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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.

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...

>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.

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.

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...

"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?"

It doesn't matter if you're "willing" to pay more for things or not. If the Fed monetizes debt, more money enters the system, there are more dollars bidding for the same amount of goods, prices rise, and creditors will get less for their money. Simple supply and demand.

If you were right, the Fed could just write checks for the whole $14.5 trillion debt in one go and we'd have a balanced budget overnight. Do you think that would be a good idea? Hell, why not create a quadrillion or two more on top of that and make us all millionaires??

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"

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.

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