United States loses AAA credit rating from S&P

http://www.reuters.com/article/2011/08/06/usa-downgrade-sp-idUSN1E7741TJ20110806

by tshtf • 15 years ago

769 497 15 years ago

reuters.com

kenjackson• 15 years ago

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

fanboy1233• 15 years ago

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

aculver• 15 years ago

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

fanboy1233• 15 years ago

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• 15 years ago

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

ktsmith• 15 years ago

We can expect this to not impact how the parties work against each in the least. The ratings agencies said up front what they were expecting to see in the debt deal and congress didn't come close.

seldo2• 15 years ago

Correct, and it's already begun:

http://tpmdc.talkingpointsmemo.com/2011/08/gop-tries-to-shif...

guildchatter• 15 years ago

It's definitely going to be the blame game, especially with Obama's re-election campaign coming up.

sigh

protomyth• 15 years ago

Sadly, both parties will see this as an advantage going into the 2012 election.

watchandwait5• 15 years ago

There has been a complete lack of leadership from the Congressional Democrats on this issue. They haven't produced a budget plan in nearly three years, while borrowing 40 cents of every dollar spent during that time.

I'm not a partisan-- George Bush's runaway spending contributed a great deal to the current predicament. But the basic Congressional oversight and operating under a budget hasn't happened the last couple of years.

logjam3• 15 years ago

Uh, you are merely parroting inaccurate GOP talking points, and I think we can be a little more accurate than that here.

First of all, the House and Senate easily passed Obama’s first budget on the president’s 100th day in office. That budget measure, however, did not include a single GOP vote, a harbinger of the lack of bipartisanship to come. From 2009 to January 2011, Republicans forced more than 90 “cloture” votes, which require 60 senators to agree to limit debate (ie stop a filibuster) on a measure.

Pretending that there was no Democrat "budget plan" for 2010 is disingenuous at best. Ongoing Democrat "plans" were continuously on the docket:

http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=11...

Democrats did not have anything like a filibuster-proof majority in the Senate, and Republican Senators were quite open with their threat to filibuster any legislation until the “Bush-tax cuts” were extended.

http://www.nationaljournal.com/congress/gop-will-filibuster-...

"We write to inform you that we will not agree to invoke cloture on the motion to proceed to any legislative item until the Senate has acted to fund the government and we have prevented the tax increase that is currently awaiting all American taxpayers,” said the letter, which was sent to Senate Majority Leader Harry Reid this morning."

“The true effect of this letter is to prevent the Senate from acting on many important issues that have bipartisan support,” Reid said this morning on the Senate floor. He said the letter codifies a GOP strategy of delaying action “on critical matters, then blaming the Democrats for not addressing the needs of the American people. Very cynical, but very obvious, very transparent.”

And imagine that, here we are in 2011....

Of course, filibuster has been used by both parties, but these tactics by Republicans accelerated drastically when Dems took over Congress late in Bush's presidency. As even the conservative American Enterprise Institute noted, Republican filibusters were used increasingly to obstruct legislation:

http://tpmdc.talkingpointsmemo.com/2010/01/the-rise-of-clotu...

"It is the most striking in history," American Enterprise Institute resident scholar Norm Ornstein told TPM.

"What happened, Ornstein says, is that during the last two years of President George W. Bush's second term, Republicans offered "no initiatives to speak of."

"The initiatives were coming from the Democrats, and the Republicans wanted to kill 'em, or slow things down. Republican filibuster threats, Ornstein said, were "like throwing molasses in the road."

"Still, Ornstein largely attributes the stark rise in cloture motions in the 110th Congress to Republican delay and obstruction tactics."

cantbecool2• 15 years ago

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.

fanboy1233• 15 years ago

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.

cantbecool2• 15 years ago

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

adaml_623• 15 years ago

Or perhaps the drop happened because a lot of the big banks knew that the downgrade was coming. Is it insider trading if everyone knows?

winestock11• 15 years ago

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?

aaronbrethorst2• 15 years ago

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• 15 years ago

> 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.

mark_l_watson2• 15 years ago

+1 for that. Expiring the tax cuts and reducing foreign military expenditures is our best option. We have an obligation to keep our current military personel employed but I would rather they be spending their salaries in local businesses here. Military cuts can occur by shutting down foreign bases and drastically reducing the recruitment of new military personel.

It would be funny, if it were not so serious: a lot of my conservative friends harp on the need to stay in the middle east, but refuse to pay for it with taxes.

gte910h2• 15 years ago

The terms of the debt ceiling deal look like it will force one/the other/both:

http://www.editedforclarity.com/2011/08/01/debt-ceiling-deal...

silverlight• 15 years ago

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.

jackpirate• 15 years ago

That's one of the MAJOR implications of this, if I'm not mistaken. Of course, bonds denoted in Euro's or other currencies wouldn't be affected.

mdda6• 15 years ago

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.

cfaubell• 15 years ago

There are countries who don't use debt payments as political tools. A congressional stalemate that leads to a failure to pay bondholders is entirely possible.

Atropos• 15 years ago

Some other AAA countries: Switzerland, Luxembourg, Norway, Singapore.

To me it seems a little ridiculous that the US and these countries shared the same rating for such a long time. On the other hand, there are AAA countries like UK, France, Germany that do not seem to fit into the same category either.

I have no real opinion if the US deserves the AAA rating, but thinking treasuries are the safest investment in the world seems a bit optimistic.

fleitz• 15 years ago

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• 15 years ago

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.

pyoung6• 15 years ago

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.

eps• 15 years ago

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.

seldo2• 15 years ago

This is by far the biggest problem. I don't think anybody realizes how huge a sell-off that's going to be if the institutions apply their rules about AAA debt to US bonds (a big if, as others have noted).

A sell-off of bonds would make it more expensive for the government to borrow money, which would further accelerate the expansion of the deficit. The deficit is the primary driver of the downgrade, so an acceleration would trigger further downgrades.

_delirium6• 15 years ago

Treasuries act as a money store for large institutions that I think would be hard for them to replace in practice. They use T-bills in particular as more or less a jumbo-sized version of an FDIC-insured bank account. Where would they move that money to? I.e., who else provides a similarly safe account where you can deposit $50 billion? Can't be to a bank account, because all the major banks have even lower ratings. There aren't enough AAA-rated corporates to move all that money. Eurozone bonds aren't looking too hot, and may also have institutional rules on proportion of the investment that can go into foreign bonds. I suppose they could buy large quantities of gold and physically store it in vaults, but many institutional investors also have rules on how much they can put into commodities. Perhaps giant suitcases of dollar bills? You can't pull money out of an instrument without putting it somewhere else!

muyyatin• 15 years ago

It would be interesting if they make a financial vehicle that turns US AA+ debt (along with something else) into AAA.

winestock11• 15 years ago

Damn you, but the boys at Goldman Sachs are probably on it, right now. Take a pile of T-bills. Siphon off the income from them into a pie. Cut the pie into tranches. The first tranch or two are guaranteed to be AAA. Just look at the math that the quants derived...

We can all lipsync this tune.

_delirium6• 15 years ago

Does it? Many institutional investors don't treat U.S. Treasuries as ratable bonds, but a separate category (they aren't lumped in with AAA corporates in investment strategies, for the good reason that they have quite different characteristics).

Based on the slim case studies we have so far, the S&P downgrade of Japan in 2002 had approximately zero impact on Japanese bond rates. It doesn't even show up as a small blip on the 10-year graph; was just completely ignored.

thematt3• 15 years ago

That's because Japanese debt (up to this point) has been primarily financed by its own citizens, life insurance and pension funds. These are more likely to accept sub-AAA rated bonds and support their own government than external investors are.

joebadmo• 15 years ago

Is it really imaginable that institutional investors won't just change their rules to allow an exception for US bonds? Honest question.

westicle• 15 years ago

Unless they are required to do so by law.

daemonize3• 15 years ago

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

thematt3• 15 years ago

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

winestock11• 15 years ago

Old joke: If you owe the bank a thousand dollars and you can't pay it back, then you have a problem. If you owe the bank a billion dollars and you can't pay it back, then the bank has a problem.

CoffeeDregs• 15 years ago

It'd have to get very bad for China to pull out. If China pulls out and damages our economy, our imports will dry up, their exports will dry up and their economy will dry up. I understand that China and the US might not be the best of friends right now, but their interests are generally aligned on US debt.

cageface• 15 years ago

In the most recent Planet Money podcast they claimed that a downgrade from AAA to AA would have no effect on investors. This is way out of my area of expertise but they seemed quite certain on this point.

TomOfTTB4• 15 years ago

I'm sorry but this seems alarmist to me. Any automated system can make an exception. For your logic to hold these institutional investors would have to not take notice of the U.S. Government having its credit rating dropped. You're arguing they'd treat the United States and "any other investment" and rely on an automated system.

That's not going to happen.

Plus S&P's logic is shaky on this. The whole reason the threat of S&P dropping our rating has had no impact is because their demands were impossible to achieve. Cut $4 trillion from the budget in 10 years when we're expected to add $9 trillion in the next 4? Not possible and everyone knows it.

darksaga3• 15 years ago

I think they sending a clear message to the US government to get their financial house in order. The fact this has never happened (to either democratic or republican presidents in the history of the country) is a major issue.

Imagine if we actually passed the balanced budget amendment back in 1997 - things would be a LOT different.

berberich• 15 years ago

I don't think this is correct. Planet Money did a recent podcast on this very subject (Would A Downgrade Matter?)[1], and they concluded that a downgrade from AAA to AA+ doesn't matter very much in the long run. Yes, it's somewhat embarrassing, and interest rates are likely to go up _slightly_, but that's about it.

The big leap is from "investment grade" securities to "junk bonds" ('BB'/'Ba' or less). We're still a long way from there.

[1] http://www.npr.org/blogs/money/2011/07/28/138721364/

mdda6• 15 years ago

Maybe long-term the interest rates don't go up much. But the main impact is a huge rocking-the-boat in the banking system : one of the bedrock ideas has just changed. You wouldn't want to do this if the banking system were strong. Now is really not a good time...

ristretto• 15 years ago

Naive question: the money that gets de-invested will be reinvested where? France? UK?

pyoung6• 15 years ago

I don't think de-invest is an actual word, but I will role with you on this. Investors treat U.S. Treasury bonds like cash. A lot of financial transactions are actually done with Treasury notes, because they are considered extremely safe and reliable, and unlike cash, they generate interest payments. If investors don't like the downgrade, then they will sell off their bonds for cash. Cash is theoretically the safest asset you can hold (some would argue that gold is, but that is a different topic). Cash never decreases in value (relative to itself at least, it can change value when compared to other countries currency, and inflation can take it's toll, but once again, this is a different topic), whereas treasury bonds can.

giardini5• 15 years ago

You've got to be kidding.

Even as we speak the Euro is breaking apart. Europeans are pouring billions of dollars into U.S. currency, bonds and investments even at a loss, even after the S&P downgrade. Yesterday Bank Of New York Mellon told depositors that they would only accept investment if the investor accepted a _negative_ interest rate!

http://www.24hgold.com/english/news-gold-silver-bank-of-new-...

Why?

Because things are worse in Europe! The Greece financial crisis is ripping the Euro apart. The U.S. remains the best haven in a lousy neighborhood (the world): better than Europe, better than China, better than Asia.

We should obliterate S&P, Fitch and Moody's for their financial crimes during the financial meltdown. More trustworthy firms will rise to replace them. Meanwhile investors will become appropriately wary of investing in financial instruments about which they know nothing.

rrkk• 15 years ago

us government bonds have more recently been excluded from this rule.

fletchowns• 15 years ago

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?

thematt3• 15 years ago

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.

grourk• 15 years ago

S&P and Moody's don't exactly employ an "army of experts" either. It's a few analysts making a rather subjective judgment and voting. (Literally, a few).

And the investors who are actually buying US debt don't rely on ratings agencies to give them guidance, and do in fact have expertise in-house to evaluate these things.

As has been mentioned elsewhere on this thread, institutional investors don't treat US bonds like any other, subject to triggers and rules like AAA-only. It's an exceptional case that is treated differently than the others, and one rating agency's opinion is not going to make as big an impact as people seem to think.

It comes down to this: where else would they put their money?

giardini5• 15 years ago

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.

adulau• 15 years ago

The interesting part is who is paying the credit rating companies... usually, it's the emitter of the bonds[1]. The emitter can be a state, a local region or some other organization. The emission of the bound is quite often managed by a financial organization. So the interface between the bond, the credit rating company and the state is "a financial organization". Of course, they don't have any conflicting roles in working in the field...

[1] http://en.wikipedia.org/wiki/Credit_rating_agencies#CRA_busi...

winestock11• 15 years ago

You have a point, but the downgrading has symbolic value. Don't denigrate that symbolic value, either. Confucius say: "Signs and symbols rule the world, not words or laws."

As another comment on this thread pointed out, if the sole maker of the world reserve currency cannot keep a AAA rating, then who really deserves it? As the recent budget fight showed, the US government cannot make more than token attempts to improve its finances. The current debt is about one-fifth of the annual world GDP. Well-nigh invincible power blocs guard the biggest line-items on the budget. Tax increases are off the table and of doubtful effectiveness in this economy even if they were passed.

What confidence should such a government inspire?

mdda6• 15 years ago

You're making the assumption that the dollar remains the world reserve currency. Now there's a huge additional argument for moving to a trade-weighted basket of currencies. Besides, there are EUR issuers that are still AAA.

credo• 15 years ago

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...

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• 15 years ago

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• 15 years ago

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.

localhost3000• 15 years ago

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.

mdda6• 15 years ago

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)'.

Uchikoma3• 15 years ago

So you think the US has had inflated ratings for years just like with subprimes? And should be even lower rated?

chailatte3• 15 years ago

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

wtallis4• 15 years ago

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

_delirium6• 15 years ago

In particular, their statement seems to claim that it's almost entirely due to their view that the U.S. might choose not to pay back its bonds, not that it couldn't; when explaining what's changed since previous assessments, their statement mainly focuses on the political will to service debt.

joezydeco3• 15 years ago

Listen to the Planet Money podcast. Lots of factors are considered, including political ones.

watchandwait5• 15 years ago

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

apaprocki• 15 years ago

... 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-...

winestock11• 15 years ago

"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."

NHQ• 15 years ago

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.

latch2• 15 years ago

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.

TomOfTTB4• 15 years ago

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)

mbreese4• 15 years ago

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.

jpdoctor3• 15 years ago

> 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.

It's not a matter of how "people" treat it. Many funds are prohibited from holding anything other than AAA. Those folks will now be selling bonds.

For those that haven't looked at the math of bonds: When the price of a bond goes down (as it does when there are many sellers), the yield goes up. That yield is what the US Govt will be paying on future issued bonds, more or less.

Good luck to us all. We're gonna need it.

mdda6• 15 years ago

But the most important aspect is on the banking industry, where there are huge positions that look like (X-X0). X0 may rise, which is a problem, but the bigger issue is that the overall size of this type of bet can be enormous, because it's overall AAA. Suddenly, a fundamental assumption underlying a lot of these trades has been shattered, and will force people to unwind losing positions... And the banking system wasn't a picture of health before.

Alex3917• 15 years ago

This also triggers the automatic review of the debt rating for various states and hundreds of small towns across America. A lot of cities across the US are going to lose their ability to borrow cheap money because of this, not just the federal government.

usaar3334• 15 years ago

I doubt it will be that significant. Japan has been at AA- from all rating agencies forever (and has vastly higher debt) and pays lower rates than the US. Besides, as you pointed out there are so few large countries with AAA from all agencies.

Besides, there's no new information released today, other than what some analysts at S&P think.

jrockway• 15 years ago

Exactly. The big banks do their own research, so what S&P thinks is largely irrelevant. We have an entire division devoted only to US treasuries.

watchandwait5• 15 years ago

Japan is a nation of savers and has a massive domestic pool of savings. Also, Japan will drop below investment grade within the next ten years as those savers retire.

America, on the other hand, needs to borrow internationally.

ohyes4• 15 years ago

Don't think it this really matters. The US still has the strongest economy of pretty much anyone (even with recession).

There isn't going to be a massive dumping of US bonds.

The AAA credit rating is helpful, but is only used by certain investors, and those big enough to make a real difference have their own assessors of risk.

I think the cutoff for the smaller guys to be legal to invest in is something like AA-. We aren't in danger of that. We'll probably be like AA+ or something.

Hopefully the US will quit spending so much on military and raise taxes on the ultra-rich to even things out, but who knows.

darksaga3• 15 years ago

Even if you tax the hell out of the rich, it still leaves this country TRILLIONS in debt.

It's a fact - you don't tax your way out of a recession and you sure as hell don't tax people to create jobs. It simply doesn't work.

And yeah, great idea. Let's cut military funding while we're fighting a war on terror in three countries. Apparently you don't remember Clinton's military cuts which removed almost 300,000 people from the federal payroll. When you make military cuts, you're not just removing tanks and guns. You're also sending a lot of people to the unemployment line.

bubbleRefuge6• 15 years ago

Federal interest rates will not go up because interest rates are controlled endogenously. They will go wherever the fed wants them to go.

pmorici• 15 years ago

It's interesting the Treasury Department Issued this statement after the downgrade news basically saying, for all practical purposes we still consider the debt to be AAA regardless of what S&P thinks.

http://www.occ.treas.gov/news-issuances/news-releases/2011/n...

geuis5• 15 years ago

(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.

quandrum• 15 years ago

Why would you cut Social Security? It's in no danger.

And frankly, medicare wouldn't be if we killed the payroll tax cap. I never understood why it's ok for payroll taxes to be regressive.

pauldino• 15 years ago

The Medicare portion of FICA isn't capped, only social security is.

watchandwait5• 15 years ago

Social Security is supposed to be a pension program, not an income redistribution program. So you are making "contributions", not paying taxes, in the official lingo.

Of course the program is most regressive for younger workers, who pay the most and will get the least in return.

Social Security is in serious trouble, by the way, although it is not the driver of the current budget crisis. In just a couple of years the program goes into the red, and increasingly so as more boomers retire. The unfunded liability is around $8 trillion. That's serious money.

joezydeco3• 15 years ago

"Put another way, the Federal Reserve says that the nation’s net wealth is about $57 trillion. That figure would have to be $18 trillion larger to generate enough additional G.D.P. to pay Social Security benefits without making anyone worse off in the future through higher taxes or lower benefits."

http://economix.blogs.nytimes.com/2011/05/17/the-real-social...

winestock11• 15 years ago

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.

geuis5• 15 years ago

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.

ataranto• 15 years ago

There's a huge gap between isolationism and, you know, not occupying TWO countries on the other side of the planet.

I stopped reading your comment after that sentence with the assumption that all of your other points would be equally dumb.

ubernostrum2• 15 years ago

The thing with Social Security is that it's such a huge, tempting cookie jar for Congress to reach into -- remember that this is a program that easily runs a surplus when we just leave it the hell alone. So instead of cutting it, how about we build a big damn electrified fence around it? ;)

philwelch5• 15 years ago

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.

Not having read the North Atlantic Treaty, I don't know that the US has any special obligation above and beyond the rest of the NATO members. Yes, the US is obligated by treaty to defend Latvia, but by the same token Latvia is obligated by treaty to defend the US. American deployments to Europe are likely above and beyond American treaty obligations.

trevelyan4• 15 years ago

Why do you - as a conservative - consider it rational to cut social security? The program is popular and self-sustaining. and if you read the trustees' reports you'll see it has been in surplus and perfectly solvent since 1985. In a few years it will stop generating surplus revenue for a few decades as the baby boomers move through the system, but it isn't threatened with insolvency.

There is an ethical problem with using surplus social security revenues to fund tax cuts to non-contributors and then claim there isn't money left to pay back the workers who contributed in good faith. But this isn't a problem with bureaucracy so much as a problem with the Republican Party.

fabjan• 15 years ago

Point 3. I don't know who these cool people are that you're talking about, "liberals" I assume. I find it hard to believe they will call you heartless if you socialize your health care to make it cheaper and available for all. http://en.wikipedia.org/wiki/File:Total_health_expenditure_p...

orblivion• 15 years ago

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

That's why in some ways, watching the government on the brink of default is exciting. For once there's nothing the Cool People can do.

sliverstorm3• 15 years ago

It really is depressing realizing that the only changes we can viably make to those three great leeches is to allocate even more money to them.

ericd5• 15 years ago

One thing to note, I think the strength of our currency is at least partly based on the large amount of military power behind it, and the promise of stability that it brings.

Basically, it went from being backed by gold to being backed by power and promise of restraint in printing more. I guess we've largely given up on the restraint side, though.

fauigerzigerk• 15 years ago

Quite a few fallen empires have made that error of judgement. I believe it hails from a time when the military could be used to make occupied peoples pay taxes. Nowadays, a military that is much bigger than what is needed for defense suffers from diminishing returns in terms of backing the currency with a safety net.

The military is not going to force the Fed to stop printing money.

j_hightower• 15 years ago

"Given China's rise, its wise long-term to keep a presence in the region."

Why?

China will surpass the United States in soft and hard power eventually. This is demographically and economically inevitable. Even sooner, if not already, China will become an unshakable hegemon over all of Asia. So why fight it in the most expensive and futile ways possible, i.e., by maintaining the fiction that we will be able to exercise any sort of long-term military power in Asia?

It's time we focused on our economic power, and not our military power. The former is a necessary precondition of the latter, and we're acting as though it's not.

jerf• 15 years ago

"This is demographically and economically inevitable."

Oh, no it's not. First China has to hold together over that time frame. This is feasible... this is not inevitable. There's a lot of tensions over there. Then even if they pass that test, there's other things they're going to have to deal with.

Right now, there isn't a single world power that's looking to be "inevitably powerful" in the next 50 years, it's really "anybody's game".

illumin8• 15 years ago

China's defense spending is less than half of the US. This is not an inevitability. Learn the facts before you go spouting off nonsense: http://en.wikipedia.org/wiki/List_of_countries_by_military_e...

srl2• 15 years ago

> China will surpass the United States in soft and hard power eventually. This is demographically and economically inevitable.

As far as I can tell, this conclusion can only be reached via naive interpolation of current trends. I can't come up with one plausible scenario in which this actually happens. Most of China, population-wise, lives in a state of abject poverty, about which the government has done very little. The Chinese gov't itself indicates that nearly 10% of the population are migrant workers. The migration of peasants from the countryside to the city is already considered the largest migration in human history, and it's expected to grow drastically over the next decade or so.

No country can smoothly handle the kind of stresses that come with having most of the country living in abject poverty, and seeking migration to already-overpopulated cities. At some point, /something/ will snap - the magic bubble that is China's economy will pop, and we'll all realize that being gigantic is an impairment, not an advantage.

Put another way: at some point, China's ridiculously poor standards of education and health care will catch up to its economy - and the western companies that have been moving (partly) there, helping to fuel the growth, will stop doing so.

Your point about economic vs. military power is, of course, valid, and largely irrefutable. I would add that, as China does seem to be a relatively stable country - with a competent and, most importantly, sane government - they stand little to gain by way of aggressive military action. We may do well to let them police their part of the world (read: keep North Korea in line), trusting their own rational self-interest, and save ourselves the effort.

keyle2• 15 years ago

This all makes good sense and would make a great political party's campaign.

The problem is, it wouldn't work. The economy, as small as any small country, isn't a piece of programming. You don't audit and refactor, or rewrite parts and plug it all in. It's made of generations of flesh and bones, all of which have worked their guts out to get whatever it is you're trying to take from them.

In a tyranny, maybe. In democracy, you have no chance of getting anywhere which such an overhaul.

marshray2• 15 years ago

Which is why the US was founded as a federal republic.

geuis5• 15 years ago

This is a completely bullshit way of thinking. Its also just another example of the defeatist attitude so many people in this country have. "Oh, the problem is too big to handle" or "Welp, that's just the way it is".

You ABSOLUTELY audit and refactor a society. Every time the country has gotten a bit more free with a new law or court decision, that's a refactor that improves the system.

Sometimes people have added parts to the system or revised bits that end up for the worse. Examples include Prohibition, Jim Crow laws, Defense of Marriage Act, software patents, etc.

One thing that would help society out a lot would be societal unit tests. Set baselines as to what works and doesn't, and if some new changes breaks the tests you go back and refactor again.

prostoalex3• 15 years ago

What constitutes defense spending nowadays?

Is it largely salary payments to current troops? Wouldn't we have to deal with a large unemployment problem in case we laid off a bunch of military employees and told them to go find a job somewhere else?

Or is it payment to defense contractors, such as Valley's own Lockheed Martin? Wouldn't this cause a large number of people to be unemployed, contributing to recession?

geuis5• 15 years ago

Is it the government's job to keep people employed for the sake of employing them? No!

There are times in history where government spending can help, like during the Great Depression. The government spent a lot of money on public works projects to help put some people back to work. But this didn't do much to actually end the depression. It was the onset of WWII and the subsequent ramp-up to a war economy that really ended the Depression.

winestock11• 15 years ago

That is an excellent question. I'm too lazy to search for the answer, but, with our luck, I'd say that the Defense budget is about evenly split betwixt personnel and hardware. Therefore, cuts to defense spending will cause unemployment for both defense contractor engineers as well as veteran grunts.

olalonde• 15 years ago

Theoretically, this problem can easily be solved: keep sending them paychecks. At least, they could be working on something productive like finding jobs or starting businesses.

veyron8• 15 years ago

Problem is that, especially during the bush era, there were a lot of no-bid contracts to firms such as Halliburton. And we are obliged to make those payments.

dupe123• 15 years ago

Spending money on government employees who provide no value is not sustainable. Those employees go spend their money on goods and services produced in other countries (where the workers are actually providing useful services) and you get a net flow of cash out of the U.S.

nkassis• 15 years ago

Well at least if they live in the US the government does not have to feed them all and provide shelter etc... At home they support the economy of the US by buying things whit their salaries here. Soldiers at home are cheaper than soldiers on a battleground. Add to that lower amount of injured soldiers etc... That's also a cost when you factor in the medical costs on the battlefield with the need for quick transport to a hospital etc and future disabilities.

abalone• 15 years ago

The only reason the healthcare issue seems so complicated is the massive amount of propaganda we're subjected to in the U.S. media about it. You're on the right track to figuring out an answer. Just look at what all the other industrialized countries do. Then do that.

Nice little overview: http://en.wikipedia.org/wiki/Universal_health_care

This is of course beyond the pale of rational discussion in U.S. political discourse. Just whisper "socialism" and it's off the table, instantly.

latch2• 15 years ago

Social security shouldn't be cut, it should be turned into a purely social program (and grandfathered in at that too). Instead of being an entitlement program, it should become like welfare and enabled for the bottom X % of the population. Specifically, the burden for retirement for the middle class should be placed on individuals rather than government.

For too long, babyboomers have relied on social security as a sort of no-interest loan. Why put that extra money in my 401K when I can rely on social security? I'll get a second car, or we'll take a yearly family vacation overseas...

Also, simplify the tax system and close loopholes, but do not directly raises taxes.

clarkevans• 15 years ago

You completely underestimate how the average person finds something more important to spend money on now rather than saving for their future. The reason we have social security is because people don't save what they need to. If you don't have this, most of the population will be in poverty when they retire. Social security also has things like survivor's benefits: payments to children and dependents who have lost a wage earner.

I don't think the Social Security program is at all broken; what's broken is that we've used the Social Security surplus over the last 20+ years to help fund a general fund spending deficit.

jsz02• 15 years ago

I have an easy solution. Let's make your federal income taxes look less like a bill and more like an order form. So for example some portion of your income taxes are pre-allocated for essential services (say 50%) and everything else is your choice. You get 50 points to spend and a variety of categories to choose from: education, defense, infrastructure, green energy, science research, enhanced Medicare services, NASA, deficit reduction, etc. This data is delivered to congress who must use it as a framework for 50% of the federal budget. After you filed your taxes mid-year you'd receive a detailed receipt that let you know exactly what Americans have decided to spend our money on.

chc2• 15 years ago

The thought of how this would actually lead to a better allocation of money baffles me. It sounds like the first half of the tragedy of the commons.

veyron8• 15 years ago

Problem is that most things you have described are public goods, for which you really can't allow people to attribute.

Unseelie2• 15 years ago

Many, many people use tax-deductable donations to do just this. Soo...this is already done. To make it done more, there should be non-profits. Non-profit insurance organizations, non-profit post, mail, private schools. Seriously, just encourage more people to donate, rather than be taxed. Of course, this won't solve the government's problem, because the government is intentionally expansionary.

notatoad3• 15 years ago

the actual step 1: admit you have a problem. the US still spends with the attitude that it is a rich country. it needs to start spending with the attitude of a country that is rapidly going broke.

of course, this can't happen because any politician who doesn't parrot the "America is the greatest country in the world" message gets ousted.

rwmj2• 15 years ago

Why do they get ousted? Surely you'd vote for them?

i2o• 15 years ago

On point #3, while I'm sure it can be better, it is worth noting out that historically medicare has done better at cost management than private healthcare (http://krugman.blogs.nytimes.com/2009/07/29/medicare-versus-...). I don't have the answer either, but health is one of those areas we know enough about yet to optimize using the same techniques you would in manufacturing, for instance. It is about investing in preventative measures as it is in reactive treatments. In Canada we face similar issues where more of our tax dollars being spent on healthcare with lesser returns. This is due in part to an ageing population, but can also be attributed to the lack of broader innovation in the delivery of care. A first step would be to encourage a more team-oriented approach where the doctor's lobby group (aka union) doesn't retain so much influence and control over policy decisions. From afar it looks like the private insurance lobby is one of the larger distractions preventing the US from getting down to the real issues of efficient and effective health practices.

On the business front propping up failing business models is a tough one. There is something to be said about preventing a complete and sudden collapse. The number of unemployed would hit the system in so many other ways. What we have seen from the auto industry, as much as I disagreed with the bailouts, is reinvention and retooling. I hope they take their bailouts with a great deal of thankfulness and invest wisely. I look at the next generation of companies like Tesla Motors and hope that more auto industry giants will seek to innovate and evolve rather than focus on just getting bigger (and slower).

The message I believe we all (conservative and liberal) can and should agree on is respect for the tax payer dollar. Money in government isn't free, the debt and deficit isn't free. As they plan out capital and operating expenses they need to do so with an passion towards building a better country while taking calculated measures and risks. Government's role, in my mind, isn't to innovate itself but instead to facilitate innovation by its people. It should focus on facilitating the success of the people through "just enough" regulation which means refactoring how they work on a regular basis to find the most effective means in which to operate. They need to continue to question their own purposes, not get comfortable in the security of a public sector job for life. Most importantly they need to share with their shareholders, we the people, on their progress in an open and transparent manner. I don't need fancy marketing campaigns to tell me about the good work that they do, but I don't want to see them hiding it either. One way to do this is to add a more direct measure of how tax dollars are spent. In Canada we pay a good portion of our taxes into a general revenue pool. I would like to see that eliminated in favour of a clear indication of what portion of my taxes go towards specific ministries or sectors of government. I think that next level of granularity would provide a bit more awareness that public money really belongs to the public.

twoodfin• 15 years ago

It's fairly widely understood (though I guess not by Professor Krugman) that Medicare offloads some of its own costs onto the private sector by the below-market rates it pays providers.

He's also neglecting to make a real comparison of the services that private health care provides vs. Medicare. Sure, private insurance premiums may have risen faster than Medicare spending during the '90s, but Medicare wasn't even paying for prescription drugs (a huge cost driver) until Part D was implemented in 2006.

bigwally• 15 years ago

A lot of your points seem to cover international issues/action.

The US needs to come to the realization that it is part of the world economy and not the ruler/leader.

A large percentage of the US economy was damaged in the events that occurred after September 2001. Trying to to do business, travel or get workers to the US requires so much paperwork that a lot of business has simply gone elsewhere. Even trying to do financial trade in the US these days ends up with so much taxes or the threat of your money being taken as it may be linked to some terrorist organization.

And your health insurance.... well I like collecting dividends. If you like I could go into the oil industry, I will say thank you to the American tax payer for electing to go to war and making me some money.

The US has managed to dig itself into a great big hole and gave people like me money. Congratulations on your sinking economy and thank you.

So keep watching that propaganda you call Fox News :)

gnosis• 15 years ago

You forgot the War on Drugs. Get rid of it, free all the people in prison for non-violent drug-related offenses, and tax the newly legalized drugs.

This should free up a lot of money that's being wasted on ruining people's lives right now, and make more money from taxing legal drugs.

As a bonus, it'll get rid of a lot of organized crime. Witness what happened with the repeal of Prohibition.

dreamdu5t2• 15 years ago

The war on drugs is only 0.5% (approx. $18 billion) of the Federal budget (approx. $3,456 billion), so it's inconsequential to our debt crisis.

I whole heartedly agree that drug prohibition should be repealed, and that we need to put an end to the war on (some) drugs.

But, the military, social security, and medicare comprise approx. 70% of the budget, so it's really not going to help us solve the debt.

Jach• 15 years ago

That has to come in parallel with a bunch of lower-skill job programs centered around prisons with the highest non-violent drug-related offense inmates about to be released. The current system makes the unemployment issue seem a bit less, but it also lets the corporations who contract out prisoners for work make a killing. It's a modern form of slavery. Though as others have noted, while this is an important issue, solving it wouldn't give us the greatest bang-for-buck so to speak. If we can solve it concurrently with other problems, all the better, but there are sadly bigger issues...

atsaloli• 15 years ago

Check out www.downsizedc.org

They are proponents of ending all offensive military action overseas, and cutting government spending and red tape.

They have an excellent system that makes it easier for USA people to contact their government -- you put in your name and address, and they give you a simple "contact us" form (just a single text area) where you can write your comments and they automatically get routed to your reps in Congress and Senate -- very efficient use of the voter's time!

dglassan• 15 years ago

Tearing the healthcare system down to it's nuts and bolts would costs a lot more than to continue reforming. I spent some time consulting hospitals an implementing electronic medical record systems for hospitals. It costs a hospital millions of dollars and thousands of hours to install and train people for these systems. Too many hospitals are too deep in these EMR systems to start from scratch again. Their margins are only around 1-2 percent as it is.

I agree, the healthcare system is a complete mess, but think of it like re-writing software. Sometimes continuously refactoring code is a much wiser decision than completely re-writing the code

MartinCron2• 15 years ago

By "sometimes" you mean, "nearly all the damn time".

As an incrementalist coder, it frustrates me to see how non-incremental the approach to solving social problems often is. Decouple, solve one thing at a time, etc.

ericd5• 15 years ago

A hospital's margins are only 1-2%? Do you have a source for that?

Maybe they can pull that off by paying themselves all the profits, but there's no way that I buy that hospitals have thinner margins than grocery stores before that. Hospital administrators are very well off on average. Their fees are way too large to be running so close to the wire, given their expenses.

friendstock• 15 years ago

"Maintain important overseas installations such as Japan and Taiwan." - there are no US bases in Taiwan currently. Perhaps this is referring to Korea?

http://en.wikipedia.org/wiki/List_of_United_States_Air_Force...

CamperBob4• 15 years ago

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.

Once you realize that the military is not a collection of armed forces so much as it is the US's largest social welfare program, these policies and figures start to make more sense. Put it this way: We're paying our troops there so we don't have to pay them here.

Don't look for this to change anytime soon.

araes2• 15 years ago

True, and numerous families across the US depend on the active and guard pay of the armed forces. However, by bringing troops home, there are a number of secondary costs that can be reduced, or eliminated. For example, one of the more famous recently has been the discussion of AC in Afghanistan. Per the NPR article:

http://www.npr.org/2011/06/25/137414737/among-the-costs-of-w...

We are spending 20 billion a year to truck energy supplies across some of the worst terrain in the world so that we can provide AC to thousands of horridly inefficient tents for our soldiers in the field. For comparison, that's more than the entire yearly budget of NASA. And its only one of numerous logistics and support costs we incur in our active warzones.

notatoad3• 15 years ago

i see this point made every time the discussion about military spending comes up, and i hate it so so much.

what this argument boils down to, for me, is "we need to keep killing foreigners so that our economy doesn't suffer", and this is a morally reprehensible position.

uladzislau2• 15 years ago

Great ideas! But please someone fix this site design. Current design undermines all data credibility.

Benjo• 15 years ago

There are lots of things we could do to end the recovery. They won't happen because they are not in the best short term interest of the politicians making the decisions. Natural selection has weeded out the congressmen that make decisions contrary to their ability to raise campaign money.

That is the root cause of the problem. Until that is solved, there's no point in dreaming up efficient solutions, because they won't happen.

mcantelon2• 15 years ago

Exactly. The problem is corruption. Everything else is a symptom.

yuhong• 15 years ago

Agreed but note also that the campaign donations would not work if not for the Baby Boomers.

redthrowaway7• 15 years ago

The only problem with slashing military spending and ending foreign interventions is that it has been just that spending, and those interventions, that have made the US the economic powerhouse it is today. The US has a history, stretching back well over a century, of launching military campaigns to support corporate interests. Be it South America, the Middle East, or Asia, the US has invaded countries and toppled governments time and again in support of its economic goals. Now, I think this is reprehensible, but I also wouldn't be so naive as to say that the path to economic recovery lies in an end to military adventurism. The US is rich for the same reason Rome, England, and Spain were: they won their riches at the the end of a sword.

The American military budget is clearly unsustainable, but that doesn't mean an end to foreign wars is in their economic interest. It's no coincidence that the US has been both the most prosperous nation on Earth, as well as the most aggressive, for nearly 200 years.

Take a look at the history of US military actions on Wikipedia [1], and see how many times the phrase "protected American interests/property" is mentioned.

[1] http://en.wikipedia.org/wiki/Timeline_of_United_States_milit...

dereg• 15 years ago

You're making a spurious correlation. If your assertion was correct, the French, British, Danish, Portuguese, and Spanish, et al.--the great colonial powers--should be stronger economies than the United States.

http://qed.princeton.edu/getfile.php?f=European_Colonialism_...

In conclusion, you've made a spurious correlation.

jaredmck• 15 years ago

Isn't the primary reason the US is rich due to being located far from the battlefields in WW1&2, and after each of these wars an influx of immigration out of Europe into the newly stimulated American industrial economy? We've essentially been riding the demographic wave up the hill since, and yet few in govt/media seem to really take this into account when planning for long-term spending and economic projections. Something has to give eventually, the question is when this long-run day of reckoning will finally come- although to quote Keynes (IMO the only thing he's been proven right about thus far), in the long run, we're all dead.

forgottenpaswrd• 15 years ago

"The US is rich for the same reason Rome, England, and Spain were"

Not really, have you been in England, Rome or Spain?

Rome legionaries were used to make roads and bridges and mining 90%of their time. If I show you the extensions of the land they "washed" to get mineral you won't believe it(you can see it using google earth, e.g in the north of spain, look for grooves around mountains).

England made itself rich because of commerce, like Spain(they took the risk to travel the ocean and won the first mover advantage, and when the rest of the world notice, it was late for them). That was what made them rich, not the military.

The US is rich because... IT IS RICH. It is a huge place with huge resources for a small population.

The US became the more powerful country on earth because Japan and Europe totally destroyed itself by the military in the WWII. The US waited for them to auto destroy, and then entered the world and finished it with all their cities untouched, 90% of the world gold reserves and creditor to them all, being able to force the dollar as world currency and english the official language of aviation, and naval commerce. Every body lost their colonies and US got them all(they just wanted the commerce and influence without having to build roads like English or Portuguese did in Africa).

Yes, it was a coincidence(being far away), no, US was not the most prosperous nation on Earth 200 years ago. If you believe in that, please study some real history. US was not the technical leader that is today thanks to all the Europeans that went there thanks to Hitler(militarization and economic totalitarism), the Edisons, the von Brauns and von Newmans.

Thomas Jefferson and other of the US founding fathers thought a permanent military and central banking would ruin the country because military people do nothing while things work at it should they need to create new enemies so they can justify their existence.

I had family members that were in Soviet Russia when something like 95% engineers were used in the war industry, while people needed cars, washing and sewer machines. This was not wealth for Russia, that was a bully inside. Mass media brainwashed them all them about how cool they were being able to destroy anybody else.(This strange pride remains today)

Today 60% of the engineering in US goes to war efforts, 50% of all their money to the military, so they can kill better, while the rest of the world expends significantly less.

They will talk about GPS, but the question is if this money expended in real economy would be able to create as much as the military does?

shareme• 15 years ago

1. 85% of the $14 Trillion deficit over the past 3 years was not any items you described but these items:

-TARP

Until we decide to have the bank lobbyists pay for their transgressions we will continue to be in deficit no matter what entitlement cuts are passed.

Two options:

Right now individuals pay 2/3rds of gov expenditures not corporations.

1. Reform corp tax law. There should be no Google or MSFT only paying 5% instead of the full 30% corp tax.

2. Reform internet sales tax. If states have adequate tax revenue than the Education and Medical entitlements on the Fed level can be cut back.

redthrowaway7• 15 years ago

>85% of the $14 Trillion deficit over the past 3 years was not any items you described but these items: -TARP

TARP was $300B, of which the government will recover all but $25B, according to the CBO. The "bailout" in general (considering all acts that fall under that umbrella term) consisted of about $3.5T in payouts, the vast majority of which is expected to be recouped.

Also, you're confusing debt with deficit. The debt is $14T, the deficit is just over a billion. Your 85% figure appears to have been drawn from your sphincter.

vlisivka• 15 years ago

Disproportion between givers and takers of money makes democracy weak at this. In democratic country, bigger and poorer group can always take some money out of smaller and richer group.

See http://en.wikipedia.org/wiki/File:Income_Taxes_By_Country.sv... - all top countries are democratic.

tjogin• 15 years ago

What about the single biggest contribution to the deficit, the Bush tax cuts?

Bertil2• 15 years ago

You seem to have forgot one point: the trillions spent in the Middle-East are to protect the supply of cheap Oil — so step 0. is: Sell your car, insulate your house.

shiftpgdn• 15 years ago

We get more oil from the gulf and Canada than we do from the Middle-east. That's not to say energy savings are a lost cause.

paolomaffei• 15 years ago

2) I'm pretty sure Western Europe is fine with Russia without US intervention, thanks.

Troll_Whisperer• 15 years ago

Maintain important overseas installations such as Japan and Taiwan.

The US hasn't had a base in Taiwan for 30 years. Maybe you're thinking of Korea?

sandstrom• 15 years ago

3. The Healthcare System is interesting. The US simply pay a lot more than all other industrialized nations (and still everyone isn't covered).

These two graphs are quite telling: http://www.rwjf.org/images/pr/thumbs/full/45110.jpg http://media.economist.com/images/20090627/CBB677.gif

I think the problem is manifold, but here are some things that may be problematic (please let me know if you agree or disagree):

# Doctors risk getting sued for maltreatment, and thus they prescribe all possible medications, take too many samples and generally spend too much resources.

# On the same note, they also pay large insurances against lawsuits, increasing the costs further.

# Medicine prices are higher in the US, for reasons I don't fully understand.

nickik3• 15 years ago

Intressting, I'm from switzerland :)

In our system you need to have health care insurants. Its alot to pay but as far as I can tell we have one of the best systems and everybody really gets good treatment (my father is a doctor my mother is a nurce and my sister is studying medicin). Witch seams not to be the case in america (I watched Sicko, other then that I have know knowlage).

I can only compaire to some other europen countreys but when you get hurt in italy for example the first rule is to get to switzerland as fast as possible.

zzzeek• 15 years ago

more liberal than conservative yet no suggestion to raise taxes which are at their lowest levels in 50 years (http://www.chamberofcommerce.com/business-advice/tax-prepara...) ? not even on billionaires sucking the government dry via the bush tax cuts (http://voices.washingtonpost.com/ezra-klein/2010/11/the_bush...) ?

bostonscott• 15 years ago

This is a plan I could sign on to (for the most part), but as Winestock said, such a plan would never get support.

It is not a coincidence that Presidential elections are as close as they are. Politicians essentially buy votes to get elected, in the form of government programs.

The problem in this country is medical entitlements - not so much Social Security. Social Security in theory funds itself, although Social Security's funds have been raided to fund other programs which now jeopardize its future.

Politicians will not address medical entitlements, because they will lose too many votes in doing so. Ultimately it's these medical entitlements that will bankrupt our country, and in the process, cause the greatest transfer of wealth in the history of the U.S. - not from the rich to the poor, but from the young, to the old.

Most people who support medical entitlements do so for "selfish" reasons, in that they want those entitlements to be available for themselves, their family, and/or their friends. They say things like "health care is a right," although it obviously is not a right. Health care is essentially the result of man's labor, and to say you have a right to health care, is to say you have a right to impose your needs on another man. Which of course is silly and inconsistent with the American constitution.

Still - people will assert their right to medical entitlements, and politicians will oblige, which in the long-run will pull money away from business investment (not all businesses are rich with billions in cash). The added financial burden will either stifle entrepreneurship and innovation, or it will send it oversees.

Of course, anyone who stands up against medical entitlements, like Paul Ryan, will be referred to as a villain who wants to murder old people. To quote the President: "throw grandma off the cliff."

That's my long-term prediction, anyway.

In the short-term we will continue to go through up and down cycles. Each down cycle will bring fear. Each up cycle will bring relief. There will be booms and busts in America's near-future, although the booms will be short-lived, and the busts (like our current bust) will be longer-lived.

To the extent innovators, like many of the people on HackerNews, are able to create great innovations, we can postpone the day of reckoning for our country.

russell2• 15 years ago

@geius:

3) Health care: it is screwed up because of the economic model. A single payer system is much more efficient with the government overhead at 5% vs private at 20%. Allow the govt to negotiate drug prices. Currently it's prohibited by law. Streamline the FDA without losing effectiveness.

4) Social Security is in decent shape. Dont cut benefits. If necessary, raise the retirement age. That's a fair trade-off for improved health care.

+ Fix campaign financing to remove the "hidden" corruption that is distorting Congress. Roll back anti-trust a hundred years to the age of the trust-busters. Roll back Republican/Bush deregulation so that banks aren't too big to fail, so that Rupert Murdock doesnt own all news channels. Cone down hard on regulatory capture. (The govt gang that was watching BP should be in jail.)

Edit: Oh yeah taxes. Roll back the Bush tax cuts. My share of the tax cuts was $300 on a 6 figure income. At the time I wished Bush has gone for deficit reduction. The $300 made very little difference to me. Close the loopholes. The oil companies dont need subsidies.

greengarstudios• 15 years ago

You sound like Ron Paul. http://en.wikipedia.org/wiki/Political_positions_of_Ron_Paul

mdkess3• 15 years ago

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.

georgieporgie2• 15 years ago

There's a lot that doesn't make any sense. As you say, interest rates are low. Plenty of people are out of work. To me, that says, "perfect time to build and repair infrastructure!"

Whether you believe FDR's New Deal helped or hindered recovery from the Great Depression, the simple, business-oriented financials of it would seem to indicate that right now is the time to be building roads, trains, dams, nuclear plants, etc.

Instead, we cut funding to things which may pay off later in order to funnel money into which have an inevitable negative rate of return, like imprisoning people, security theater, and killing people on the other side of the globe.

mdkess3• 15 years ago

That's exactly what I thought the response would have been. Cheap money, low employment - hire lots of people to do stuff. But it seems like the public opinion is that this debt is bad, and I'm don't understand why entirely. I mean, I see a lot of comparisons to credit card debt, so is it just lack of education/understanding?

veyron8• 15 years ago

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.

bubbleRefuge6• 15 years ago

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.

Cushman4• 15 years ago

This economic crisis isn't about economics, it's about politics. When the GOP goes off on "cutting spending", they're not being fiscally responsible. Ideally, they would literally like to cut every dollar that isn't going to the Pentagon. "Spending cuts" is a dog whistle for the idea that the Federal government shouldn't exist at all.

It doesn't matter if borrowing and spending (some might call it "investing") money is good fiscal policy— "spending" is just wrong.

orangecat• 15 years ago

"Spending cuts" is a dog whistle for the idea that the Federal government shouldn't exist at all.

Please. The government spent far less during Clinton's administration (the last vaguely fiscally responsible president), and I don't recall having to step over that many starving homeless people to get to work.

pitdesi• 15 years ago

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-...

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

marcamillion5• 15 years ago

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• 15 years ago

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

imcqueen• 15 years ago

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?

CamperBob4• 15 years ago

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.

AgentConundrum• 15 years ago

S&P's report is here: http://www.standardandpoors.com/servlet/BlobServer?blobheade...

marshray2• 15 years ago

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.

veyron8• 15 years ago

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.

mark_l_watson2• 15 years ago

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.

kragen• 15 years ago

> What pisses me off is that my wife and I have savings, live within our means, and... inflation ... takes money from savers and basically gives it to debtors.

Well, it takes money from lenders (or cash holders) and gives it to debtors. If you don't like that, stop being a lender or cash holder: move out of cash and bonds into, say, stocks, commodities, or real estate. If you're really confident that that inflation is going to happen, go short cash: build up a huge credit card balance at the current low interest rate, while pouring all of your earnings into non-cash holdings. (Danger: if you go short and you're wrong, you're fucked.)

3pt14159• 15 years ago

So buy Canadian Bonds or Chilean Bonds or Gold or Silver or Apple stock.

beagle3• 15 years ago

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.

rayiner3• 15 years ago

If you're expecting sustained inflation then don't hold debt. Take your cash and buy rental properties with the crazy-low mortgage rates we have now. If we get sustained inflation then rental rates will go up while your fixed-interest mortgage payments will stay the same. Profit.

dennisgorelik• 15 years ago

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

Tekhne• 15 years ago

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

warmfuzzykitten• 15 years ago

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.

logjam3• 15 years ago

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?

chailatte3• 15 years ago

The potential implosion of EU, caused by Italy

The rich is alerted the downgrade first, naturally.

logjam3• 15 years ago

Yep. I'm more than a bit suspicious that it's your option 2, given that it's been "Greece"..."Italy"..."Ireland"..."Greece"...Euro-disaster talk for months now without the kind of precipitous one-day decline that just happened to precede this announcement.

ww520• 15 years ago

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

ig1• 15 years ago

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.

SkyMarshal• 15 years ago

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.

bokonist4• 15 years ago

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.

noagenda2• 15 years ago

You are correct in everything you've said. The national "debt" clock should be thought of more as a national "savings" clock...

danenania2• 15 years ago

Paying back creditors in severely devalued dollars isn't exactly meeting obligations. Presumably the ratings would take this into account.

That said, I agree these ratings don't have much basis in reality. As others have commented, look at how S&P and similar organizations rated subprime debt. They're part of the Wall Street club. They might nibble a bit on the hand that feeds them for political reasons, but they certainly aren't going to bite it off.

It's pretty clear that a AA+ rating for US debt is as much of a joke as AAA. The token 'downgrade' gesture just adds to the absurdity.

bokonist4• 15 years ago

Issuing currency to back the "debt" is not a devaluation. Imagine you hold $100k in treasury bonds. The Federal reserve then prints a bunch of money, buys those bonds from you, and gives you cash. Are you then going to be willing to pay twice as much for a car, twice as much for a loaf of bread, etc? No. Your financial position has not changed. No change in your financial page, no inflation, no devaluation. All buying back debt with currency does is replace one piece of paper backed by the US Gov with another piece of paper backed by the government.

See my post here for a more in depth explanation: http://intellectual-detox.com/why-the-national-debt-is-non-p...

yaroslavvb• 15 years ago

Just because the government has the printing press doesn't mean it won't default. When China downgraded US ratings last week they said it's because "neither the Democratic Party nor Republican Party has shown any consideration for the general interest in order to argue for their own partisan interest; they had a hard time making the correct choice in a timely manner"

bokonist4• 15 years ago

Right, the only risk of default is political risk. But the S&P's rating is still absurd. The peak of political risk was one week ago. Now the risk of a politically-caused default is much lower than it was one week or one month ago. So they should have cut the rating a few months ago, and raised it after the debt ceiling deal was passed.

T-hawk• 15 years ago

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.

bokonist4• 15 years ago

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... 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...

giardini5• 15 years ago

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

OK, let's take the financial crisis, where S&P, Moody's, and Fitch rated thousands of CDOs as AAA. In return for the fabricated ratings, S&P et al received billions of dollars. Years later, the credit rating firms downgraded all those CDOs and they went belly up.

The credit rating firms have been under investigation for years now and the Senate has called for criminal investigations by DOJ. Its time your "smart economists" took a perp walk.

These firms should be smashed by the SEC and their officers branded on their foreheads with a giant letter "E". There are other more reliable companies in the industry that will rise to replace them. They have caused the loss of so much money, they have misled so many, they would not be missed.

chicagobob• 15 years ago

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.

mdda6• 15 years ago

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.

bubbleRefuge6• 15 years ago

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

alecco2• 15 years ago

From Khan Academy last week:

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

(Khan was a Hedge fund analyst)

goatrope• 15 years ago

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

hooande• 15 years ago

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...

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.

Someone3• 15 years ago

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.

Uchikoma3• 15 years ago

You cannot compare GDP between countries, as the US for example changes GDP (via the inflation component) every few years. US GDP in general is calculated too high as inflation is calculated too low compared to other countries - e.g. Germany.

alecco2• 15 years ago

(via angriers@reddit)

http://en.wikipedia.org/wiki/List_of_countries_by_credit_rat...

BlackJack• 15 years ago

"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....

Says it all.

finin• 15 years ago

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."

almightygod• 15 years ago

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

giardini5• 15 years ago

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.huffingtonpost.com/2011/04/13/credit-rating-agenc...

d2• 15 years ago

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.

niels_olson• 15 years ago

S&P source:

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

yoyar• 15 years ago

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

uladzislau2• 15 years ago

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• 15 years ago

> 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.

ck2• 15 years ago

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.

ejbadger• 15 years ago

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?

Uchikoma3• 15 years ago

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

marcamillion5• 15 years ago

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• 15 years ago

It's Cojones. Cajones means drawers.

marcamillion5• 15 years ago

Sorry....my bad.

marcamillion5• 15 years ago

Or perhaps something like this - i.e. an attempt to erode the credibility of S&P:

http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SP...

VicT11• 15 years ago

“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

Tycho• 15 years ago

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.

binarysolo• 15 years ago

The ensuing blame game and rage depresses me:

http://youropenbook.org/?q=AAA+obama&gender=any

http://youropenbook.org/?q=aaa+republicans&gender=any

http://youropenbook.org/?q=aaa+democrats&gender=any

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

http://youropenbook.org/?q=aaa+congress&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...

DanielBMarkham• 15 years ago

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.

jlangenauer2• 15 years ago

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• 15 years ago

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)

OllieJones• 15 years ago

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.

quattrofan• 15 years ago

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.

jballanc• 15 years ago

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.

da5e• 15 years ago

The debt is not the problem.

Rariel3• 15 years ago

THer

Rariel3• 15 years ago

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.

Rariel3• 15 years ago

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

daniwan2• 15 years ago

Raise the taxes on the rich! Jesus Christ!

daniwan2• 15 years ago

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!

United States loses AAA credit rating from S&P

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