Hacker News Reader

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)

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.

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

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

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

You are assuming that enough people have an actual interest in letting the U.S. remain in the position it is now or that a recession in the U.S. will affect the rest of the world enough to matter.

While that may have been true a couple of years or may be even months ago, I'd say that this is anything but certain. There are a lot of people and government through out the world who would like to see the U.S. weakened.

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

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

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

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

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

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

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

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

Ratings are a factor in financial-industry regulations and in internal policies at financial institutions. But almost all of these regulations and policies treat a AAA rating the same as a AA rating. So a downgrade from AAA to AA would trigger little or no forced selling, Arora said. An official at Vanguard, the big mutual fund company, told me this week that "a downgrade from AAA would not trigger any events inside our funds."

From Planet Money's blog, http://www.npr.org/blogs/money/2011/07/27/138738198/3-reason...

The full podcast, "Would a downgrade matter?", is an excellent listen: http://www.npr.org/blogs/money/2011/07/28/138721364/the-tues...

People mention that a lot, but what specific institutions have that requirement? And haven't they developed some more coherent requirements ever since subprime mortgage bonds proved the system could be gamed?

One example that comes to my mind is that Indian IPOs can be subscribed by foreign institutional investors using AAA bonds (they just show this as backing instead of paying the full price in cash before getting any shares allocated). I think now investors can only use the bonds of others countries.

Now that being said, I have no idea how this would work in practice.

That's the problem. No one else knows either. Monday is not going to be a good day.

Flux happens.

> 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.

It's a little more complicated than that. Treasury bonds are actively traded on secondary markets. The 'price goes down, yield goes up' generally refers to secondary markets. The concern for the U.S. govt isn't the secondary market. It is the primary market where they auction off bonds to raise money to fund operations. In the primary market, the U.S. treasury issues a certain number of bonds in order to raise a specified amount of money. Investors bid on the bonds, and the best bid (i.e. lowest interest rate) wins. With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.

US government doesnt sell bonds to fund operations, it is never revenue constrained (because the US dollar is a non-commodity backed, floating exchange rate, fiat currency). It sells bonds to remove dollars from the system.

> US government doesnt sell bonds to fund operations

Yes it does.

> It sells bonds to remove dollars from the system.

No. The Fed is in charge of the money supply, and when they sell bonds, dollars are removed from the system.

The US Govt selling bonds actually increases various measures of the money supply.

> The 'price goes down, yield goes up' generally refers to secondary markets.

No. It also refers to the bidding process when the US Govt goes to initiate the sale of bonds.

Regarding the rest: Yes, that is why I included "more or less" in my original post. The bidding for new bonds and the pricing of old bonds is quite close in most circumstances. (If they are not close, then there is usually trouble.)

> With a credit rating downgrade, there will be a lot fewer bidders, hence higher interest rates.

Regardless of the details above, we both get to the same place.

I was under the impression that there were funds that were legally required to not anything lower than a certain value, but those values were much lower than AAA (AA or AA-).

Which funds cannot hold anything lower than AAA, and are they really big enough to dump enough US bonds to make a difference?

Some funds strictly cannot hold anything lower than AAA, but most have "investment grade" requirement which is BBB (Baa in moody's ratings)

That type of downgrade is very unlikely

The only ones I can find that are strictly AAA are either all-corporate to begin with, or explicitly say that they invest in "AAA-rated U.S. Treasury and agency securities" or similar language. Which is awkward if there is no such thing, but it's not clear it'd require them to sell off, since there's nothing eligible to move to.

Checked on BB. It looks like $80B of invested assets across bond funds with any reported information would be affected (which is paltry, considering the full run of US treasuries far exceeds $10T)

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.

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.

Trillions in debt is perfectly fine for an economy as large as America's. It's tens of trillions where you have a problem long-term.

I agree that you should just run the short-term deficits. That said, if we have to cut short-term deficits (which I don't think is a wise strategy), it is significantly better to tax the rich than cut benefit programs.

Finally on military, I'd feel it'd be a better use of resources to transfer the 300,000 people to infrastructure projects. The ROI on the investment is much better than the wars where we have ground-troops.

>> Trillions in debt is perfectly fine for an economy as large as America's.

No it's not. Wouldn't it be much better to not have to constantly pay billions to simply pay the debt's interest? We aren't even reducing the principal, which is why we have to keep raising the debt ceiling.

That's like saying it's perfectly fine to maintain a large credit card debt because you have a high income.

Just because you can handle it, doesn't make it wise.

>Because of those low rates, the amount the U.S. government pays to service its debt is, relative to the size of the economy, less than it was paying throughout the boom years of the 1980s and 1990s and for most of the last decade. The Congressional Budget Office estimates that net interest on the debt (which is what the government pays to service it) would be $225 billion for fiscal year 2011. The latest figures put that a bit higher, so let’s call it $250 billion. That’s about 1.6% of American output, which is lower than at any point since the 1970s – except for 2003 through 2005, when it was closer to 1.4%.

http://moneyland.time.com/2011/07/15/the-u-s-is-not-drowning...

Yes, we should do what we can as a matter of course to pay down the national debt, but we really weren't any worse off in our ability to pay than we've been in decades.

At the very least, manufacturing a crisis out of the matter -- and this one was completely manufactured by the GOP -- that has resulted in making it harder to pay down the debt we already have was a completely daft move.

The US pays a very low interest rate on its debt. If you made $250k per year had a 3% interest rate mortgage of $200k, would you pay it off any faster than you had to? Of course not. You'd spend the money on things that would give you a much better return.

There is absolutely no need for the US to pay down inflation. GDP growth will naturally reduce the effective value of the principal. The problem is the run-away increase in the debt over GDP ratio that we've been seeing.

I agree with you for the most part, particularly about the run-away increase of debt.

I even agree that I would not payoff 3% debt while I could earn higher elsewhere. However, the government isn't doing that. They aren't delaying payback so they can earn a higher rate somewhere else, they are delaying payback and spending the funds.

>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.

If it is a fact, where is the data?

Economies are stimulated by people spending money.

A tax cut to someone making 50,000 dollars a year is going to have a greater percentage of it spent than a tax cut to someone making 5,000,000 a year. Conversely, a 5-10% tax increase isn't going to drastically change the spending habits of someone making 5,000,000 a year, where as it might make the person making 50,000 a year cut back on a number of things.

The important part is that money finds its way back into the market. The rich have 90% of the money. It would make sense to either tax the rich and spend it on infrastructure (or stuff like scientific research and education). Or tax the rich and spend it on the poor (who will actually spend the money).

I hope we cut down on military spending because I think war is bad. We should stop having it. I can't imagine justifying fighting 3 wars on the basis of possible unemployment.

You take the Keynesian view. It's difficult to discuss this in more than a soundbite, but the Hayekian view is well explained by these two videos:

  http://www.youtube.com/watch?v=d0nERTFo-Sk
  http://www.youtube.com/watch?v=GTQnarzmTOc

Well worth watching if you haven't seen them.

In short, the opposite/Hayekian view contends that taxation is seizure of resources from profitable/efficient entities and redistribution towards unprofitable/inefficient entities. We saw this in extremis in the bank bailout, and more controversially in microcosm with individual redistribution.

If you accept this -- that "profitable" correlates with "efficient", and conversely, though the correlation is not perfect -- then taxation is not a Robin Hood sort of thing that increases well being, but rather a move that ties the legs of the efficient sectors of the economy -- those that can post a profit even in tough times -- to those that are already underwater.

The Hayekian view here seems patently false according to Moody's research firm, which determined in 2008 that the most cost effective stimulus was food stamps and the least effective was business incentives such as tax breaks for buying new equipment.

http://money.cnn.com/2008/01/29/news/economy/stimulus_analys...

Oh yeah, reference Moody's, they did such an awesome job rating mortgage securities a few years ago.

My own wholly unfounded reasoning goes as this: give a broke guy some food stamps, he'll spend it on food. So the government is essentially buying this guy food. Food and groceries happen to be some of the the lowest-margin sectors of the economy - Safeway's operating margin hovers a little under 3%. So yeah, the guy will spend it right away, but you're not making much money out of this. The broke guy just wants to feed himself.

Give that same money to someone who's actively trying to make more money out of it (e.g, a business), they have much more incentive to use it efficiently.

I'm a SF liberal, I totally believe feeding the poor should have government support. But it makes a poor economic argument to me.

I think your reasoning is unfounded.

Safeway's doesn't have a huge margin, but so what? They employ people directly and indirectly: cashiers, truckers, stock clerks, people who work in canneries, farmers, chemists who formulate fertilizers, etc. It isn't as if a dollar spent at Safeway's ends up in an incinerator while a dollar spent at Apple mates with another dollar to make change.

Sure, but the study tries to find the most cost-effective way of providing stimulus. If you don't care how efficiently that money is used then we might as well just employ a fuck-ton of people building bridges to Hawaii.

What does margin have to do with it? Why is using the money efficiently important? What is your definition of efficiency?

Lets assume he is dirt poor, rather than broke. Everyone needs food and groceries. If he spends the food-stamps on food, he will likely spend the money that he would have spent on groceries on something else. By giving food stamps, you've given him a surplus of money, so he'll buy something that he needs but can do without, or a luxury good that he wants.

Lets assume now he is rich. We give him a tax break equivalent to the food-stamps (or even the same food stamps). He's already buying everything he wants and putting some in the bank. With the food stamps, he is able to put more in the bank. If the money is in the bank, it can be loaned to the poor guy, but it is actually (eventually) taking money out of the economy when it is loaned... the poor guy has to eventually pay it back to the bank with a few % interest.... it isn't actually getting 'spent' on anything.

If Safeway makes 3% on everything this guy buys, that's 3% additional wealth that wouldn't otherwise be there, right?

Meanwhile if you give it to a more profitable business, they'll make much more out of it. We're not pissing around stimulus dollars to feed poor people or make them richer. We want to increase the total amount of value in the economy.

Your now-he-can-buy-luxuries argument is bullshit. Great, let the government subsidize iPads, that'll get the economy going.

Sure, but you are arguing for short-term spending vs long term capital investment. Basically you are arguing that you don't need to get more sleep, you'll just have a red-bull tonight. So the red-bull is better than getting more sleep in general.

If you take all the money (100%) from people who build and make things and give it to people who don't have jobs to spent, in the short term things will be bought and everything thing will appear stimulated. In the long run your entire economy will collapse as your capital base erodes. The basic Keynesian error is to not distinguish between purely consumptive (why don't create jobs to build ships, fill them full of gold and new technology, and then drive them into the Pacific and sink them?) and productive goods which actually build economic wealth and raise the standard of living.

That's just completely divorced from reality. There are so many areas of the economy that could not reasonably be directly profitable on their own, but magnify the profit of the overall economy. Many of these things are funded by taxes.

The problem with the Hayekian view is that it's one-size fits all. People who think Keynesian economics works in certain situations have the great depression to back them up. And they're likely to sympathize with a Hayek type view during good times when there's no need for the government to stimulate demand.

> If it is a fact, where is the data?

Play Sim City and try to win. Check into the facts that Sim City was built upon.

> I hope we cut down on military spending because I think war is bad

All reasonable people think this. When the rest do then we will have autonomous world peace. Until then, we need peacemakers.

you sure as hell don't tax people to create jobs vs military cuts ... sending a lot of people to the unemployment line.

so, you don't tax people to sustain jobs, yet you don't cut jobs to lower spending. That is paradoxical.

First of all I fail to see how taxing people sustains jobs. As a business, if you're having to give more money to the government, and putting less of it back into your business, it would seem you're actually creating an incentive to lay people off as opposed to hiring more. It makes it harder to grow and hire more people if your business is taking in less money. I know it's obvious but. . .

There are a million ways to cut spending. Taking Obama's 2.5 TRILLION dollar "Obama Care" would be a great start. Take out his TRILLION dollar stimulus which was an epic failure and guess what? You just saved 3.5 TRILLION dollars without cutting any jobs.

First of all I fail to see how taxing people sustains jobs. You said it, "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." So, to fund the military, you have to either sell bonds or levy taxes. Playing World Police for 60 years has been fun, but it's getting a little expensive.

I know it's obvious but... It's not obvious. What if those tax dollars were reinvested in universal health care? A small business wouldn't have to incur the cost of insuring its full-time employees. That would help stimulate growth, as it would cost less to hire each employee.

The premise that your argument stems from--lower taxes means more jobs--has been, time and time again, false in practice. Trickle-down economics are theoretically sound, but in 30 years of attempted trickle, nothing statistically significant has come down.

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.

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.

Beyond that, I'm not sure why any of these agencies has any real credibility anymore, since they were giving AAA ratings to the "toxic" CDOs up until they collapsed.

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.

Japan's famous savings rate, just like its famous work ethic, is nothing but a myth anymore. It stands now at 2% in 2009. (and its famous work ethic...no more. 30% of its working population is part-time. look up 'freeter')

http://belfercenter.ksg.harvard.edu/publication/20397/japans...

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.

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.

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...

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