luck.” and go on my way.
if it was politics I’d say, “There you go again.”
but just for the record, i said three times that posting real world facts and source data was entirely called for in response to Jack. my issue was whether the facts were dispositive, and then whether you had any idea how you were coming across.
he answer appears in both cases to be “no.”
I will stick with the real world facts and source data. Every single day.
OK, ilsm. Thanks.
well, no, they’re not.
meanwhile for something completely different:
http://newscenter.berkeley.edu/2011/08/10/treasury-official-who-spotted-2-trillion-error-is-recent-economics-ph-d/
for those who like me don’t like links, the article talks about s and p’s 2 trillion dollar error and what they did when it was pointed out.
I take it as evidence of bad faith.
Coberly,
Do you any idea why Treasury says that S&P made an error is their draft calculations?
Do you know how insignificant the error was with regard to S&P’s 3-5 year projections upon which much of their rating is based? Try $200 billion. That’s all. The difference is not enough to change their growth assumptions for fiscal year deficits and debt held by the public.
Do you know that the $2 trillion error that Treasury cited focuses on 2021 cumulative net outcomes? Do you know that means much of nothing in the big picture as the United States is still increasing its debt held by the public well beyond the levels that S&P determined necessary to reduce the debt to GDP ratio of the United States of America.
The Budget Control Act of 2011 (the debt ceiling legislation) moves the USA in the right direction for reining in the projected federal budgets’ deficits and growth in debt held by the public. All fine and good, but the legislation does not begin to elimnated all of the projected debt growth still anticipated by 2021. The United States will still be facing projected fiscal years’ deficits growth of roughly $6.5 to $8 trillion or so on top of the current $9.75 trillion in debt held by the public. That level excludes any consideration of debt growth in intragovernmental holdings, another $5 to $6 trillion or so by 2021. This means the United States is still on an unsustainable fiscal path.
Are you familiar with the modified CBO baseline that Treasury is promoting as the golden reference, and the CBO alternate fiscal scenario that S&P references in its final report on the credit rating of the United States of America?
Do you believe that the CBO baseline is the standard by which we should evaluate the probable outcomes of future federal budgets? Or do you believe that the CBO alternate fiscal scenario is the better choice for such determination?
Treasury simply challenged the CBO reference by which S&P made some of its lower bound calculations. Yes, Treasury was correct, but it did not change the fact that future federal budgets are projected to require deficit financing which will further increase the debt to GDP ratio that S&P, Moody’s, Fitch, Egan-Jones, and other credit rating firms have expressed concerns. Treasury can’t successfully refute those concerns nor promote the CBO baseline as the magic reference upon which credit rating firms or others should base their projections for federal budgets’ expenditures and deficit spending. Instead, S&P will rely on the CBO alternate fiscal scenario as will many other credit rating firms.
Treasury had their fifteen minutes in the news on a technical point. Treasury, though, can’t refute the claims that the debt held by the public is still projected to grow well beyond any level that is considered sustainable. After all, Treasury has stated the same concerns in its annual financial statements of the United States of America.
“….but it did not change the fact that future federal budgets are projected to require deficit financing which will further increase the debt to GDP ratio that S&P, Moody’s, Fitch, Egan-Jones, and other credit rating firms have expressed concerns.” MG Projections are assumptions about future activities. In effect projections are an “educated guess.”
“Treasury, though, can’t refute the claims that the debt held by the public is still projected to grow well beyond any level that is considered sustainable.” MG A subjective analysis.
“Treasury has stated the same concerns in its annual financial statements of the United States of America.” MG A subjective assumption.
“The US Treasury has never failed to pay its debt.” Jack A fact.
Jack,
You said, “To not see H.M.III as an instigator in the action is naive to an extreme extent.”
You have no idea what really happened. You’re just making up stuff.
Jack – “The US Treasury has never failed to pay its debt.” Jack A fact.”
That’s not true. You just make up stuff.
Well it took some searching, but I did find one, that’s one single occurence, of a Treasury default on some US debt instruments. Here’s the reference, but be sure to read to the end for the explanation of a back office glitch together with a peculiar convergence of issues that relate to bond redemption by the Treasury Dept.
The source of the reference: http://dmarron.com/2011/05/26/the-day-the-united-states-defaulted-on-treasury-bills/
“Terry Zivney and Richard Marcus describe the default in The Financial Review (sorry, I can’t find an ungated version):
Investors in T-bills maturing April 26, 1979 were told that the U.S. Treasury could not make its payments on maturing securities to individual investors. The Treasury was also late in redeeming T-bills which become due on May 3 and May 10, 1979. The Treasury blamed this delay on an unprecedented volume of participation by small investors, on failure of Congress to act in a timely fashion on the debt ceiling legislation in April, and on an unanticipated failure of word processing equipment used to prepare check schedules.
The United States thus defaulted because Treasury’s back office was on the fritz.
This default was, of course, temporary. Treasury did pay these T-bills after a short delay. But it balked at paying additional interest to cover the period of delay. According to Zivney and Marcus, it required both legal arm twisting and new legislation before Treasury made all investors whole for that additional interest.”
And this PS appears at the end of the article:
“P.S. Some observers believe the United States also defaulted in 1933 when it abrogated the gold clause. The United States made its payments on time in dollars, but eliminated the option to take payment in gold. For a quick overview of this and related issues, see this blog post by Catherine Rampell at the New York Times and the associated comments.”
So in fact Treasury has always paid it debts, once a little late because of that peculiar confluence of issues, but paid never the less. Am I saying that its a good idea for the US to be in deep debt? No!! I’m saying that a great deal of bull shit is being flung around the issue. Debt and deficits are not the problem. Jobs, income distribution and taxation are the problem. The solutions aren’t that complex unless, as is now occuring, the real problems are ignored while our poliltical class runs amuk with its own agendas aimed at destroying our middle class quality of life.
MG
I was referring to the part where when shown the error, S and P deleted its argument and pretended that nothing had changed. You seem to be saying that in fact nothing had changed. I can’t evaluate that.
I don’t see anything in your analysis that compels me to accept your view. So I am left with my layman’s sense of what arguing in bad faith looks like.
And my impression of the whole debt fiasco is that it is an argument in bad faith. When you get people screaming about deficits while cutting taxes, you suspect they are either not sincere or not rational.
Ah yes the old saw: “Liars or incompetent?” Of course they are not mutually exclusive unfortunately.
Note that MG has focused his diatribe on the arithemtic argument between Treasury and S&P and avoided reference to the fact that S&P has made it crystal clear that the primary focus of the reason for the “down grade” had to do with the Congress being unable to come to terms with budgetary and deficit issues. That decision was primarily political and any attempt now to focus on the “fixed” arithmetic is little more than an effort to obfuscate the legitimacy of the rating itself.
coberly,
The S&P clarification statement was posted in full text on a previous Angry Bear Open Thread for anyone to read. You didn’t have link to anything.
On August 6, 2011, S&P stated in a clarification to U.S. Treasury attacks on the S&P decision and final report which downgraded the credit rating of the USA:
Standard & Poor’s Clarifies Assumption Used On Discretionary Spending Growth
“New York, Aug. 6, 2011. In response to questions, Standard & Poor’s today said that the ratings decision to lower the long-term rating to AA+ from AAA was not affected by the change of assumptions regarding the pace of discretionary spending growth. In the near term horizon to 2015, the U.S. net general government debt is projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption.
“We used the Alternative Fiscal Scenario of the nonpartisan Congressional Budget Office (CBO), which includes an assumption that government discretionary appropriations will grow at the same rate as nominal GDP. In further discussions between Standard & Poor’s and Treasury, we determined that the CBO’s Baseline Scenario, which assumes discretionary appropriations grow at a lower rate, would be more consistent with CBO assessment of the savings set out by the Budget Control Act of 2011. Our ratings are determined primarily using a 3-5 year time horizon.
“In the near term horizon, by 2015, the U.S. net general government debt with the new assumptions were projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption – a difference of $345 billion.
“In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP).
“The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook. None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision.”
Things can change for the better or worse. What is important to remain positive that it will all work out fine someday and things will be clearer. As a result, the people will benefit.