
United States loses AAA credit rating from S&P  - tshtf
http://www.reuters.com/article/2011/08/06/usa-downgrade-sp-idUSN1E7741TJ20110806
======
geuis
(Reference: <http://www.federalbudget.com/>)

Steps to recovery:

1) End all offensive military actions overseas. Finish winding down Iraq and
abandon Afghanistan wholesale. These actions have cost several trillion
dollars over the last 10 years. We can't get that money back, but we can stop
spending more.

2) Defense spending is in the top 3 highest budget expenditures. Cut it by 1
third across the board. Maintain important overseas installations such as
Japan and Taiwan. Given China's rise, its wise long-term to keep a presence in
the region. Scale back deployments in Europe unless Russia still is still a
threat to western Europe.

3) The most amount of money the U.S. spends is Health and Human Services. The
U.S. health system is a fucking mess. Somehow we spend the most on healthcare
and get some of the worst societal benefits out of any industrialized country.
I don't have an answer here, but it likely involves completely tearing down
the existing system to its nuts and bolts and building it back up. I'd love to
hear ideas on this point from others that know more about it.

4) Social Security is the other one. My mom relies on it, so does a lot of my
family. We're from meager backgrounds and traditionally have come from poorer
parts of the nation. That being said, cut it.

When I look at my paycheck and see that upwards of 40% of my income is being
sucked out by the government and used more for things I oppose than things I
support (e.g. war spending versus scientific investment) it pisses me right
off.

Yes, I have heard the naive argument "But taxes are there to run the things
you use like roads and government services that you use every day". This is
true only in part. Yup, we need an army. Yup, we need local police. Yup, we
need roads. Yup, we need a justice system. But it doesn't take trillions of
dollars a year to run those things.

The government shouldn't interfere with business like propping up failing
business models. It should work to make sure that business plays fair, i.e.
anti-monopoly or collusion, etc.

I'm more liberal than conservative, and definitely not one of these people
that wants business to have free-reign over everything. But there are bottom
lines that we have crossed and need to back off.

~~~
winestock
You're more liberal than conservative. I'm more conservative than liberal.
Bless your heart, I agree with all of your points. At the end of the Cold War,
other conservatives were making the same noises that you're making now. For
their pains, their careers were destroyed by the people who run the current
mainstream conservative movement. Let's take a look at those points of yours.

Points 1 & 2\. Cut defense spending and all of the cool people will call you
an isolationist. Sure, argue rationally all you want; the name will stick.
Also, remember that the United States is bound by treaty to defend more than
two dozen nations. That includes keeping bases in some of those nations. Those
treaties will have to be renegotiated. Those nations will have to increase
their own defense spending. Many of those nations have budget problems of
their own. Have fun.

Point 3. Touch social spending and the cool people will call you a heartless
bastard who cackles at the sight of starving widows in between gulps of baby
orphan blood. Sure, argue rationally all you want; the charge will stick. Of
course, this doesn't solve the money problem. Iceberg? What iceberg?

Point 4. Social Security is the third rail of American politics: If you touch
it, you will die. Sure, argue rationally all you want. It will help as much as
it ever has.

Long story short, the bureaucracy rules us. The administration of
administrators who administer the other administers who supervise the people
in charge of those who actually get real work done cannot make any concessions
to reality. It would be like Gorbachev loosening the grip of Communism; one
exit through the Iron Curtain and it's all over.

The Cool People will double down. They will continue to double down until it
is physically impossible for them to continue doing so.

~~~
geuis
Thanks. I have no refutations to any of your comments. I know exactly what you
mean.

One interesting thing about your first statement, "At the end of the Cold War,
other conservatives were making the same noises that you're making now". A few
years ago I had the opportunity to hear Francis Fukuyama speak. He was the
author of The End of History and a later follow up book. I never knew it
before then, but he was one of the founding members of the Neo-conservative
movement. It was originally started by him and a group of like-minded sorts
around a cafeteria table in some ivy-league college (Princeton maybe?). He
went on to talk about how the ideals of what they founded were adopted and
warped beyond recognition by the Evangelical Christian community in the U.S.
and by other conservatives. What was remarkable about the talk was that at the
end, he essentially repudiated everything he had originally written in The End
of History.

I remember stories my grandparents told of growing up during the Great
Depression. I also remember stories from my mom's family of 7 kids growing up
poor in Rochester, NY in the post-war era. Perhaps I've inherited an attitude
of bite-down and deal with reality from their history.

~~~
paganel
> I also remember stories from my mom's family of 7 kids growing up poor in
> Rochester, NY in the post-war era. Perhaps I've inherited an attitude of
> bite-down and deal with reality from their history.

I have not much to add to your excellent comments, I just wanted to give you a
heads-up. I grew up in a former Eastern-European country, and my childhood and
teenage years were very much marked by the economic collapse of the post-
communist years.

First, regarding the reducing of military spending by the US, I can still
remember reading a very beautiful Soviet propaganda magazine in 1989 (with
colored pictures and all) about how happy everyone was that the Soviet Army
was getting out of Afghanistan and how about everyone will be happy. Then 1991
happened to them and the Soviets disintegrated under their own weight, in many
cases leaving military units stranded in foreign territory because the money
had just run out. I don't know what the moral of this story should be, maybe
that it is never too early to cut military spending. You (the Americans)
should do it now.

Second, I have nothing intelligent to say about your health-care system, but
regarding Social Security I hope that you, the American people, will find a
bunch of decent politicians willing to sacrifice their political careers over
this. The reason being that when the money will run out (and at this rate it
will definitely run out) no amount of blaming the other party or of accusing
the Chinese or the Martians or whatever will make up for the fact that
Government-run agencies will have no money to actual do their jobs (and no,
inflation, i.e. indefinite printing of money will not help solve this, it will
only make it worst). Again, I saw this happening in my country, ~20 years ago,
social services going the way of the shitter and basically the entire
Government-run infrastructure crumbling on its own weight. It wasn't funny at
all.

~~~
kapitan_grant
vi opyatj vse pereputalji, moj daragoy paganel.

~~~
srl
"Again you are mistaken, my dear Paganel."

Care to elaborate? (Preferably in English.)

~~~
abalashov
Reference to <http://en.wikipedia.org/wiki/In_Search_of_the_Castaways>

------
latch
For those who aren't sure why this matters there are two things to note.

First, interest will go up. US Bonds are now considered riskier than they were
before. This means investors in US Bonds will expect to collect more interest
due to the greater risk they are taking. Instead of paying China and Japan 3%
(for example) on $1 trilion (each), the US will now have to pay 3.5% (and
climbing). Of course, the higher the interest rate, the harder it is to pay
back (the quicker a new ceiling is reached), the likelier this happens again.

There could be some pretty massive dumping of US bonds. A number of foreign
investors can only carry AAA risk. (It's kinda unclear where they'll run to
though, since I _think_ all the other AAA countries combined don't issue as
much debt as the US). So, the economy might take a pretty big hit by losing
all those investors.

Now, generally you need 2 of the big 3 rating agencies to trigger any of this.
So it remains to be seen whether Moody or Fitch will follow. I think they both
will.

Also worth mentioning is that Canada recently came back from a downgrade (by
S&P) mostly by tightening their spending belt. Took 10 years (1992-2002).
Australia did it too, though it took 7 years longer.

~~~
TomOfTTB
Again this is based on the same logic that people will treat the U.S.
Government the same way they'd treat any other person and that's just not
going to happen.

If the U.S. falls back into recession we'll take everyone with us. Other
countries know this. Banks know this. Institutional Investors know this.

Increase the interest rate on the U.S. and you'll trigger an increase on the
U.S. consumer while exacerbating the U.S. debt crisis (which is the whole
reason for the downgrade). That would guarantee a recession and would bring
every investment down.

Finally everyone knows what S&P is up to. You said it yourself. They aren't
happy with U.S. policy and they've been able to bully other governments into
austerity in the past. So they think they can do it here. But S&P's opinion of
U.S. policy isn't going to be enough to convince investors to willingly create
another recession

(Please note I'm in favor of austerity and think we're already headed into a
recession I'm just realistic about S&P's limited power)

~~~
mbreese
Some institutions are obligated (by charter or contract) to only buy AAA rated
bonds. That's why it's a big deal... Now that being said, I have no idea how
this would work in practice.

~~~
TomOfTTB
I'm sorry but that's bull. Anything can be changed. Contracts can be revised
and even charters can be updated by a Board of Directors. If you hold a
significant amount of U.S. Bonds you aren't going to ditch them on S&P's say
so. You're going to call a meeting of the Board of Directors or Trustees or
whoever and decide based on your own judgement.

The whole point of a rating agency is to provide you with research that you
couldn't get based on your available resources. But every economist in the
world is a resource on the U.S. Government's viability. You can turn on CNBC
and get 24 hour coverage of it.

So the U.S. is a special case and the ratings agencies don't mean all that
much in regards to it.

~~~
spdy
There is a lot of hope in your post. Investors will just move money to another
country and there are enough who have much better grow rates. (China / India).
Or entities who will bet on the downfall of the U.S and there will be
countries who have a high interest in this.

On Monday you can short every major company the downfall will be significant.
This will be very interesting to watch the next world recession is on our
doorsteps.

Money does not care who you are or what you do.

~~~
radicaldreamer
Well, you might be surprised. Japan's market rallied 3% the day after their
downgrade.

~~~
mbreese
That's probably because the market thought they hit rock bottom. Markets like
uncertainty less than bad news, so they are much happier knowing about the
downgrade.

~~~
joelhaus
p.s. To your earlier point, the '40 ACT details investment requirements for
Money Market Funds [can't think of them now, but you are right, there are
numerous statutory requirements related to the grade of security certain
bodies may invest in]:

<http://taft.law.uc.edu/CCL/InvCoRls/rule2a-7.html>

~~~
radicaldreamer
Those don't come into play because Moody's and Fitch maintained their AAA
ratings for US treasuries.

------
credo
This illustrates one of the risks of hostage-taking and the mistaken
assumption of Republican leadership that the "hostage" (their words, not mine)
wouldn't be harmed

see quote from Senate minority leader below

From [http://www.washingtonpost.com/politics/in-debt-deal-the-
triu...](http://www.washingtonpost.com/politics/in-debt-deal-the-triumph-of-
the-old-washington/2011/08/02/gIQARSFfqI_story_1.html)

 _But at the Capitol, behind the four doors and the three receptionists and
the police guard, McConnell said he could imagine doing this again. "I think
some of our members may have thought the default issue was a hostage you might
take a chance at shooting," he said. "Most of us didn’t think that. What we
did learn is this - it’s a hostage that’s worth ransoming. And it focuses the
Congress on something that must be done."_

 _[edit]: Interesting to see all the downvotes, but my comment had a direct
quote from the GOP senate leader. Can anyone explain why they downvoted it.

As for temphn's point below. Has any Nobel laureate defended the "hostage
taking" ?

Congress already controls both spending and taxation. So they can start fixing
the deficit problem by cutting down on pork, cutting tax loopholes etc.
Threatening to force a default is not the answer._

~~~
temphn
The question is whether you believe the issue would have become an issue even
if the Republicans hadn't raised it now. Many people look at this as an
intervention; if the US is addicted to oil, we are even more addicted to
borrowing. I suppose it really comes down to whether you find
multiplier/countercyclical spending arguments persuasive or not; Nobel
Laureates come down on both sides.

~~~
Pewpewarrows
The Republicans raising the issue was good and healthy for us. The clusterfuck
that emerged in the months afterwards because of them refusing to pass any
bill that didn't fall neatly into their little new imaginary rules was the
problem.

------
fletchowns
Didn't S&P maintain that Lehman Brothers had a favorable rating up until they
collapsed? And in the subsequent congressional hearings the rating agencies
simply responded that the rating is their opinion. Why do people put so much
faith in these ratings when they have proven to be not very useful in
evaluating the risk associated with investing in an institution?

~~~
thematt
People put faith in them because not everyone can hire an army of experts to
evaluate all possible investments. S&P supplies their ratings to life
insurance companies, pensions funds and even municipal governments. These
entities don't have the resources to employ that expertise in-house, so they
rely on companies like S&P and Moody's to give them guidance.

~~~
giardini
thematt says

"so they rely on companies like S&P and Moody's to give them guidance."

And those companies fabricate data and sell it to them.

Perhaps not everyone should invest in areas where they have no possibility of
understanding the risks.

~~~
nazgulnarsil
"Perhaps not everyone should invest in areas where they have no possibility of
understanding the risks."

You just managed to sum up the vast majority of economics problems. Humans are
dumb though. Not much you can do.

------
eps
One thing to keep in mind is that many institutional investors, including
those in Europe, are required to invest _exclusively_ into triple-A
instruments. This downgrade means a major sell-off of US bonds and whatnots
currently held by such investors, and that could have an interesting avalanche
effect.

~~~
daemonize
What about China bailing. How bad does it need to get before they decide to
pull out?

~~~
thematt
They would do that without hesitation. The problem (at the moment) is they
have nowhere else to put that much money.

~~~
TomOfTTB
Its really not. If what you say was true they wouldn't still be actively
buying U.S. Debt.

Their hesitation is they wouldn't get all their money back. If China pulled
even 25% of its investments out of the U.S. the dollar would free fall. They
wouldn't be able to cash out before most of the dollars value was inflated
away.

China continues to buy our debt because they don't want the value of their
current investment to collapse

~~~
johnny22
that's not the only reason, they also need to keep buying it for as long as
we're a sizable portion of their export market. We still are, for now..

------
apaprocki
... and now all the random crap financial code out there that simply hard-
codes "AAA" as the US credit rating will have problems. I bet a lot of people
will be bug testing this change over the weekend.

EDIT: This seems to sum it up:
[http://lostechies.com/johnpetersen/2011/07/16/the-impact-
of-...](http://lostechies.com/johnpetersen/2011/07/16/the-impact-of-united-
states-debt-crisis-on-technology/)

~~~
winestock
"Sorry, boss. Our positions are busted because we hard-coded AAA as the T-bill
credit rating. Look on the bright side, everyone's got bigger things to worry
about."

------
localhost3000
These are the same guys who rated subprime mortgage backed bonds AAA. How the
rating agencies still have _any_ credibility is completely incomprehensible to
me. I hope someone in the press has the wherewithal to make this point.

~~~
mdda
So are you saying that the US shouldn't have been AAA? Or that S&P should be
regulated so that its hands are tied behind its back?

While the {S&P, Moodys, Fitch} sub-prime department obviously got completely
ahead of itself modelling-wise, the corporate and sovereign departments have a
lot of credibility : partly because they haven't been trying to assign values
to 'a whole new way of doing things (this time it's different, etc)'.

------
fanboy123
from the press release:

"The political brinksmanship of recent months highlights what we see as
America's governance and policymaking becoming less stable, less effective,
and less predictable than what we previously believed. "

~~~
Getahobby
This really should be a call for both parties to start working together but it
will most likely turbo charge the blame game.

~~~
seldo
Correct, and it's already begun:

[http://tpmdc.talkingpointsmemo.com/2011/08/gop-tries-to-
shif...](http://tpmdc.talkingpointsmemo.com/2011/08/gop-tries-to-shift-blame-
for-sp-downgrade-of-us-creditworthiness.php)

~~~
hugh3
My favourite thing about that link is how it functions both ways. It
_describes_ an example of Republicans trying to shift blame onto Democrats,
and it _is_ an example of Democrats trying to shift blame onto Republicans.

------
warmfuzzykitten
The real story is that S&P thinks downgrading the US debt will provide
political cover against investigations into their role in the mortgage
securities debacle by the SEC and Justice. They were determined to downgrade
no matter what. Their original justification is the US didn't make their $4
trillion cut target. When Treasury showed them a $2 trillion dollar error in
their arithmetic, they changed the justification to political gridlock. Time
for a perp walk.

------
SkyMarshal
Wanted to check out Krugman's take on this:

<http://krugman.blogs.nytimes.com/2011/08/05/sp-and-the-usa/>

TLDR:

1) The 'madness of the right' holding the debt-ceiling hostage cost us the
confidence of investors (and S&P).

2) The ratings agencies have shown they aren't qualified to rate anything,
much less sovereign debt.

3) S&P miscalculated the downgrade by $2T before going ahead with it anyway.

4) S&P's magic number for averting a downgrade was $4T deficit reduction over
the next decade. The Congressional deal failed to reach that, but according to
Krugman that number is barely relevant to the US debt costs and should not
effect the credit rating. The real downgrade risk is with long-term unfunded
healthcare liabilities, which S&P seems to have ignored here.

------
winestock
So it begins.

A quote: "The outlook on the new U.S. credit rating is negative, S&P said in a
statement, a sign that another downgrade is possible in the next 12 to 18
months."

I.e., things are going to get a lot worse before they get worse.

Time to bring this back to a hacker's perspective. Is there any way to "hack"
the system so as to get government finances to within commuting distance of
sanity? Or have recent events already answered that question?

~~~
aaronbrethorst
Letting the Bush tax cuts expire next year, and winding down operations in
Iraq and Afghanistan would go a _long_ way to balancing the Federal budget.

As far as reducing the deficit goes, I have less insight into this. Except
that making the Federal government's budget revenue-neutral is a critical
first step.

~~~
onedognight
> would go a long way to balancing the Federal budget

> as reducing the deficit goes, I have less insight into this

Balancing the budget is exactly reducing the deficit. It's the debt I suspect
you have less insight into.

Frankly it's an embarrassment that they could only agree lower the deficit by
less than 10%. They are a long way from addressing the debt.

~~~
aaronbrethorst
Yes, you are correct. Long day and I'm confusing terms :)

------
NHQ
I am totally flabbergasted that media and governments would give one-shits-
worth of consideration to what the credit ratings agencies have to say. The
same agencies that gave high ratings to the sour derivatives market which
eventually collapsed our economy. The ratings agencies are Wall Street shills.
Lowering US Debt ratings will result in the US having to pay higher interest
rates, which go into the pockets of the major financial firms. Government et
al playing right into the hands of the banks.

------
mdkess
I am not American, and here's what I don't get: America can borrow money right
now at 1.5% for five years. Why is there such a clamour to stop? I would hope
that the government would be able to get better than 1.5% return with the
money - if the CEO of any company chose not to take on debt at this rate
they'd get fired. It seems like all of the media coverage is glossing over
this.

~~~
veyron
The real problem is that the republicans are zealots of the church of voodoo
economics.

The reality is that demand-side economics has stronger and more intelligent
underpinnings (give money to individuals --> they spend --> increase demand
--> hiring). Giving more cash to companies doesn't induce hiring; demand for
products induces hiring.

~~~
bubbleRefuge
You are absolutely correct here. When people have more money they tend to
spend more and sales at corporations increase and thus the invest and hire
more employees to meet the increased demand. How do we get more money in hand?
Full payroll tax holiday + New deal 2.0.

~~~
Cushman
We couldn't even pass New Deal 0.3b today, man. Can dream, though...

------
giardini
The SEC should criminally prosecute S&P, Fitch and Moody's for their corrupt
participation in the financial meltdown. It should have been done sooner (the
case was already made). To do so now would look like vengeance. But if
vengeance is required then vengeance should be served.

Put their controlling officers in jail and shut down the companies forever.

[http://www.housingwire.com/2011/04/14/credit-ratings-
agencie...](http://www.housingwire.com/2011/04/14/credit-ratings-agencies-a-
key-cause-of-the-financial-crisis-senate-report)

[http://www.huffingtonpost.com/2011/04/13/credit-rating-
agenc...](http://www.huffingtonpost.com/2011/04/13/credit-rating-agencies-
triggered-crisis-report_n_848944.html)

------
mark_l_watson
Yeah, the US deserves a downgrade. What pisses me off is that my wife and I
have savings, live within our means, and if you believe Harvard economist
Kenneth Rogoff (which I do), there is going to be 5% to 10% yearly inflation
for a good while that takes money from savers and basically gives it to
debtors.

I am actually sympathetic to some debt forgiveness - it is not the people in
need that I am pissed off at. Anyway, it is a mess, and everyone who is worth
less than many millions of dollars is going to feel some pain.

I expected this economic collapse to happen after the 2030s - suddenly, after
a few years of W. Bush's presidency I realized that the grand plan was to
cause the collapse to happen much sooner.

~~~
3pt14159
So buy Canadian Bonds or Chilean Bonds or Gold or Silver or Apple stock.

~~~
beagle3
You can't just quit the game.

You bought gold, which conserves your wealth ... and the government takes 15%
to 50% of your "profit" (depending on your circumstances). Debasing by the fed
together with the tax systems guarantees there's nothing you can do against
it.

------
OllieJones
Perfect. Obama and Boehner are doing an excellent job of what they are paid to
do: transferring the wealth of the USA to Wall Street plutocrats. They've
given the sleazeball so-called "rating" agencies the cover they need to demand
higher interest rates.

No new taxes. No new jobs. I can't believe that folks who are in their 20s and
30s aren't throwing rocks at people my age (late 50s) for our generational
greediness.

By the way, I had a six figure federal tax bill one year, when my cofounders
and I sold a startup. Maybe I'm an aberration, but I was proud to be able to
chip in that much to the government that paid for ARPA back in the day.

------
hooande
I find that this graph summarizes my thoughts on the US debt in relation to
the world economy: [http://www.china-mike.com/wp-
content/uploads/2011/04/china-w...](http://www.china-mike.com/wp-
content/uploads/2011/04/china-world-gdp_growth-chart-forutne-2011.jpg)

The United States produces _so much more_ in terms of GDP than the next
largest nations that it's a stretch to compare them. I think the fact that we
produce more than 2X what the next largest single nation produces means that
debt may function differently for us. The global economy is complex enough
that relative position can mean more than short term profit and loss.

Debt is a bad thing. But the debt ceiling we just fought over extending
represents 1 year of USD GDP. In everyday terms, someone expected to make
$100k per year being $100k in debt. To me that sounds more like a student loan
than a national crisis.

Should we make changes, cut spending and increase revenue? Sure. But we should
also keep the bigger picture in mind, and look at our debt as it fits into the
context of a global economy.

~~~
Someone
Debt does function differently for the US; the US up till very recently were
paying less interest than Germany, even though all economical indicators say
Germany is doing better than the US.

I do not think that is directly because of GDP, though. It is because of the
size of the US bond market. If you want to buy or sell US bonds, you can
easier find a seller or buyer, the larger the market.

That is why people think Euro bonds (bonds issued by the EU, not by individual
EU nations) would benefit even the financially stronger nations. They would
create a huge market, and gain interest benefits from it.

------
chicagobob
Please note that there are two other credit rating agencies, Moody’s and
Fitch, and both of them have stated that they have no current plans to
downgrade US debt from AAA, although one of them did place a negative outlook
on the US. So, generally as long as one of the three agencies has a AAA rating
the debt is usually fine for most investment / trust purposes.

~~~
mdda
But now S&P has provided the others 'cover' for downgrading.

Since part of the reasoning of S&P was that US politicians were willing to
play chicken with events of default, I don't see that this is an easy hole for
the US to dig out of. The fact that politicians in the US were openly
discussing 'how bad would a default really be' sums up why the AAA rating was
no longer deserved.

IMHO, 80% likely that the other agencies will follow within a couple of weeks.

------
imcqueen
I just got a NYTimes news alert that S&P is in fact holding off on downgrading
the US based on the math error that was discovered.

Did anyone else see that come through? Is NYT just behind a little?

~~~
CamperBob
If so it might be an interesting political tactic on S&P's part. Issue a
downgrade to show you're serious, but include a 'math error' that justifies an
almost-immediate retraction.

If a ratings agency feels that it's necessary to use scare tactics, that's
scary enough in itself.

------
silverlight
If the government that produces the reserve currency can't hold up a AAA
rating, what can? The idea that anything else should have a AAA rating if the
US gov't doesn't seems a little ridiculous to me on face value.

~~~
mdda
The implication is really the other way around. The USD was the reserve
currency in part because of the credibility of the US government's financials
(and also because of amount of trade, etc). But obviously, the US has taken a
huge beating credibility-wise recently.

After all, Sterling used to be the world's reserve currency : things change.

------
cantbecool
I wonder what would have happened if S&P dropped the rating during the trading
day, and not after the markets closed. We probably would have seen another
-500 point drop on the DJI.

~~~
fanboy123
They wait until late friday to make big changes to give the
officaldom/industry a weekend to scramble/grab parachutes. They actually didnt
release today until after the SPY stopped trading.

~~~
cantbecool
I wonder if they, the parachutes, will be golden this time around.

------
veyron
End of the day, these are the same jokers who were rating junk assets as AAA
and completely missed every problem in this financial crisis.

And the fact that moody's still maintains Aaa means that there's a nonzero
chance it will have no effect. I hope.

------
bubbleRefuge
This is a non-issue and further proof of the incompetency and worthlessness of
Wall Street. The ratings agencies are out of macro-economic paradigm. The US
federal government can meet any and all financial USD obligations because it
is an issuer of currency as opposed to a user of currency such as Euro-zone
states or US states. Of coarse it is possible that politicians refuse to pass
the necessary legislation to meet these obligations ( not raising or
eliminating the debut ceiling). Read more at www.moslereconomics.com

------
bokonist
Mindboggling. Does the S&P understand that the U.S. debt is all denominated in
a currency that the U.S. government can print at will? If the U.S. government
doesn't have an AAA rating, what does an AAA rating even mean?

At the moment, the national "debt" is over $10 trillion dollars, while the
total supply of currency is about $2 trillion, and total government profits
are about negative $1.5 trillion. If we assume that the government will not
use it's powers as fiat-currency-creator to back the national debt, than the
proper credit rating of the U.S. is F. There is no way it could possibly pay
back the debt. The debt is five times greater than the total supply of
dollars. It's debt to profits ratio is way worse than many bankrupt companies.
On the other hand, if we assume that the government will continue to use its
power of fiat to back the debt, then the rating is AAA. It's safer in nominal
terms than any other sort of debt. It is the baseline, the reference point. No
other dollar-denominated debt can possibly be safer.

So you have two possibilities for the U.S. "debt" - AAA or F. Rating it
anything else just demonstrates extraordinary ignorance.

~~~
T-hawk
<http://en.wikipedia.org/wiki/Fractional-reserve_banking>

Fractional-reserve banking might be a good topic to review. It is entirely
possible for more debt than currency to exist. Suppose you deposit $100 at a
bank, which lends $80 of it to Alice. She deposits her $80 in another bank
which lends $60 to Bob. So that's a perfectly legit scenario where more debt
($140) exists than currency ($100). And it doesn't mean that the debt can
never be paid back.

> So you have two possibilities for the U.S. "debt" - AAA or F. Rating it
> anything else just demonstrates extraordinary ignorance.

Did you just call the entirety of Standard & Poor's, a leading financial firm
for over 150 years, extraordinarily ignorant? What basis can you demonstrate
that you understand the world and national economies and credit markets better
than a few thousand really smart economists? There certainly does exist a
spectrum between being the safest investment in the world and currently
actually in default (which is what an F actually means.)

That said, it's true that S&P changing their rating doesn't have much concrete
meaning. S&P didn't actually make the government any weaker than yesterday.
Nobody knows what's going to happen next. S&P is guessing like the rest of us,
although the guess is built on the strength of some very sophisticated
financial models and analytical tools.

~~~
bokonist
History shows that fractional reserve banking is incredibly unstable with that
degree of leverage. As soon as there is the slightest hint of fear of
bankruptcy, everyone hoards cash, no one can repay loans, and thousands of
banks go bankrupt. See for reference every single recession and depression
before the creation of the FDIC.

The only reason fractional reserve works now is because there is an FDIC and
Federal Reserve who will create new money any time there is excessive demand
for people to convert deposits into cash. Fractional reserve only works
because of the fiat powers of the government. So my point stands - if you
assume the U.S. is using its fiat powers, then the debt is AAA. If you assume
the U.S. is not using its fiat powers, then the U.S. should have the debt
rating of an over-leveraged, 1929 private bank - ie, extremely low.

 _Did you just call the entirety of Standard & Poor's, a leading financial
firm for over 150 years, extraordinarily ignorant?_

Yes I did. And why shouldn't I? Maybe the S&P was glorious a hundred years
ago. But the last few years their track record has been dismal. See for
reference the entire subprime fiasco.

 _What basis can you demonstrate that you understand the world and national
economies and credit markets better than a few thousand really smart
economists?_

All I have his my own brain, and my use of reason, logic and evidence. You
either buy my arguments or you don't. If you're not willing to use your own
reason, and base your views entirely on appeals to authority, then there
really is not any point in further discussion.

If you wish to see my arguments laid out in further detail, I do have a blog.
Here are some general thoughts on the economy: [http://intellectual-
detox.com/assorted-thoughts-on-the-econo...](http://intellectual-
detox.com/assorted-thoughts-on-the-economy/) It's only been nine months since
I posted that article, but so far my predictions have been spot on.

Here is a post I wrote about the national debt: [http://intellectual-
detox.com/why-the-national-debt-is-non-p...](http://intellectual-
detox.com/why-the-national-debt-is-non-problem/)

------
ejbadger
S&P is the same agency that rated AAA mortgage backed securities. not exactly
a brain trust over there. my guess is they took this route for publicity.

again the same group that rated a bunch of debt AAA when it was junk. what is
their motivation?

~~~
Uchikoma
So they rated junk as AAA. Do you imply US bonds are junk because they have
been rated until now AAA by the agency?

------
VicT11
“It doesn’t make sense. In Omaha, the U.S. is still Triple-A rated and if
there were a Quadruple-A I’d give the U.S. that.” -Warren Buffett

------
BlackJack
"Treasury officials noticed a $2 trillion error in S&P's math that delayed an
announcement for several hours." -
[http://professional.wsj.com/article/SB1000142405311190336650...](http://professional.wsj.com/article/SB10001424053111903366504576490841235575386.html?mod=WSJPRO_hpp_LEFTTopStories).

Says it all.

------
alecco
From Khan Academy last week:

Government's Financial Condition <http://www.youtube.com/watch?v=LOiw5aBrm4Y>

(Khan was a Hedge fund analyst)

------
DanielBMarkham
Some great non-hair-on-fire conversation here. Whenever I read and note that
most folks are not that far apart on things, I keep wondering why the system
is so broken. Here's the systemic problem, which has nothing to do with
Treasury Bills, tax structures, or political parties.

Phases of political maturity:

1) Apathy. Political parties are like football teams. You pick one and they're
your guys. You root for them no matter what. If anything, there might be
something wrong about folks who take these things too seriously.

2) Emotion. The other political party is the devil. They are out to destroy
America.

3) Enlightenment. The other party is just full of people like me. There are
some smart folks, but the problem is that they have all the wrong incentives
and conclusions.

4) Understanding. Gee, there are those same bad conclusions and wrong
incentives in my favorite party too. Ergo, parties don't matter. There are
smart people everywhere. When the system fails, it's a problem of the system,
not of the people or parties.

The problem in the U.S. is that the majority of folks are in stage 1 or 2 when
we need them to be in 4. So when deep structural conversations come along,
they're still either rooting for their team or blaming the other guys, when
they should be talking about principles that need to be changed for the entire
system to work better, no matter what the actual goals of any party.

There is another problem that helps create deadlock -- an understanding of
where the money comes from. I think many folks view the economy as something
the government grows so that it can harvest money in the form of taxes. (This
is not a Keynesian discussion, simply a discussion about taxes in general.)
Other folks view the government as something the economy grows in order to
keep it functioning. These are two deeply conflicting world-views. I'm not
sure you'll ever reconcile them. Some put trading first and sharing second.
Many put sharing first and trading second. These two camps have come to
demonize the others, sadly. (Which takes us back to the observation above)

For this problem to be solved, we need to give up on arguing specific issues
or philosophical positions and instead talk about fixing structures so that
the budget stays balanced long-term no matter who is in power or what their
priorities are. This is a meta conversation, the kind the framers had. I am
very doubtful there is anyone around today in power that can handle it. Not a
happy outlook. All of the people in political power got that way by playing
ideological and rhetorical games and by being fiercely loyal to their party.
It's the exact opposite qualifications for folks that would have a chance at
actually solving anything.

I think we could talk forever and reach general agreement informally on all
number of things, but if the system remains broken, it's all going to be for
nothing, sadly. Without an honest look at meta systemic issues, a free-for-all
discussion around U.S. policy is all so much activity without results.

~~~
jlangenauer
Actually, I think there's a stage before all this:

0) Withdrawal. No political party represents me, and the ones in existence
represent other groups. There's nothing I can do to change the system, and
it's not even worthwhile voting. I'm going to watch Jersey Shore.

In most Western countries, there's a lot of people in stage 0. It's a problem
for any putative democracy.

~~~
mchusma
Actually, withdraw may be the last stage (or at least the most logical one).
Public choice theory looks at this in depth. Essentially, if your vote doesn't
really matter (and statistically it almost never does), then understanding may
be too much work with too little payoff. I would say that is why the founders
thought limited government was best (although that seems to no longer actually
be the case)

------
kenjackson
Has the US ever not had a AAA credit rating from S&P (until now)?

~~~
fanboy123
Has always had AAA rating since the start of sovereign ratings. Look out
below.

~~~
aculver
.. and that was in 1918. So basically this is the first time in almost 100
years.

------
uladzislau
It's not just US the whole world economy system is screwed. Look what happens
in Europe.

People should really make some radical improvements to the way economy and
finance system work. The main things: it should be simplified and transparent.

If only a few experts understand what happens how could the system be reliable
and secure? Everyone also knows that the more complicated is the system the
higher is the failure rate.

~~~
davidw
> If only a few experts understand what happens how could the system be
> reliable and secure?

Would you rather fly in a 747, or something from 100 years ago? The latter is
far, far simpler and easily understood by non-experts.

------
binarysolo
The ensuing blame game and rage depresses me:

[http://youropenbook.org/?q=AAA+obama&gender=any](http://youropenbook.org/?q=AAA+obama&gender=any)

[http://youropenbook.org/?q=aaa+republicans&gender=any](http://youropenbook.org/?q=aaa+republicans&gender=any)

[http://youropenbook.org/?q=aaa+democrats&gender=any](http://youropenbook.org/?q=aaa+democrats&gender=any)

[http://youropenbook.org/?q=AAA+tea+party&gender=any](http://youropenbook.org/?q=AAA+tea+party&gender=any)

[http://youropenbook.org/?q=aaa+congress&gender=any](http://youropenbook.org/?q=aaa+congress&gender=any)

[http://youropenbook.org/?q=aaa+politicians&gender=any](http://youropenbook.org/?q=aaa+politicians&gender=any)

I have my own opinions as to who's responsible and what amger is well placed,
but I think one can draw their own conclusions.

Yes I know these are a limited sample set of people who have set their
profiles to public. But still...

------
jballanc
The true shame is not loosing some arbitrary rating from some arbitrary
organization, but that this action still matters even after said organization
was shown, conclusively, to behave in a completely arbitrary and ultimately
self-serving way.

------
AgentConundrum
S&P's report is here:
[http://www.standardandpoors.com/servlet/BlobServer?blobheade...](http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-
Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-
Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-
type&blobwhere=1243942957443&blobheadervalue3=UTF-8)

~~~
marshray
I love to hear them tell it like it is, all matter-of-fact like that. S&P
ought to run as a 3rd-party presidential candidate in 2012.

It's about time somebody brought down the cluebat.

------
fleitz
I wonder if the downgrade is because the US might be unwilling to pay its
debts or because they feel the people may be unwilling to bailout the banks
again?

~~~
miked
The downgrade is because the US Gov is spending far more than it's taking in.
In other words, it's for the same reason that every other person / business /
government gets downgraded. It's important to realize that there's no magic
here.

~~~
pyoung
You cannot compare 'person' and 'business' with government. The government has
the ability to print money, whereas the other two do not. The only reason they
don't print money to pay off all their debts is because it will result in
massive inflation.

The reason the European debt crises is so serious is because the adoption of
the euro means that no individual contry can print their own money to avoid
default.

~~~
usaar333
Inflating your way out of debt is as bad to debt holders as a (partial)
default.

~~~
pyoung
I agree that is bad for debt holders, but from a political stand point, it is
easier to gradually print money to devalue your debt than it is to default.

------
quattrofan
This is the beginning of the end of the dollar as the worlds reserve currency,
its bad for the rest of the world and only good for the US, its imbalanced.

I am not so sure most Americans are ready for what the world will be like when
it happens, because unless the need for a regular deficit is reduced and
reliance for imported oil curbed, it will be very painful indeed.

------
Tekhne
This downgrade may just be the first sign of real problems to come. For
detailed coverage of the coming US financial storm see the documentary
I.O.U.S.A. from former U.S. Comptroller General David Walker (I've seen it on
Netflix streaming).

<http://www.iousathemovie.com>

------
Tycho
It seems that for the last 40 years we've been in one huge bubble - the
'American bubble.' Overconfidence in the continual growth, recovery and
viability of US economics is finally coming to an end, and most of the globe
is exposed.

------
d2
So keep an eye on treasury bonds on monday morning. Rate goes up, people still
believe the US is safe, regardless of S&P. Rate goes down, market sentiment
mirrors S&P's rating, and that's very very bad.

------
alecco
(via angriers@reddit)

[http://en.wikipedia.org/wiki/List_of_countries_by_credit_rat...](http://en.wikipedia.org/wiki/List_of_countries_by_credit_rating)

------
finin
from the S&P rationale section of their press release:

"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."

------
niels_olson
S&P source:

<http://news.ycombinator.com/item?id=2853064>

------
marcamillion
WOW....talk about CAJONES! I must tip my hat to S&P. This one...just WOW.

I mean, I am not a conspiracy theorist by any stretch of the imagination, but
I just never imagined that they would be able to pull the trigger.

All it takes is some 'investigation' by the US Treasury into S&P and that's
it....game over. Not that I think the US Treasury will retaliate....but WOW. I
never thought they would take this step.

Good for them.

Double-dip recession, here we come.

~~~
pacomerh
It's Cojones. Cajones means drawers.

~~~
marcamillion
Sorry....my bad.

------
Rariel
THere is a simple solution to the Social Security "crisis". Right now only
income up to 100,000 is subject to social security taxes. Anything over
100,000 is not taxed for social security. If we raised taxable income to
150,000 or 200,000 even we'd have plenty of money.

~~~
Rariel
I'd love if some of the downvoters could explain 1) why I'm wrong or 2) what
an alternative would look like?

------
almightygod
I don't care about karma burn; F&$# those damn ignorant republicans

------
goatrope
So, anyone know what happened to whoever bet 1bil that we'd lose AAA?

------
ck2
Regardless how you take this news, S&P just bought themselves a whole bunch of
free advertising.

I don't think that was their primary goal but their name is now going to be
mentioned on every newscast and in every paper everywhere for weeks.

------
daniwan
Raise the taxes on the rich! Jesus Christ!

------
daniwan
All the seemingly smart guys here, producing stupid arguments. Stop thinking
how to cut children's lunch and start thinking how to get a 2nd job!

------
da5e
The debt is not the problem.

------
yoyar
The chickens will come home to roost. It's just as simple as that.

------
dennisgorelik
That's a good news and a wake up call.

------
Rariel
THer

------
pitdesi
An answer to the question we're all wondering- "What happens now" answered
well in a planet money from a couple of weeks ago:
[http://www.npr.org/2011/07/18/138164761/what-happens-if-
u-s-...](http://www.npr.org/2011/07/18/138164761/what-happens-if-u-s-bond-
ratings-are-downgraded)

TL;DR - "I'm not sure it will have any impact. When you look at the bond
market — 10-year U.S. Treasuries, for example — where is it today? In the
light of all this hype about debt ceilings and possible defaults, it's at 2.93
today, so this is an extremely low interest rate in both nominal and real
terms. It means that everyone in the world is willing to hold these bonds and
is not the least bit worried about the possibility of a default. So, investors
haven't changed their view of the creditworthiness of the United States at
all, and I don't think they're likely to in the foreseeable future." -Mark
Weisbrot, co-director of the Center for Economic and Policy Research

~~~
marcamillion
The reason yields have been so low is because a) there is no other 'safe
haven' for investors to flock to, and b) the markets generally didn't
anticipate a downgrade.

A downgrade, even if the markets don't raise Yields, can be catastrophic
because many financial institutions (mutual funds, insurance companies, unit
trusts, etc.) can only hold AAA rated securities in their portfolios - and
some central banks can only hold AAA rated securities as collateral in some
situations.

So, legally, they will not be able to hold on to American gov't debt, even if
they wanted to. The mere fact that a ton of people will be flooding the market
with debt, will push up yields and that will lead to other catastrophic
consequences.

I expect that the Fed will buy a ton of bonds to push down yields and keep the
Treasuries Interest costs low - but they will have to print a ton of money to
do that....which will lead to inflation, which leads to higher yields which
leads to higher interest costs, and creates a crazy cycle.

You get the idea.

However, that's just theory - in a perfectly balanced global economy that's
not fragile. In this global economy, I suspect that there might be a concerted
effort to loosen standards to prevent a mass exodus out of US Treasuries, but
at least this sends a strong signal that the ratings agencies are serious.

~~~
puredemo
How does this play out with the multiple ratings firms though?

~~~
marcamillion
Good question...I think the actual legal rules are probably something like you
have to maintain AAA from 2 out of the 3 rating agencies or something of that
nature.

They do account for multiple ratings agencies having different opinions.

------
chailatte
Took those lazy rating agencies a while.

\- 1.6 Trillion budget deficit

\- 14 Trillion national debt

\- 55 Trillion US total debt

\- 115 Trillion Unfunded liabilities

\- 17% U6 unemployment

\- 45.8 Million Americans on Food Stamps

\- 52 Million Americans without health insurance

\- 1/2 of mortgages are underwater

\- 63% labor participation rate, lowest since early 80s

\- -5% in Real medium household income in the last 10 years

\- 25% of US households have zero or negative net worth

\- 1 out of every 45 households was hit with foreclosure

\- average length of unemployment is now 40 weeks

~~~
wtallis
The S&P rating is only an assessment of risk in the US Treasury bonds, not a
general rating of entire US economy.

~~~
watchandwait
That's wrong, the GDP and expected GDP is a big part of the rating-- known as
the "capacity to repay".

~~~
wtallis
Doesn't the phrase "capacity to repay" make it clear that GDP matters only to
the extent that it is a risk factor?

------
logjam
One minor elephant in the room that only a few seem to be mentioning is the
500+ point selloff on Thursday.

On Thursday evening, the economist talking-heads expressed some confusion
about what was driving that sell-off on that particular day. There was vague
talk of problems in Europe, although there has been worse news out of the
Eurozone for months without that kind of drop.

On Friday, we get the S & P announcement of a decision that may impact
markets. One can only imagine when this particular decision was actually made.

What drove the sell-off on Thursday?

~~~
ww520
Someone in S&P leaked the downgrade ahead of time?

~~~
ig1
Unlikely, there's a reasonable chance you could face jail time if you were
caught doing such a thing and probably wouldn't be able to work in the
financial industry ever again.

So your upside would essentially have to be a huge amount of money, but of
course you're much more likely to get caught if you're moving around such a
large sum.

