Just the Facts: S&P's $2 Trillion Mistake | Hacker News Reader

Just the Facts: S&P's $2 Trillion Mistake

treasury.gov

233 pointsbryanlarsen232 comments

S&P's mistake is certainly incredibly embarrassing but apart from that I'm asking myself a much more fundamental question:

Why is the ability to pay considered at all when it comes to the US? A country that is indebted in its own currency can theoretically never default on its nominal obligations. Not due to inability to pay at least. I don't think that credit rating agencies even try to pass judgement on the likelyhood of governments inflating their debt away, so based on ability to pay the US credit rating should be fixed at AAA.

On the other hand, S&P clearly says that what they judge is the ability AND the willingness to pay. Considering the number of congressmen and women who recently voted in favor of default, the willingness to pay has to be in great doubt. In that light, I think, the US does not deserve a AAA or even a AA. B seems more appropriate.

No one was seriously suggesting that we never pay our debts ever again, There really was two things proposed:

One was too not raise the debt ceiling and use SS and Medicare funds to pay off the debt;

The other was to default but just for a short while so as to provide more pressure on the Democrats. If we defaulted for say a month; it would hurt a minuscule fraction of the debt holders. If it actually would hurt debt holders China would be pointing nukes at us.

So the risk that a lender would not get his money back is incredibly small. As for inflating the money away. They could come to the conclusion that that would hurt the economy more then it is worth and default on all the debt collective (like of like declaring bankruptcy). This is a possibility in the distant future.

I believe that the US government has an obligation under current law to make payments to Medicare and SS recipients. It's not a voluntary donation. I don't think the government can simply stop making those payments tomorrow without violating current law.

You see, it is this entire attitude of political parties negotiating in the 11th hour about whether or not to honor this or that obligation that isn't exactly encouraging. This is just not a responsible way to deal with political differences over government spending.

I also doubt the quality of the solutions coming out of that kind of process.

How can that be? Suppose our debt limit were hit. Law says we can't issue more debt; another law says we must pay social security. Until more taxes start rolling in, we'd be breaking one law or the other.

That's a very good question. In my view, it's simply incompetent, populist, law making. How can it be that a country can even have such a rule on the statute books without getting downgraded on the spot?

Because it's been raised with minimal problems for the law's near century of existence.

Good point. I didn't know the rule was that old.

No, SS can be paid without affecting the debt ceiling.

"By law the Treasury is bound to redeem any bonds presented to it by the Social Security Administration. And when the Treasury does, total government debt subject to the debt limit falls by the amount of the redemption—thus freeing up the Treasury's ability to issue new bonds equal in amount to the redeemed Trust Fund bonds."

http://online.wsj.com/article/SB1000142405311190355490457645...

Um, you do realize the US government makes (and changes) those laws you seem to value so highly.

What makes you think I do not realize that? It's exactly why I took (small) pains to say "current law" and not just "law".

Under the rule of law, the government has to honor its own laws even though they can change them. They cannot make a law that incurs costs, take on debt, and then stop paying down their debt just because they could potentially change the law that caused those bills to run up in the first place.

SS is self-funding, and is one of the creditors owed as a part of the debt, because it holds treasuries. To suggest that we use SS funds to avoid default is to suggest that we default to avoid default.

It's very rare that a sovreign nation defaults because of outright inability to pay. I mean if you think about it, we could probably pay down our debt by raising taxes to an exorbitantly high rate and limiting spending to just the military and police. One former Soviet nation that was deeply in debt got out by forcing its people to work slavishly for little pay.

However, most well-intentioned leaders don't have the stomach for these measures (and the bad ones at least know they'll be the target of a coup if they try them), so they default. And the reality is that oftentimes, that's the rational choice.

So more than likely, willingness to pay was the only thing under consideration. And with elections nearing next year, I think they may be holding out for political change before they downgrade us further.

In all, I don't like the credit agencies or what the downgrade represents, but I can't disagree with it.

I agree that it's always more a matter of willingness in the case of sovereigns. But willingness depends on the extent of hardship a government would have to ask their people to endure (as you correctly point out). So if a country can pay its debt by printing money that hardship is greatly reduced or spread over a much longer period of time.

Your suggestion that US would be able to print it's way out of debt is incorrect, the devaluation of the currency caused would be consider a default and lower the rating of the debt to junk status.

Your suggestion of fixating the rating of the dent to AAA is even immoral, I understand that you are basing that on the premise that US can pay all obligations through devaluing the currency, but even then, if a credit rating agency were to unilaterally decide to apply a good standard to ratings... well a new level of corruption would have been reached, that's for sure.

"We can pay back our debt since it's denominated in dollars" is a meme thrown around online blogs, but it is misguided. If the way the debt is paid back is through currency devaluation, it's safe to say that the investors were not truly paid back--i.e. there was a loss of principal measured in purchasing power.

So while it's true that the US can always pay back the full dollar amount of how much it owes, it's less true that it'll pay back the total "purchasing power" that the bondholder gave up to buy US bonds. Therefore, there's additional risk even if you will get your money back.

However, in that light all dollar-denominated debts should be downgraded for the same reason that US treasury bonds are--for the additional currency risk should the government choose to "default" by devaluation.

That's exactly what I said. The keyword is "nominal obligations".

I was answering "Why is the ability to pay considered at all when it comes to the US?"

Perhaps I misunderstood your comment, but it read like "it doesn't matter because we can pay all debts."

The government can always pay its nominal debt with interest. I didn't say they were not going to inflate the debt away or that this would be OK. But S&P did not make that assumption in its rating. S&P assumes a 2% inflation rate.

What is your point?

The meaning of the downgrade is, if the inflation rate is 2% then there's a risk that US doesn't pay its debts. Now, if US does pay the nominal debts as you assume, then you cannot assume the inflation rate is only 2%.

If paying the nominal debt guaranteed an AAA rate regardless of inflation, then every country in the world would have an AAA rate. Argentina would just print a lot of pesos and then buy US dollars with it. Europe would just print a ton of euros and Greece et. al. would have no problems.

If paying the nominal debt guaranteed an AAA rate regardless of inflation, then every country in the world would have an AAA rate

No, because creating peso inflation does not reduce Argentinas dollar debt. But dollar inflation does reduce the USA's dollar debt. Therefore it makes sense to rate the ability of Argentina to pay its nominal dollar denominated debt but it makes no sense at all to rate the ability of the US to pay its dollar denominated debt.

Whether S&P says it or not, then, we should consider part of the 'default' risk being that USGov intentionally, strategically breaks those stated inflation assumptions.

Yes, exactly. That's what the bond market does anyway and according to the bond market there is currently no danger of any inflation whatsoever.

If there is a risk that the US will significantly inflate the currency, then that risk should be reflected in the ratings for all dollar-denominated bonds, not just Treasuries. But there are still AAA-rated corporate bonds. Heck, S&P still rates the bonds of 13 states as AAA, which makes no sense to me.

Not all US debt is classic Treasuries. They also sell inflation-linked debt instruments, such as TIPS and I-Bonds.

I forgot who said it recently, but I thought it was a really interesting point that printing money to pay the debt is like partially defaulting.

Yes, the likelihood of the US not paying its debt is basically 0 -- what they are really concerned about the US printing money (something that's already started under QE2).

Printing money is basically a way to default without calling it a default -- and as a bond holder it can be disastrous.

If it leads to hyperinflation, yes it is a de facto default. However, the simple act of printing money isn't an act of default, and there may be valid reasons for it economically.

Valid economically, sure. That doesn't mean it wouldn't be disastrous to investors, which is what S&P cares about.

S&P's base case scenario assumes 2% consumer price inflation and a 3% nominal GDP growth rate. Their downside scenario assumes 1.5% CPI and 2.5% GDP growth. So inflating the debt away is clearly not the basis of their calculations.

>>voted in favor of default

It was framed this way by some involved parties, but it's a second independent decision to let that happen.

The other option was for the Treasury to stop issuing checks at a rate higher than than it's inflows.

This is similar to what many of us might have done at some point (college might be one), riding as close to your limit as possible, but making minimum payments and reducing spending as needed.

I'm sure they have a playbook somewhere that sets priorities of payments. Actually defaulting on a tranche (does that term apply here?) of bonds would spike the rate so much, they'd avoid it for all but paying themselves, probably.

I don't think anyone who is forced to "set priorities", meaning he can only honor some obligations but not all of them, deserves a AAA rating.

No all obligations are equal, and the AAA rating is only on some of them. U.S. bonds are AAA, but you can be sure that your future Social Security benefits have junk status.

I think Congressmen and women who recently voted in favor of default on external debt.

     US internal debt to GDP ratio is 78% 
     US external debt to GDP ratio is 100%

Our downgrades aren't about our ability to pay - it's about our willingness to pay. That has gone out the window. As S&P says, the Republican Party is now so rabidly anti-tax that their new baseline assumes the indefinite extension of the '01 and '03 Bush tax cuts, meaning that we will run structural deficits forever.

Hate to just post a +1, me too, but this, it seems, just isn't be said or recognized enough. The US, with one of the lowest tax burdens in the western world (the lowest?) can easily afford to pay down it's debts but without any support for raising taxes in the slightest, not just amongst republicans but from what it seems are a vocal and loud minority (majority?) of Americans, no one can really act surprised by S&P's decision here.

It isn't our current debts that have people concerned. It's the combination of current debts and unsustainable future obligations, which are so large that they in fact can't be paid down by just raising taxes. Barring an adjustment in what they are, they grow to the point that they eventually consume 100% of the economy in something like 40 years in conjunction with interest payments, but of course they become completely unsustainable long before then.

There's no solution that doesn't involve cuts, and lots of them. That's not a political statement, at least to me it isn't... it's a math statement. We have obligations in excess of what we could possibly pay down even if we hypothesize a 100% tax that somehow magically draws from a perfectly healthy economy while its happening. The only questions are who gets them, how we do them, and when we do them. Failure to do them at all means we choose the default choice of economic collapse, at which point obligations will still not be paid. There's no solution where we simply honor all of our current "obligations".

(And I would point out that I can't emphasize this point enough. If we do nothing, the default answer is still that we default on everything when the economy collapses. If you value Medicare, Social Security, and everything else, truly value it and not just valuing it the way politicians do as a vote-buying mechanism, you ought to be leading the charge to turn them into something managable, because the worst case scenario doesn't come from Evil Repulicans, it comes from economic collapse. The "evil Republicans" are the only ones taking actions that may mean that Social Security still exists for anyone in 2050.)

Well, there is, technically, which is that some amazing breakthrough in technology suddenly makes us all a lot wealthier very quickly, which is such a long shot it's hardly worth talking about. (And still not worth planning for; should we become radically wealthier we can work out ways to use it when we have it.)

My apologies if this is just rampant ignorance talking (including ignorance of American future obligations), but it appears to me that "The US has future obligations so large that even a magical 100% tax in a magically healthy economy cannot pay for them" is, as they say, an extraordinary claim requiring extraordinary evidence. Or at least some evidence.

And even were that proven (or at least were that to be slightly persuasive), there's still substantial arguing yet to be done, to argue that a refusal to raise taxes at all is an action in _favour_ of coping with debt (indeed, allegedly the only such action).

This article http://www.economist.com/node/21524889 covers some of it.

"Health spending will rise by 5.8% each year from 2010 to the end of 2020, according to actuaries at the Centres for Medicare and Medicaid Services (CMS). In 2020 health care will account for one-fifth of America’s economy."

The article goes on to point out that surveys suggest that the Federal government will be liable for a huge amount of medical obligations... and all this will occur in the country which has the most expensive healthcare in the world.

Something has to break.

Staggeringly poor article. Projecting out a trend line by effectively assuming sustained exponential growth is completely retarded. It's really the same as the projections predicting that the sustained 1990s bubble would continue and the US debt would be paid off by 2009.

Considering the demographics involved -- the population as a whole is getting older and health care for old people is expensive as all hell -- it seems the burden of proof is on you to demonstrate why sustained exponential growth in health-care costs will not take place.

The average lifespan in the US is decreasing.

The number of new drugs intering the market is decreasing, and once the patent expires on an existing drug most drugs effectivly become free.

Most importantly we spend twice as much of our GDP on heathcare as most contires with universal heathcare for reduced benifits. If the numbers keep getting worse the government can get involved in the supply side of the equation without reducing benifits to patents.

The US health care system is clearly on an unsustainable path. But the reason is that it's grotesquely inefficient compared to other health care systems. Some European health care systems cover everyone for less than half the share of GDP. So cutting costs is definitely necessary. Cutting services is not.

It is a political statement. As the Gr.Grandfather comment said, our debts are denominated in dollars, and can be paid off instantly, simply by printing the money. The only reason we can't is because the interest rates on treasuries would go asymptotic if we did that, because investing in bonds denominated in a currency that has a history of doing that would be a risky thing to say the least.

If the reason for the S&P downgrade was based on the debt, it would be purely political, because along with US treasuries, every security denominated in dollars would have to be equally downgraded simultaneously to make economic sense. They understand this, so this is not the reason they gave - they graded the US on its willingness to pay its debts. I think that's a vast overestimation of the power of unpopular spoiler Republicans (edit: and anti-Chinese xenophobia), but a case can be made.

But, even with the fiscal shape of the US now, investors are buying treasuries with interest rates at historic lows, because if you're not investing in US treasuries, what are you going to invest in? The property bubble was largely a response to super low treasury rates, and since it has burst, there has been a massive run-up in precious metals as a way to store savings and get a rate that beats inflation. Investors (the only people that have to be answered to in questions of government debt) make their evaluation of US debt available in real time, and the evaluation is excellent, no matter what any individual investors/pundits say with their mouths.

The worst outcome of more money printing is that those interest rates start to rise, making the dollar less valuable with respect to other currencies, which will make imported products more expensive for domestic consumers, and make our exports cheaper abroad, stimulating a rise in domestic manufacturing and employment. If in addition, that newly printed money was used to make investments in infrastructure, or simply handed to people with low to negative savings who will immediately spend it, the domestic inflationary effect would be captured by a rise in domestic wages. To the degree that all of this happens is the degree to which the massive trade deficits we've been running since Reagan decline or reverse, and the national debt (the combination of domestic public and private debt) is an accumulation of those deficits.

(And I would point out that I can't emphasize this point enough: If we do nothing to Social Security, it will be able to pay exactly as it has until 2035, and if no fixes have been made until then, 80% of what it has been paying until the earth plunges into the sun. This 80% will go further than the 100% being paid now due to the productivity gains between now and then, unless our response to the underutilized economy of this demand crisis is to make cuts that further underutilize the economy.)

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edit: that's what I get for not RTFA before commenting. I gave S&P a benefit of the doubt that it didn't deserve, and most of this was actually said by the treasury except for the "weak dollar is good and SS is fine" stuff. Well, a weakened dollar is good and SS is fine:)

> if you're not investing in US treasuries, what are you going to invest in?

You could fund my mortgage. I pay 7% floating in a currency with a pretty good record of late. My property could halve in value and you would still get your money back, and I can fund the the loan from my current income.

I also can't just decide to not pay you without you being able to foreclose.

<quote>Well, there is, technically, which is that some amazing breakthrough in technology suddenly makes us all a lot wealthier very quickly, which is such a long shot it's hardly worth talking about.</quote> Wealth? Is there really a lack of wealth in the US? I though the problem was not a lack of wealth, but more a lack of those in the US that possess it in abundance to share it with those who don't (e.g., by paying taxes). Even if some 'technology' came along that could generate wealth, that would very likely still be owned by a minority of the population and would not solve any of the problems faced by the nation as a whole.

In this debate in particular, I think it's critically important to distinguish between "dollars", a currency controlled by the US government, and "wealth", the real things those dollars can buy. As has been pointed out, nobody denies that technically the US can spin up the printing presses and make as many dollars as it wants. However, even ignoring the other catastrophic consequences that would have, there's also the considerations of the real wealth consequences we're committing to. It isn't just "lots of money", it's also things like committing real people to build real facilities so that other real people will take care of the real old people living in those facilities for years at a time on the government's dime. To exaggerate for clarity, we can't afford to have an economy in which everybody is dedicated either to caring for old people, treating old people, or supporting those who do. Somebody's actually got to be able to produce something to feed the economy. Obviously we can't get to this point, but it's not clear how much of our real economy can actually be dedicated to these things, because the support networks can end up being a lot deeper than surface intuition would expect. Studying modern military logistics can be very helpful; in particular, look for the statistics about how many support personnel there are per front-line soldier doing the "actual" military work, and apply the lessons to the "real" economy.

I agree. "Wealth" is what is lost when workers who want to work sit idle because the fed decides that protecting the value of "dollars" is a more important mandate than full employment.

The US does not tax wealth, really, except when it's inherited. We tax income, and the most of the income taxes are paid by the top income-earners.

> It isn't our current debts that have people concerned. It's the combination of current debts and unsustainable future obligations, which are so large that they in fact can't be paid down by just raising taxes.

Who is proposing that we only raise taxes, without cuts? The entire Democratic 'compromise' is effectively all cuts.

> The "evil Republicans" are the only ones taking actions that may mean that Social Security still exists for anyone in 2050.

The "evil Republicans" hyperbole might be helpful in dismissing the fact that both parties are horribly complicit in the problem we have now. Neither one of them have done anything meaningful to cut budgets for any of their favorite projects. And that hyperbole ignores the fact that there is a significant percentage of Americans that do not identify with either party [1], and as such are not blaming the 'evil Republicans'.

1 - http://www.rasmussenreports.com/public_content/politics/mood...

As a result of the spending cuts, the discretionary budget will be 0.6% lower in 2012 than it was in 2011 and 18% higher in 2021 than it is in 2012.

http://www.economist.com/blogs/democracyinamerica/2011/08/de...

Those democrats, how could they agree to such harsh cuts!

(The media is describing it as a "cut" because the growth rate of government spending has been cut.)

Comparing fixed dollar amounts when the GDP is changing is silly.

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&#...

PS: If growth avergages less than 1.6% for the next 9 years we are going to have an issue. But, a few of those 5+% years and things start to look vary diffrent. Except for SS which recives little benifit from GDP growth only population growth.

Why would the cost of the government grow with gdp? If people are richer, it costs more to build roads and aircraft carriers?

Growing with population or inflation makes sense, at least for costs which scale with population. Growing with gdp is nonsensical.

Wealth only indirectly influences GDP. If you had 1billion dollars’ worth of Sony stock and don't buy, sell, or receive dividends then the impact on US GDP of you owning that stock vs. someone in Japan is zero.

When you break it down short term GDP growth is dominated by the size of the working population and changes in the value of your currency. Over the long term you need to consider technology and infrastructure improvements but wealthy society’s both expect more from the government and can afford to have their government provide more so that's not really an issue. Thus linking government spending to GDP is fairly healthy activity.

PS: I would happily to drastically cut a lot of government spending, but I also realize doing so quickly would be vary damaging to our economy. I think a flat 25% federal tax including social security that starts at 70 and universal healthcare and excluding any and all tax breaks would be close to optimal, but good luck getting that passed.

No doubt, I'm definitely not suggesting it can be done without some cuts, just that cuts alone are not likely to suffice.

Our tax burdens are not the lowest by any means. My total tax rate partially due to living in California (although it is mostly Federal) is ~40%. There are plenty of countries in Europe that would be happy to tax me less.

My buddy in Singapore pays about 8% all told and he's in the same income range.

The temptation to become an expat gets stronger as I earn more money.

My sin is not being a fat cat living off capital gains. I have to actually earn my income, so I get fucked.

Singapore's not quite the oasis you make it out to be. Have a look at how much it will cost you for a car once you get over there.

I've been there, thanks for assuming, and I also know how much a car costs.

You don't need a car there, it's a petty way to show off. Taxis are absurdly cheap in Singapore. gothere.sg is a great site for getting places too.

You really don't need a car in singapore. It's one city, and you can fly everywhere in SE asia for $50-$200 round trip with AirAsia.

You really don't need a car to live in Singapore. Most of the time, driving will take you longer than getting on the metro. Remember that Singapore is an extremely small country and you can easily commute to anywhere on the island with a pushbike (even in the rain, most offices have showers).

Renting or buying property is the expensive part of living in Singapore. However, it is quite inexpensive to get a live-in maid/nanny.

That being said, it's also a little unfair to use it as a standard reference point, given that it's a small city-state which also happens to be the best-placed trading port in the world. Singapore is an outlier - when you can take the cream off an inordinate amount of trade pouring past, you don't need as much income tax.

How do you manage to get an effective 40% tax rate in California? I could see that as a marginal rate on the last few dollars, but you'd have to make in the millions to get there for your overall tax rate.

For example, if you make $100k and take only the standard deduction, you'll pay $19k in federal taxes (19%) and $6k in California taxes (6%), for 25% total. If you include payroll taxes, that's another ~7.5%, so 32.5%. Of course, many people take much larger deductions than the standard deduction, so pay considerably less.

>And San Francisco applies its city payroll tax to income from self-employment. [1]

>[1] http://taxes.about.com/od/income/a/Self-Employment-Income.ht...

Unless he's a multi-millionaire who has one of the worst tax preparers in history, he doesn't have a 40% tax rate.

The reason why he thinks his tax rate is 40% is because he's making the mistake that common among financial illiterates, which is confusing the maximum tax rate with the marginal (i.e., actual) tax rate.

The highest Federal tax rate is currently 35%. That bracket applies to people who earn $379,150 or more. But if you earn $379,151, that means that only one of the many dollars you earned is actually taxed at the 35% rate.

Similarly, the highest California tax bracket is currently 11%, for people who earn a million bucks a year or more. But again, only the income that's above $1 million is taxed at that rate. Your first $47,000 in income is going to be taxed at the rate of 0 percent to 10 percent.

And that doesn't even factor in deductions. So even if your income is a million bucks a year, it doesn't mean that your combined state and federal tax rate is 40%.

This is true, yet often when it is brought up as you have done it is a straw man. The OP has in his mind that taxes collected are excessive. If you show him that rates are progressive, he won't decide that enough money is being collected after all. He is only using the tax rate as a rhetorical point -- he points elsewhere for proof that too much is collected.

Edit: should clarify I prepare taxes among other things. I'm NOT saying the brackets aren't progressive, just that this guy isn't saying, "gee, if only we progressed up to 35% things would be fine."

Most people in the middle and upper middle class complain that their taxes are too high in hopes that benevolent, democratically elected lawmakers will lower them. But it's a fact that Americans enjoy an effective tax rate that is quite low by both international and historical standards.

Of course, we're about to learn the consequences of that as we slowly decimate our educational system and national infrastructure, but that's probably a separate discussion.

He is probably forgetting to subtract what he contributes to 401k and medical and dental plans. If I simply look at what gets deposited in my bank, and what my salary is, it comes out close to the 40% number.

If you count income taxes, sales taxes, property taxes, other "sin" taxes and various and sundry fees, it's a lot more.

It's a lot more in the places you compare against it then, too.

seriously. Most western nations have VATs that dwarf sales tax rates in any part of the US, for example.

Maybe he's figuring in property and sales tax?

Total tax burden includes sales tax that you pay on what you spend, property tax, gas tax, payroll taxes, taxes on utility bills, dog license fees, etc. I don't think 40% is completely far fetched.

Not sure how exactly one would calculate this, though, other than looking at taxes as percentage of GDP and maybe trying to fit yourself in there somehow based on your tax bracket as a ratio to other people. But with an average total tax burden of 26.9% (http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenu...), 40% for someone in an upper bracket doesn't sound so crazy.

Lumping all fees and duties together is not what people normally assume. Usually, just the income tax is compared, as it is present in most economies of the world.

Here in Norway an income tax bracket of 50% for a well-off middle class family is fairly normal. On top of that, sales tax is 25%, gas is mostly made of taxes (about 2.5 times what you'd pay in the US) etc.

Still somehow there's less bitching about taxes (or gas price) per capita than you hear from overseas :)

You get a lot more for your money. Sweden too.

I hear a lot of bitching about food and gas prices for example here in Finland. Also very few people DON'T have a problem with some sort of bureaucrat, for example idiotic and incoherent health inspectors, bureaucrats deciding who gets subsidized etc.

The best way to deal with bureaucrats here is to catch them making a mistake and then using that to make them sign the papers. (Usually this involves following their orders until there is some kind of incoherence in them, and thus is costly if those orders involve eg. building/renovating something that is fine as is).

For some reason the favorite explanation nowdays is that the EU is in fault here, even though this crap has been going on before the EU existed.

You could add in 8.5% for sales taxes. There are also other 'hidden' taxes like gas and property taxes.

As a Singaporean, all I can say is that once you become more aware of how the incumbent government generates most of its revenue, you will be rendered speechless. Americans often exaggerate and say that their nation is turning into a corporate state - come to Singapore, and you will realize that the state is administered exactly like a corporation.

I actually think the problem with perceptions of taxes in the US is not that we are taxed too much, but rather that many people feel they are taxed too much relative to the value they get from paying the taxes. If everyone had free, universal healthcare, I'd guess people would feel better about paying their taxes. The fact that a large portion goes to funding a largely unseen war machine doesn't help.

The other issue, of course, is that many people don't seem to realize that they benefit from the taxes they pay - a classic example being the tax credit for owning a home.

I wonder where this lowest tax burden comes from. My BC Canada income tax is pretty much identical to my California Income Tax. Does it really mostly come from the mortgage intrest deduction??

As far as I understand, the field in which AAA and AA and B exist is defined by the stable dollar, among other things. Once this axiom is invalidated, all ratings lost meaning, and therefore they can't account for this possibility in their rating. That, or add a separate class. Which wouln't be useful.

Infinite borrowing and defaulting are consequentially the same. I'm absolutely amazed that people believe otherwise.

Simply false. If interest payments can be made sustainably, there is no default.

At some point though you have to balance the budget or they won't be sustainable.

Nope, don't even have to go that far. So long as interest payments as a fraction of tax revenue doesn't increase, debt is sustainable. You can raise tax revenue either directly or by growing the whole economy, so the taxes are the same percentage, but coming out of a larger number.

It's no different than personal finance. If I get a raise and my income goes up by 10% and get a fancier apartment for 5% more, I'm still better off overall because my salary grew at a faster rate than my rent.

True, as I understand it though they still have a fair bit to go to bring it to a sustainable level in that sense.

To me, it raises this other fundamental question: if, in a case so high-profile such as rating the US debt, S&P and their best experts make a $2T mistake, then how much trust can we put in the financial rating industry at a whole?

The erosion of faith goes deeper than that, as James Galbraith discusses in this talk from earlier in the year.

http://www.nakedcapitalism.com/2011/08/james-galbraith-on-fr...

  This is the diagnosis of an irreversible disease. The corruption and
  collapse of the rule of law, in the financial sphere, is basically
  irreparable. It’s not just that restoring trust takes a long
  time. It’s that under the new technological order in this field, it
  can not be done. The technologies are designed to sow and foster
  distrust and that is the consequence of using them. The recent
  experience proves this, it seems to me. And therefore there can be no
  return to the way things were before. In other words, we are at the
  end of the illusion of a market place in the financial sphere.

Thanks for the link. James is the son of famous economist and author, John Galbraith. A quote I pulled from his Wikipedia page:

"The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness."

I like "Faced with the choice of changing one's mind and proving there's no need to do so, almost everyone gets busy on the proof."

Being deep in debt is a big problem for a country but not the worst thing ever. With a fair amount of fiscal discipline it's usually possible to dig out of debt as long as it's not such a huge multiple of GDP. About the worse thing a country can do to deal with big debt is to print money as that will create an inflationary spiral which is harder to get out of than just debt. Indeed, runaway inflation can wreck the economy and destroy GDP growth. And from a creditor's perspective being repaid in inflated dollars does not actually repay the value of the debt.

If the US were to try to inflate its way out of debt by printing money it would result in a tremendously fast crash of the US's credit rating.

So says the theory, yet Ben Bernanke has created hundreds of billions if not trillions of fresh cash and injected into the economy and we are not seeing runaway inflation. Sure, it's not used to pay down debt, but....you get the idea.

Fiscal discipline doesn't always work. See Greece. Greece has been enduring fiscal discipline for at least the last 12 - 18 months...but things only get worse. You can argue that is because Greece's situation is so bad, that the fiscal discipline it needs is more than it has gotten - but that is a tough line to argue because it's hard to know how much is enough. At some point, it becomes unproductive.

Yet the deepest and longest recession in history was a deflationary one.

I was wondering about the exact same thing. Ability and willingness to pay should mean ability and willingness to pay in real terms. Anything else doesn't seem to make sense.

Also: If the US defaults, how does it go down?

Here's why I'm confused:

Given that the US can't default on its nominal obligations, how does it default on its real obligations, so to speak? Printing money, aka inflation, is one way, but there's always inflation. Does that mean that the US is always defaulting to some degree? I'm thinking no, because lenders are compensated for higher inflation with higher interest rates. Would the US ever go "no, Chang, we're not going to give back your $10, sorry"?

Maybe someone can enlighten me.

Oh, I think I answered my own question. The lenders probably factor in inflation when they lend the US money. That would actually mean that the loans are in real money, and that there is no such thing as a nominal obligation.

Anyone know if this is correct?

I'm not sure I understand your question correctly. There is definitely such a thing as a nominal obligation.

When the treasury wants to borrow money, it conducts an auction to determine who gets to lend it how much at what interest rate. If, at the end of that auction, a particular lender agrees to lend the treasury USD 1bn for 10 years at a yield (interest rate) of 3%, you can calculate the exact nominal dollar amounts that are to be paid back. These amounts never change from then on come what may.

Every year the treasury has to make a USD 30 million coupon (interest) payment to the lender. After 10 years the treasury has to pay back the principal, that is the original 1bn amount. That's it.

If the average inflation rate in that 10 year time period is 2%, the lender's return on investment is 1% (10 million dollars). If the inflation rate turns out to average at 3%, the lender makes zero. If inflation is 5%, the lender makes a loss of 2% (20 million).

If the inflation rate is somewhat higher than the yield and the lender makes a loss, it is not formally a default. I'm not sure what happens in terms of formal default if a borrower deliberately and aggressively inlfates away its debt faster than lenders can react by demanding higher interest rates at the next auction.

I believe this has never happened in modern times because borrowers who would do that cannot usually borrow in their own currency. What would definitely happen is that this borrower would have to pay much higher interest rates as soon as he comes to the market again, so nobody wants that.

There is another type of treasury bonds called TIPS, which are inflation adjusted. They have a lower yield but are protected against rising inflation.

Thanks for your answer.

> I'm not sure what happens in terms of formal default if a borrower deliberately and aggressively inlfates away its debt faster than lenders can react by demanding higher interest rates at the next auction.

This is the reason why I asked my question(s). Why would the borrower ever aggressively inflate away its debt, as opposed to gradually inflating it away? If there is no definite point of default, the US is either defaulting frequently, or can never default.

I wonder what the definition of default is, and if it's an event or a process.

*>Why would the borrower ever aggressively inflate away its debt, as opposed to gradually inflating it away?

Because if it happens gradually it doesn't work as lenders would demand gradually higher interest rates every time a debt tranche is rolled over.

I have looked up the terms of credit default swaps and it turns out that inflating debt away does not constitute formal default in the CDS market. Formal default (a so called credit event) only results from missing a payment or restructuring the terms of payment.

regarding defaulting on nominal obligations:

1) sovereigns have defaulted in the past when they've had the option to monetize their obligations. often a sovereigns debt will be heavily owned by foreigners and it is a politically better option to fuck the foreigners. 2) a monetization of debt is equivalent to a partial default. if you bought a bunch of securities so you could cash them in 10 years to buy 20 hamburgers but now you can only buy 10 hamburgers because the price level has risen faster than you expected then this is equivalent to a 50% partial default. however, bondholders would prefer a country monetizes before it partially defaults (all other things being equal) because then they don't take 100% of the burden of default.

but i think you are correct in that it is mostly willingness to pay. also, it is not just the congressman but treasury as well which came out and said it couldn't prioritise debt payments. treasury might be correct morally and legally but it doesn't inspire confidence in bondholders. :)

Don't you think that monetizing the debt is a form of unwillingness to pay?

Independent of this error, there is no justifiable rationale for downgrading the debt of the United States... The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.

The conclusion blog post sounds an awful lot like an opinion, considering the title is "Just the Facts".

Yes. Claiming it's "Just the Facts" is technically incorrect. Considering the source, though, it's a lot less misleading than it could be.

It's odd that there's so much emphasis being placed on short-to-medium-term numbers when it comes to bond ratings in the first place. Especially at current interest rates, it has relatively minor implications for debt sustainability: $4 trillion in debt, at real interest rates hovering just above 1%, is maybe $50b a year extra interest in real terms. Surely the federal government's solvency doesn't turn on questions of +/- $50b a year, so the bond-serviceability picture is pretty similar whether you move things $4t one way or another.

He's a bit of a partisan, but in this case I think Paul Krugman's analysis is basically correct, that real questions of debt sustainability aren't +/- $4trillion in the next 10 years, but longer-term insufficiently funded liabilities in healthcare and pensions: http://krugman.blogs.nytimes.com/2011/08/06/the-arithmetic-o...

He's a bit of a partisan, but in this case I think Krugman's analysis is basically correct, that real questions of debt sustainability aren't +/- $4trillion in the next 10 years, but longer-term insufficiently funded liabilities in healthcare and pensions:

Krugman is a Democrat partisan, but complaining about unfunded liabilities in healthcare and pensions is exactly what the Republicans are doing too. If Krugman and the Republicans agree that it's a big problem then... damn, it must be a big problem.

but they are again refusing to face facts in front of them..its not unfunded health care liabilities..its UNFUNDED LIABILITIES in FED Budget that means anytime a law is passed without the means to pay for it..for example going to war in Iraq, etc without raising taxes to pay for it..

Another example taking over the Ed Loans from the private sector and than not raising some type of tax to pay for it.

It should be that in order to pass a bill in Congress that a pair of bills one to enact the law and one to pay for it. That is the budget reform that we need.

My preferred solution is this:

1. Every year, the US Government figures out how much money it wants to spend.

2. Then, it figures out what the (flat) tax rate would need to be in order to rustle up that much money.

3. Then, it sets the tax rate and sends everyone a bill.

You could do this a year in advance just to make sure everybody knew how much they'd be getting taxed. But the important thing is that everybody in the country needs to see the immediate hip-pocket consequences when the government spends more money.

Still doesn't help with things like SS and Medicare, though, which cost a little bit of money in the year they're passed and vast sums of money several decades into the future.

Then a financial crisis hits and the government finds itself unable to react to the needs of a paralyzed market. It's a nice idea in principle. But any time something like this or a balanced budget law/rule comes up in congress, it never has a provision for reacting to emergencies.

The problem with that is, as we've seen (and are seeing), it's trivial to manufacture an 'emergency' or a 'crisis' on demand, whenever it's convenient.

A government that can react to real crises while being vulnerable to fake ones is the best option I've seen so far. People are very creative when it comes to working around problems. Some people see data processing efficiency as a problem to solve. Others see finding ways to manipulate government for profit as one.

This is a really stupid idea.

That kind of tight-budgeting might work when introducing a 7-year old to the concept of an allowance, but national economics is slighly more involved.

"Vast sums," LOL. Very telling you don't mention the drain on the economy by the military or by the financial industry itself.

You have to give him credit for the less-is-more approach to this answer, you summed up centuries of macroeconomics and people who dedicated their lives to finding the most optimal solutions in a very easy to follow <ol>, well done!

Your student loan bill is a bad example. In this case the Gov't was already subsidizing these loans and being charged enough by the banks servicing them for those banks to also turn a profit on that line of business.

By bringing it in-house, the governement doesn't increase their liabilities, and now they don't have to pad the profit margins of loan servicers.

But anyways, generally, what you're talking about is call "paygo" rules. They've been instituted before as house rules (and commonly ignored), you're advocating for them being codified into law. Not a bad idea I don't think, but i haven't given it a lot of thought.

> Another example taking over the Ed Loans from the private sector and than not raising some type of tax to pay for it.

Don't take talking points at face value... Student loans in the "private sector" were a misnomer--they were backed by the Fed Gov't. The private lender had no risk, just guaranteed profit. We saved money by ending subsidizing the private market and making the loans directly. The "takeover" was simply ending the government backing of private loans. Not much of a takeover if you ask me. The private sector can still make loans all they want, they just have to be on the hook for it.

Modern Monetary Theory reveals the entire premise of this issue to be false. The private sector does not fund the public sector in the way that most people believe. Non-convertible floating FX currency regimes (ie fiat money) such as the US,UK, and Japan can meet any and all financial obligations by issuing currency. Thus: 1) Taxes do not fund government. ( they 'back' the currency) 2) Treasury securities do not fund government. ( they are a tool to control interest rates) 3) Social security is solvent and we are not creating a financial burden for our grandchildren. (we are creating a burden by not upgrading and investing in infrastructure such as roads,highways,mass transit,etc) 4) Medicare is solvent ( though we have to clean up the fraud) 5) Private sector savings do not fund investment. ( banks create loans out of thin air)

The public is being lied to by politicians( on both sides of the aisle) who are selling a false need for government austerity when in fact what we need is the government to invest more. Much more.

People stop believing the bullshit from mainstream media bought and paid for by the plutocrats. Spend a bit of time to educate yourself on Modern Monetary Theory. It will change your political outlook. Its an earth is round vs earth is flat type of revelation. You can Google the following list of founders and well known MMT advocates in academia and the blogosphere.

Warren Mosler - www.moslereconomics.com Dr Randal Wray - UMKC neweconomicperspectives.blogspot.com Dr Stephanie Kelton - UMKC neweconomicperspectives.blogspot.com Dr Scott Fullwiler Wartburg College neweconomicperspectives Dr Bill Mitchel - U of Newcastle, Australia. http://bilbo.economicoutlook.net/blog/ Marshall Auerback http://www.newdeal20.org/ Dr James K Galbreath UT - Austin Mike Norman Fox Business Analyst www.mikenormaneconomics.org ( Mike takes a beating on Fox -bless him)

Sure, if you choose to look at it that way. But if you're going to make "Non-convertible floating FX currency regimes (ie fiat money) ... can meet any and all financial obligations by issuing currency", then you've got to consider that entire reference frame.

Issuing currency is identically equal to inflation, which is itself nothing more than a tax levied against those holding assets denominated in that currency. Using this option makes continued borrowing increasingly expensive, because those holding the debt wind up not getting repaid in actual value, only in nominal currency.

So when you look at the world from your perspective, the result is still that, long term, continually increasing deficit and debt is unsustainable.

> Issuing currency is identically equal to inflation

That's the main dogma of monetarism, but the empirical evidence for it is fairly contested (especially by neo-Keynesians). Measured inflation in many cases doesn't seem to actually move in line with what changes in the money supply would predict; for example, we should have much higher inflation currently than we do. Some monetarists did predict significant inflation, or even hyperinflation, two years ago, in the wake of stimulus spending and quantitative easing, but it didn't materialize. But I suppose I'll keep reloading http://www.hyperinflatingyet.com periodically just to be safe...

Sure, it can cause inflation, but it is incontrovertible that governments can always replay local currency debt by issuing currency (except the EURO, where priting money has been offloaded to an external entity). Which is why sovereign debt in local currency is always the risk free credit, by definition. And the US is in the enviable position where, due to the nature of the dollar being the global reference currency, all (most?) of its debt is denominated USD.

So I'm left puzzled at the recent debate about the US debt.

In the USA the printing of currency has also been offloaded to an external entity (the Fed), and the amount of currency to circulate has been fixed by Congress. Thus while in theory it is possible to just print money, in practice it is a lot more difficult than that.

Yes they can.. unless an angry mob whose life savings they just stole does not overthrow them. There are limits on how much you can do this and stay in power, they don't figure in the economics calculations but they do exist in real life.

Yes, in the long term, printing money will lead to an inflationary spiral. The expectation of that will cause higher interest rates. But the fact remains, that in an emergency, it is a possibility. And the possibility of creates greater safety/willingness to lend.

Moody's in its latest assessment says:

"The global role of the dollar, which underpins continued demand for U.S. dollar assets, .... provides unmatched access to financing, meaning that the U.S. government can support higher debt levels than other governments"

http://economix.blogs.nytimes.com/2011/08/08/moodys-why-the-...

You have to define what printing money means? The term doesn't apply to modern fiat money. And naturally I should define what modern fiat money is. But in a broad sense the government should continue issuing currency( by increasing spending -preferably on infrastructure- or reducing taxes) which increases aggregate demand until spare capacity ( which includes unemployment) is exhausted in the economy.

No, an increase in the money supply directly leads to inflation (other things being equal, notably the velocity of money).

It's right there in the terminology: money supply. What happens when the quantity supplied of a good increases? With a constant quantity demanded, the price goes down. So it is here: if the quantity of money supplied increases, the value of that money decreases.

Thus, paying one's debts with inflated currency means that you're giving yourself a discount off the amount you owed. And that creates lower safety/willingness to lend.

> Issuing currency is identically equal to inflation

That simply isn't true, not even close to true.

<i>Issuing currency is identically equal to inflation</i> No. There is demand pull inflation and cost push inflation. If you remember from econ, inflation or price level is the intersection of supply and demand curves. Since demand and supply are not constant, it is possible to issue greater amounts of currency in the face of greater amounts of supply and still see prices decline if the increase in supply outweighs the increase in demand from issuing more currency. What you are referring to is a gold standard or fixed exchange regime concept(this is what Austrians advocate). In a gold standard, money is a receipt for a piece of gold sitting in a vault. So issuing more money without increasing the supply of gold dilutes the value of money in terms of gold. In fact, this is where the term printing money comes from in the first place. This is not applicable in a fiat currency regime. In a fiat money regime, you can give everyone a million dollars tomorrow and if they don't spend it, there is no inflation. No such thing as printing money in a fiat money regime. All money is created and destroyed in the same way. There is no magical level where money goes from not being printed to being printed in fiat.

<i>continually increasing deficit and debt is unsustainable.</i> Yes but you have to have a model to tell you when to stop increasing deficits and arbitrary numbers like 10 Trillion or 4 Trillion don't mean dick. With modern money, the size of the deficit is equal to the savings of the private sector. Paying off the deficit decreases savings to the private sector which either leads to a recession or credit bubble ( to make up for the lost money.) Deficits need to be targeted based upon the level of inflation and unemployment in the economy that policy makers wish to achieve. Obama cannot on the one hand call for "fixing the deficit problem" while on the other hand calling for more jobs. The two are pretty much antithetical.

inflation or price level is the intersection of supply and demand curves

As I understand your claim, you seem to be regarding the entire market as a single monolithic commodity -- a common Keynesian error.

Sure, the prices of discrete commodities fluctuate as their quantities supplied and demanded fluctuate. That's not at all the same thing as devaluation of the currency due to increase in the money supply.

That said, there's a good deal of controversy over the effect of wages (whose price tends to be sticky, preventing "proper" adjustment for supply/demand). Thus, even Austrians think that a moderate level of inflation is good, because it acts as a hidden throttle on the effect of wage increases.

Was referring to aggregate demand and aggregate supply.

S&P's response to the supposed Mistake:

Standard & Poor’s Clarifies Assumption Used On Discretionary Spending Growth

New York, Aug. 6, 2011. In response to questions, Standard & Poor’s today said that the ratings decision to lower the long-term rating to AA+ from AAA was not affected by the change of assumptions regarding the pace of discretionary spending growth. In the near term horizon to 2015, the U.S. net general government debt is projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption.

We used the Alternative Fiscal Scenario of the nonpartisan Congressional Budget Office (CBO), which includes an assumption that government discretionary appropriations will grow at the same rate as nominal GDP. In further discussions between Standard & Poor’s and Treasury, we determined that the CBO’s Baseline Scenario, which assumes discretionary appropriations grow at a lower rate, would be more consistent with CBO assessment of the savings set out by the Budget Control Act of 2011.

Our ratings are determined primarily using a 3-5 year time horizon.

In the near term horizon, by 2015, the U.S. net general government debt with the new assumptions were projected to be $14.5 trillion (79% of 2015 GDP) versus $14.7 trillion (81% of 2015 GDP) with the initial assumption – a difference of $345 billion.

In taking a longer term horizon of 10 years, the U.S. net general government debt level with the current assumptions would be $20.1 trillion (85% of 2021 GDP). With the original assumptions, the debt level was projected to be $22.1 trillion (93% of 2021 GDP).

The primary focus remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium term fiscal outlook. None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays and thus had no impact on the rating decision.

They don't see publicly debating for a month about defaulting on a loan for the first time and coming close to being within a day of doing it as anything that could possibly shake investor confidence? Isn't the AAA rating for ultra rock solid, and that dragged on public debate gives off the impression of anything but ultra rock solidness.

Exactly. You can't run around threatening not to pay your bills and then be surprised when you are seen as less credit-worthy than before.

A credit rating is a measure of whether or not you will pay your bills. It's not a measure of your ability to pay those bills.

The US did not come within one day of defaulting. It came within a day of hitting the debt ceiling, which is a very different thing. Despite the way it was portrayed, the government could have limped along for days our weeks without defaulting.

(I'm not saying that would have been a good thing--just that the idea of August 2nd as the day default would have occurred is incorrect.)

We hit the debt ceiling back in May. We've managed to stay afloat due to some accounting tricks at the Treasury.

http://www.washingtontimes.com/news/2011/may/16/federal-gove...

I continue to be amazed at how much credibility we seem to give this (and other) rating agency after they rated subprime-backed derivatives as safe, rated AIG & Lehman as safe. Is our collective short-term memory non-existent?

You're right, but the good thing is that nobody is really giving S&P that much credit here. Yields on new gov't debt haven't risen significantly. Sure, people say if Fitch and Moody's raise them then it'll trigger sell-offs from institutional investors.

Thing is though, the institutional investors who have policies of holding x% AAA debt can always change those rules. Because there's only so much AAA debt out there -- that's why it would be kinda bad for everybody if the US Gov't didn't carry ANY public debt.

Suppose you're a fund manager of a huge fund with $40bn under management. A full 1/4 is T-bills. Your mandate is to hold 1/4 of your fund in AAA debts. Well -- where do you put than 10 billion?

I can see many funds saying -- "look, the ratings agencies did their thing. But the world is no different today than it was yesterday."

This is especaially true because all these buyers of AA+ US Debt would stand to make a good bit more $$ than they would've before as the markets use these ratings agencies to justify increased yields.

But even that is not guaranteed because the debt is sold at auction. If there are enough buyers willing to buy at current yields, then sweet. And there may be because in this climate, if you're that fund manager, you desperately cling to safe havens like US public debit.

>You're right, but the good thing is that nobody is really giving S&P that much credit here. Yields on new gov't debt haven't risen significantly. Sure, people say if Fitch and Moody's raise them then it'll trigger sell-offs from institutional investors.

I think it's still too early to tell. S&P downgraded after the markets closed on Friday.

The real test should be this evening when the Asia session opens and into the morning.

Let's see how it plays out.

>Thing is though, the institutional investors who have policies of holding x% AAA debt can always change those rules. Because there's only so much AAA debt out there -- that's why it would be kinda bad for everybody if the US Gov't didn't carry ANY public debt.

The institutions themselves can't just change the rules. They have to work with regulators - who then can change the rules and allow them to change their portfolio allocation. It's not as easy as flipping a switch.

What's for sure though, every single financial regulator in America is working overtime this weekend.

>Suppose you're a fund manager of a huge fund with $40bn under management. A full 1/4 is T-bills. Your mandate is to hold 1/4 of your fund in AAA debts. Well -- where do you put than 10 billion?

That's simple for a hedge fund, or a private equity fund. But pension funds, mutual funds, insurance companies - the real section of the financial industry that accounts for hundreds of billions, if not trillions of AAA assets, have to abide by regulations.

Take social security - legally, social security has to be invested in AAA gov't paper. I am not sure if the Treasury can change this rule easily - I imagine it can have some sway here, but there are other financial institutions that hold significant amounts of AAA gov't debt (central banks for instance) that are legally required to do so - by their respective legal jurisdictions.

A broken clock is right twice a day. I hate the ratings agencies, but that doesn't make the downgrade wrong.

A track record is important in determining credibility. Their long term (decades) track record may be fine, but their short term (past few years) track record is suspect. This may be legitimate and above board, but it is difficult, and with good reason, to believe that this is so.

The same could be said for just about every other participant in banking, real estate, government financing, etc...including individuals who bought houses at the top of the market. It ignores the ability to learn from mistakes. The point here is that the ratings agencies are going to be much more careful handing out AAA ratings in future, BECAUSE they messed up. It's exactly the collective short-term memory you refer to, in action.

An AAA rating should be conferred on an entity that is riskless. The recent debt debacle is very likely to be repeated in the near future. These are not the actions of a riskless entity.

I hate it when students whine about the unfairness of their lousy grades and how they really deserved a higher one.

It's even worse when the Treasury Department does it.

I would whine if a teacher's mistake sent me from a D to an F if a D would let me "pass".

Well this is a difference between an A and a B. Or rather it's the difference between an AAA and an AA+, because grade inflation in the credit rating world is even worse than grade inflation in academia.

But there's a logical flaw here. Even if there was an error in the initial calculation, that doesn't mean that the end result should be different. You can show me that you actually got 81% rather than 80% if you like, but that's still a B.

Agreed. The real mistake made by all the rating agencies was in not downgrading the US years ago. And I say that as an American citizen who wants to be patriotic, but is just disgusted by the unrestrained spending in Washington.

If the rating agencies had all had the courage to rock the boat and drop us a point a couple years ago, I think that the sound of money going away might have woken up even our political leaders to do something to stop it.

"wants to be patriotic"?

it's easy for me to skip over this part of your comment, but the more i think about it the more it bothers me that i have absolutely no clue what you mean by that.

i agree with the rest of your comment by the the way.

This isn't whining - the Treasury isn't simply complaining about the downgrade. They are pointing out a fact that the original justification for the downgrade was proved to be wrong, yet after realizing this S&P maintained the same conclusion based on a different set of justifications.

This would be like a student pointing out that the teacher incorrectly graded his paper; and after acknowledging that fact, the teacher maintains the same grade.

It is worse than that.

In the original guidance that S&P gave, their target level of deficits for the USA was exactly what the real plan, without their mistake, was. So the government actually is achieving exactly what S&P wanted them to achieve.

For better or for worse I believe that the reason for S&P's downgrade is that they gave guidance of $4 trillion, they didn't see a $4 trillion deal, and they would be embarrassed if they failed to downgrade given how publicly they said that they would if they didn't see $4 trillion.

> This would be like a student pointing out that the teacher incorrectly graded his paper; and after acknowledging that fact, the teacher maintains the same grade.

Way back when I was a university undergrad, I got a 0 for a proof on a statistics exam, but the proof was correct. When I showed this to the professor, she agreed, but said it wasn't the proof she was "looking for", and so the 0 stayed. Maybe she's working for S&P now.

How about the US being insolvent? Is that enough justification?

I ended up going to summer school for physics because my teacher "unfairly" gave me an F. She told us at the beginning of the school year that we only had to do 10 of those honor questions (out of 20 possible) every unit and at the end of the year told us "Oh, I meant you only had to do 10 to not drop a letter grade" which was retarded and the class went nuts at this. And once, another student accidentally took home my packet for the weekend on the day it was due and when I tried explaining it to the teacher the following Monday, all she could do was smile and say I get a zero regardless. It was worth a SIXTH of my grade. She also never taught us and just threw homework and tests at us.

I was pretty pissed that I ended up getting an F instead of a C or D even. If you think an A to a B doesn't matter, change ALL your A's to B's and see how you like it being "fair". As for the credit downgrade, maybe it was right maybe it wasn't. Still trying to decide for myself.

P.S. That damn physics teacher is still teaching (aka sipping her Diet Pepsi in her chair all day) at my school.

You know, I'm not against people downvoting me, but I'd like to know why. I'd like people to tell me why they disagree so I can at least learn from my mistakes.

I didn't downvote you, but your comment isn't very relevant to the topic. I'm guessing that's why.

I disagreed with the guy I was replying to, but yeah, I do see that what I said wasn't relevant to the OP. Thanks for at least explaining. :)

You are whining.

There are lots of legitimate reasons to complain about teachers. You gave one legit (changing course requirements midway), and lots of illegitimate ones. You do not have a respectful tone.

Plus, the fact that you would have only gotten a D makes you look retarded in the eyes of most on HN. It's hard to get sympathy from an intellectually snobby group by bragging about your failure to excel.

In short, this is not how a polite student who deserved an A but received a B/C would have responded.

What were the illegitimate reasons? I suppose the one about someone else accidentally taking my homework? I don't think I could have helped that and any reasonable teacher might have given me half credit.

I got a bad grade for lots of reasons. I hated the class. This was a teacher that tried telling me light travels at 300 meters a second. She also arbitrarily handed out grades, marking one of my answers wrong (0m/s^2) when another student got hers right (0m^2/s) when the correct unit was actually meters per second squared.

My original point was that if the Treasury was correct and S&P gave them a bad grade based on mistakes, then yes, the USA should be complaining since the bad grade does have a negative impact.

"I suppose the one about someone else accidentally taking my homework? I don't think I could have helped that and any reasonable teacher might have given me half credit."

If I were your teacher and you told me that story you would be lucky if I didn't accuse you of academic dishonesty on the spot and filed the relevant paperwork. In the absolute best case scenario, assuming your total honesty, it's yet another lame variation on "my dog ate my homework". You are responsible for your work, nobody else.

The Units (that's what they're called) are passed back to our tables the schoolday before we turn them in (she makes us turn them in 3 days before that so she can spot check them in for some reason). I was talking to her while they were being passed back and by the time I get back, it's nowhere to be found and 5 minutes later, class ends. Turns out that my friend had grabbed hers to take home but accidentally grabbed both mine and hers. Monday comes and I don't have anything to turn in and when my friend gets back on Tuesday (she was sick), she apologizes to me profusely and proceeds to explain everything to the teacher who SMILES and says "too bad". So no, it's not a lame variation of "my dog ate my homework" because my friend admitted her mistake and begged the teacher to give me more than a zero.

Shit happens. You're going to have to learn to deal with that.

No, shit doesn't just happen. If you get sued for copyright infringement cause someone else broke into your network and downloaded Harry Potter and you LOSE, well, "shit happens... deal with that" right? NO, when the world isn't fair, you don't roll over and say "Shit happens". You change it and make the world a little bit better. Isn't that the goal of all entrepreneurs? And isn't that the goal of HN then? We want the world to improve and leaving an incompetent teacher in the classroom goes against every thread about Khan Academy or improving the educational system. You want me to be wrong so bad that you've forgotten the principles that HN is about. Entrepreneurship is about making the world BETTER while making some money off of it (or am I naive? I suppose maybe I'm too optimistic) and rolling over is not the right thing to do.

P.S. I dealt with it the best I could. I signed up for summer school then had a talk with the head of the science department who then investigated it. It was revealed to us that the physics teacher would be fired, but then because we couldn't find any replacement for her on short notice and because the science head was about to take maternity leave, the matter was dropped.

Shit most empirically does happen. If you worry yourself to much about it you're going to have one hell of a life.

If your Math professor claims you failed a midterm, then you show them they forgot to count a page's worth of marks, but they said you still the same grade because they doubted your "willingness" to pass, you'd be well within your rights to complain.

I really don't think that it is as simple as that. If your professor refused to write you a recommendation for a research position because your grades are a bit low and he doesn't think you are responsible because you were dangerously close to missing important deadlines, then you show that his grade calculation was wrong but he still won't recommend you because the second part was still true.

This was my favorite part: "Independent of this error, there is no justifiable rationale for downgrading the debt of the United States."

Apparently having a fraction of Representatives (you know, reps from that body responsible for initiating all spending bills) saying that default might be a good thing is not a "justifiable rationale".

Yikes, I'd hate to be in the accounting department at S&P the next few years. Can you say, "random IRS audit". Crazy to see the feds calling out a company like this in a blog post. Crazy times.

They deserve to be called out. This isn't their only mistake. These clowns are the same bunch who kept giving AAA scores to complex mortgage-backed securities during the housing boom.

http://www.bloomberg.com/news/2011-04-13/moody-s-s-p-caved-t...

Well, they were raked over the coals (though more should have been done) when they were too lenient. Now they're being too strict, and are still getting crap for it.

I'm not a big fan, but from a 'credit worthiness' standpoint, I'm not surprised the US was downgraded. With the sorts of people running the show, we demonstrated that we were cavalier enough to nearly get to a point where we couldn't pay our bills. And the rhetoric coming out of the Congress was serious enough to contribute to this.

Perhaps this is an oversimplification, but if I kept broadcasting to the all my creditors as well as experien, transunion and equifax that I might not pay my debts, eventually that might factor in to my credit score. If I kept announcing that I might not pay, and my credit score was lowered, I shouldn't be surprised.

"With the sorts of people running the show, we demonstrated that we were cavalier enough to nearly get to a point where we couldn't pay our bills."

s/couldn't/wouldn't

Our ability to pay our bills at present was never in question. The issue was whether we would merely decide not to pay. That induces a certain queasiness in the upper deck cabins on the ship of state.

My understanding is that we wouldn't be able to pay 100% of all our obligations pretty soon after that. Yes, we could pay bond holders, at the expense of other obligations. I may have been misinformed, but that was my takeaway.

I think it's more along the lines of them pressuring the government to change the law that now holds them accountable for the kinds of things they were doing in 2008. See here: http://www.law.illinois.edu/bljournal/post/2011/03/29/Dodd-F... and here: http://firedoglake.com/2011/08/05/is-standard-and-poors-mani...

By the same logic, why do all the other rating companies still give USA an AAA rating, when they shouldn't? Maybe S&P is the only one actually doing the right thing here, no matter how upset people get about it. Nobody likes to get downgraded. That doesn't mean it shouldn't happen if you're wasting your debt away.

The other 2 left the rating at AAA, but gave it a negative outlook. Which means that they anticipate better than even odds of a downgrade within a year or so.

To be fair, some of those junk bonds were insured by AIG, which did have a AAA rating.

From Naomi Klein's The Shock Doctrine:

In February 1993, Canada was in the midst of financial catastrophe, or so one would have concluded by reading the newspapers and watching TV. “Debt Crisis Looms,” screamed a banner front-page headline in the national newspaper, the Globe and Mail. A major national television special reported that “economists are predicting that sometime in the next year, maybe two years, the deputy minister of finance is going to walk into cabinet and announce that Canada’s credit has run out…. Our lives will change dramatically.

The phrase “debt wall” suddenly entered the vocabulary. What it meant was that, although life seemed comfortable and peaceful now, Canada was spending so far beyond its means that, very soon, powerful Wall Street firms like Moody’s and Standard and Poor’s would downgrade our national credit rating from its perfect Triple A status to something much lower. When that happened, hypermobile investors, liberated by the new rules of globalisation and free trade, would simply pull their money from Canada and take it somewhere safer. The only solution, we were told, was to radically cut spending on such programs as unemployment insurance and health care. Sure enough, the governing Liberal Party did just that, despite having just been elected on a platform of job creation.

Two years after the deficit hysteria peaked, the investigative journalist Linda McQuaig definitively exposed that a sense of crisis had been carefully stoked and manipulated by a handful of think tanks funded by the largest banks and corporations in Canada, particularly the C. D. Howe Institute and the Fraser Institute (which Milton Friedman had always actively and strongly supported). Canada did have a deficit problem, but it wasn’t caused by spending on unemployment insurance and other social programs. According to Statistics Canada, it was caused by high interest rates, which exploded the worth of the debt much as the Volcker Shock had ballooned the developing world’s debt in the eighties. McQuaig went to Moody’s Wall Street head office and spoke with Vincent Truglia, the senior analyst in charge of issuing Canada’s credit rating. He told her something remarkable: that he had come under constant pressure from Canadian corporate executives and bankers to issue damning reports about the country’s finances, something he refused to do because he considered Canada an excellent, stable investment. “It’s the only country that I handle where, usually, nationals from that country want the country downgraded even more – on a regular basis. They think it’s rated too highly.” He said he was used to getting calls from country representatives telling him he had issued too low a rating. “But Canadians usually, if anything, disparage their country far more than foreigners do.”

That’s because, for the Canadian financial community, the “deficit crisis” was a critical weapon in a pitched political battle. At the time Truglia was getting those strange calls, a major campaign was afoot to push the government to lower taxes by cutting spending on social programs such as health and education. Since these programs are supported by an overwhelming majority of Canadians, the only way the cuts could be justified was if the alternative was national economic collapse – a full blown crisis. The fact that Moody’s kept giving Canada the highest possible bond rating – the equivalent of an A++ – was making it extremely difficult to maintain the apocalyptic mood.

Investors, meanwhile, were getting confused by the mixed messages. Moody’s was upbeat about Canada, but the Canadian press constantly presented the national finances as catastrophic. Truglia got so fed up with the politicised statistics coming out of Canada, which he felt were calling his own research into question, that he took the extraordinary step of issuing a “special commentary” clarifying that Canada’s spending was “not out of control,” and he even aimed some veiled shots at the dodgy math practiced by right-wing think tanks. “Several recently published reports have grossly exaggerated Canada’s fiscal debt position. Some of them have double counted numbers, while others have made inappropriate international comparisons… These inaccurate measurements may have played a role in exaggerated evaluations of the severity of Canada’s debt problems.” With Moody’s special report, word was out that there was no looming “debt wall” – and Canada’s business community was not pleased. Truglia says that when he put out the commentary, “one Canadian… from a very large financial institution in Canada called me up on the telephone screaming at me, literally screaming at me. That was unique.”

By the time Canadians learned that the “deficit crisis” had been grossly manipulated by the corporate-funded think tanks, it hardly mattered – the budget cuts had already been made and locked in. As a direct result, social programs for the country’s unemployed were radically eroded and have never recovered, despite many subsequent surplus budgets. The crisis strategy was used again and again in this period. In September 1995, a video was leaked to the Canadian press of John Snobelen, Ontario’s minister of education, telling a closed-door meeting of civil servants that before cuts to education and other unpopular reforms could be announced, a climate of panic needed to be created by leaking information that painted a more dire picture than he “would be inclined to talk about”. He called it “creating a useful crisis."

http://www.metafilter.com/106249/US-Credit-Rating-Downgrade-...

Please have my upvote (like you need one). I will definitely include "the shock doctrine" into my "To read" list.

I wonder if there's an opportunity for "open source" credit ratings. Numbers like GDP, trade deficit or proficit, exchange rates, national debt etc are available and someone could creates a method that software or website could use to calculate all that into credit rating.

Bear in mind that there is a fair amount of criticism from many economists on the book's analysis. It may be worthwhile to include those on your reading list as well. Here are just a few: http://en.wikipedia.org/wiki/The_Shock_Doctrine#Criticism

Also remember that most economists are wrong. If you read any economist who cannot explain the works of John Maynard Keynes in lucid detail (regardless of whether they agree with him) you are dealing with someone who is an "authoritative fraud".

So pretty much the entire Chicago School.

I think you're making the classic mistake of assuming people who disagree with you are stupid. Specifically, it seems fantastically unlikely that the average Chicago school academic would be unable to explain in detail Keynes and his theses.

Actually, in this case, it's not that I think they are stupid; merely that they have lost touch with reality. An economist who denies the role of government in macroeconomics for ideological reasons may be quite bright and may be able to construct quite fearsome explanations for his positions, but he is deliberately ignoring both the reality of the present and the lessons of history.

I doubt that you can find me an anarchist member of the Chicago school. They all recognize a role for government, the debate is over how large and where that role is. The people you are bothered by are a straw figment of your imagination.

The deadliest anarchists wear silk suits and pocket squares and do more damage to more human lives with a fountain pen than a thousand men throwing molotov cocktails could even dream of.

I recommend reading Friedman's Free to Choose after reading The Shock Doctrine http://www.amazon.com/Free-Choose-Statement-Milton-Friedman/... (Friedman is the guy that Naomi Klein blames on the book)

Yikes. I refer you to Tyler Cowen's review of Klein: http://www.nysun.com/arts/shock-jock/63867/

Some highlights: "Ms. Klein's rhetoric is ridiculous. For instance, she attaches import to the fact that the word 'tank' appears in the label 'think tank.'"

"What the reader will find is a series of fabricated claims, such as the suggestion that Margaret Thatcher created the Falkland Islands crisis to crush the unions."

"If nothing else, Ms. Klein's book provides an interesting litmus test as to who is willing to condemn its shoddy reasoning."

I don't see any specific critiques in the linked article, only vague and often broad dismissals. I would need a lot more context to determine the validity of the few almost specific criticisms, and I don't have the book. He didn't even cite page numbers.

Klein is pretty funny.

Have a look at The Economist's blog that did a round up of reviews of the Shock Doctrine:

http://www.economist.com/blogs/freeexchange/2007/10/naomi_kl...

I remember reading 'No Logo' and wondering why on earth a book about how 'teh evil capitalists' exploit people would pick MS an example of an exploitative company. MS, afterall, has made thousands of millionaires out its employees. Then she goes on further to cite South Korea as an example of how terrible capitalism is because low skill production is moving elsewhere not realising that South Korea is one of the countries you do not mention if you want to talk about how capitalism is evil as it is a stunning success of wealth increase.

The Economist's own review of her earlier work that states:

"Ms Klein's harshest critics must allow that, for an angry adolescent, she writes rather well. It takes journalistic skill of a high order to write page after page of engaging blather, so totally devoid of substance. What a pity she has turned her talents as a writer to a cause that can only harm the people she claims to care most about. But perhaps it is just a phase."

is probably the sharpest criticism of all.

where in the excerpt katovatzschyn provides is klein's rhetoric "ridiculous"?

which of the claims in the excerpt are fabricated?

which parts of the excerpt suffer from "shoddy reasoning"?

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

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

I understand that government departments are led by political appointees. There's a very good reason for it. When we elect somebody as president we expect them to make an imprint on the rest of the federal government. So I'm cool with Treasury running it's own PR game and responding to other news items.

What I'm confused about is why the Treasury Department feels a need to get into a pissing contest with S&P. Nobody likes the ratings agencies, so I guess that makes them an easy target? And the U.S. will just print up more money, so it's not like the debt won't be paid -- the currency will just be trash. So there's definitely a bit of made-up drama here. But even with a math error and the flimsiness of connections to this being germane for Treasury, the overall news is still bad and it's not like somehow that makes the overall U.S. position more tenable. Instead it just looks like a lot of blame-storming -- finding the latest organization or person to point a finger at. In other words, it seems to continue drawing attention to a mess I wouldn't want any part of if I were in Treasury.

So it's not interesting that S&P made an error, or that the debt ceiling debate was so protracted. What's interesting to me is this political strategy of deflection. Can it go on forever? Isn't there some limit, some place -- perhaps if the market tanks another 5 percent next week or an election goes against the party in power -- where you just say "Maybe we need to do our job more and worry about blame a bit less?"

Regardless of the "facts" of the S&P decision, I just can't see that this communications strategy -- as a political tool -- is going to keep paying dividends. This is just like the "factual" chart the White House put out that showed debt as as a function of policies approved by which president -- true but completely pointless except as a tool to deflect blame. Every time there's bad news there's a follow-up story about how it's somebody else's fault. It might work a few times, but it can't keep working. Can it?

Buffet said if there was a AAAA rating, he would give it to the US. The S&P downgrade is bullshit and everyone knows it. So who cares if the Treasury responded negatively?

I suppose this is a good bit of posturing, but it seems disingenuous. The White House and Treasury should know better than anyone else how broken our political system is.

Given their track record, that's perhaps giving them more credit than I think they deserve.

This comes off as mindless sniping without any support for the point. It's a non-contribution.

The treasury's argument is fatally flawed.

"The baseline in which discretionary spending grows with nominal GDP is substantially higher because CBO assumes that nominal GDP grows by just under 5 percent a year on average, while inflation is around 2.5 percent a year on average."

GDP is not growing by nearly 5 percent a year and should not be projected to grow at that pace. Real GDP growth is significantly smaller. Additionally, with our monetary policy (QE 1,2,..,x), inflation is higher than 2.5%. The treasury's math is fictitious.

The claim about S&P changing their justification does not ring true. Their press release on Friday specifically mentioned the recent brinkmanship as a core concern.

Presumably the press release was issued after the write was pointed out to them. They warned Treasury in advance about the downgrade.

According to the CBO last week's budget agreement cuts $2.1-2.4T in spending [1]. S&P's guidance was that we cut $4T. So either the CBO is off as well, or this typical Washington budgetary spin.

[1] http://cbo.gov/doc.cfm?index=12357

My reading of the Treasury release is that this all has to do with"baselines". Compared to current spending the deal didn't make cuts at all--spending will continue to increase over the next 10 years. The "cuts" are compared to a projection of what would have been spent without the deal, called a baseline. There are various ways of calculating baseline, i.e. how you account for inflation.It seems that S&P's error was related to misunderstanding which baseline the 2.1T applied to.

I understand that it was relative to baseline. But the bottom line we cut 2.1T out of the budget and S&P had advised 4T. This does highlight the issue of how cutting is done, though. The budget had a trajectory of 10T in spending increases over the next decade and now it will be 2.1T less than that. So we will increase our spending by 7.9T and call it a "cut". :)

S&P's guidance was based on an analysis that made the $2.1T mistake. So $2T+ in cuts plus $2.1T error puts us exactly where we would have been if they were originally right and then we cut $4T.

But we didn't cut that, the deal only cut about a trillion and kicked the other cuts to a super committee.

We did cut that. Where the cuts will come is not yet decided, but that they will come has been finalized.

Actually nobody's talking about actually cutting spending. They're just talking about maybe increasing spending less than they were previously planning to increase it. Crucial distinction, but sadly nobody's taking the media to task for their reporting on this.

Bullet, meet foot. Given that this downgrade was triggered entirely by the poor behavior of U.S. politicians, how can it be in the U.S. interest for the Treasury to come across as whiney and paranoid? If the treasury had also mentioned the perfectly reasonable reasons for a downgrade there may be some balance, but to talk of S&P "making political decisions" puts them in exactly the same bracket as the poorly behaving politicians! Would you do business with this lot?!

The downgrade was triggered because America is borrowing 40 cents of every dollar of spending, for the third year in a row, with no sign of stopping.

The US debt increases by billions every day, the entire economy is in the toilet, but the main thing the Treasury is concerned is finding holes in S&P's report.

Peter Schiff (1) points out that the downgrade reflects S&P's doubt that the US will pay its debts without devaluing its currency. Does any reasonable person believe that?

1- http://www.youtube.com/user/SchiffReport#p/a/u/0/SgNLTb58K_Y

S&P said 2 trillions is irrelevant anyway given that their error margins on estimates was +/- 10trillions

http://www.zerohedge.com/news/sp-explains-why-2-trillion-err...

"S&P has said their decision to downgrade the U.S. was based in part on the fact that the Budget Control Act, which will reduce projected deficits by more than $2 trillion over the next 10 years, fell short of their $4 trillion expectation for deficit reduction."

This confuses me. I'd always understood "deficit" as the amount the government spends more than it takes in, in a given year, and "debt" as the cumulative deficit, i.e., total money owed.

In this case, it seems like they're using "deficit" to mean total debt? Or is the US really increasing our debt by more than $4 trillion a year, and this is a plan to overspend by less?

First of all the $4 trillion was over 10 years, not 1 year. Second, as far as I know, they haven't actually done any spending cuts - just cuts from the "spending increase" they were planning.

And USA may "plan" $4 trillion dollar less spending, but that doesn't mean they will actually do it. Right now the deficit keeps rising, and fast. It's supposed to go down, not up.

This is crazy, Treasury is shooting the messenger and damaging their own credibility with this line of attack.

Out-year budgeting is very complex, and there are a lot of bullshit assumptions about various "promised" spending cuts and tax increases. By jumping all over S&P for a mistake that has nothing to do with the massive, ongoing deficits this year and next, Treasury shows it is in a strange state of denial.

It is past time for Sec. Geithner to resign.

Predictions are trash in these arenas, regardless of the agency/branch/corporation/blog making them.

Just one data point, but there's some humor to be gained from it: http://www.zerohedge.com/news/speaking-credibility-here-cbos...

So the mystery trader who bet $1 billion that the US would default or lose their credit rating will get $10 billion?

http://etfdailynews.com/2011/07/25/investors-the-1-billion-a...

Maybe it was downgraded due to this trade made two weeks before: http://etfdailynews.com/2011/07/25/investors-the-1-billion-a...

I still question a scale where it is possible to get the highest note while have 70+% of the GDP in debts and that this proportion is raising.

A country who would reduce its debts should in theory be a better bet but this scale does not allow for that.

So what was the actual math error? If it was mentioned in the article, I missed it.

As long as our political system continues to be run on professional politicians who pander to their base in order to keep their jobs we will never fix anything.

Anyone who runs a household, a business, or both, clearly understands that sometimes you have to make decision that are painful in order to survive and grow.

Our elected officials know that the masses would boot them if they make the right decisions for the nation. Our political system isn't about making the right decisions for the NATION, they are about politicians making the right decisions for POLITICIANS and POLITICAL parties.

Imagine this if you will: In the recent budget debates politicians actually expressed concern about what they did in view of next year's elections. Really? What does that tell you?

Fix that problem and our country will flourish. Do not fix it and you will continue to enjoy a front seat to the spectacle that is the destruction of the US from the inside.

Whether you lean liberal or conservative, the truth is that if we don't change you can kiss all you hold dear goodbye because we are only headed in one direction...an it ain't up. Your politicians are too busy trying to get re-elected to actually do what they are supposed to be doing.

If you started over, blank slate, how would you structure government and taxation so that they would produce the right results for the country?

Some key questions apply here:

1- What is the role of government? 2- How much of our lives should government control? 3- What is the purpose of taxation? 4- Should this be a country where the government protects people and companies from failure? 5- If charities and religious organizations operate tax free, shouldn't they be tasked with helping those in need rather than doing it through government programs? 6- The world is complicated. Shouldn't those who aspire to hold office (at various levels) demonstrate competency in the required fields of study much like anyone else applying for a job? 7- How can we stop voting because we like someone, or they speak well, or they look good on TV? All of which are far from qualifying anyone to hold office.

Of course, there are dozens of questions one could ask on this subject.

Please don't SHOUT; use apostrophes for emphasis.

Oh, please...

>Please don't use uppercase for emphasis. If you want to emphasize a word or phrase, put asterisks around it and it will get italicized.

http://ycombinator.com/newsguidelines.html

EDIT: Grandparent should read "use asterisks for empahsis". Sorry for the brainfart.

So...rather than focus on the substance of the post and say something intelligent about a serious subject matter you choose to critique style.

What if I actually wanted to SHOUT?

And, on top of that, you down-vote me for style without knowing my intent rather than on the substance of the post, which is what the voting is supposed to be about.

Have a good one pal.

I found the post very poorly written. Is this the best Treasury could do to explain the situation?

Are there standards that govern exactly what constitutes an AAA vs an AA? If so, who makes those standards? S&P? A third party that oversees all these organizations? If the standards are vague, then it's all subject to interpretation. One person saying it's AA might be the same as another saying it's AAA. S&P isn't giving a perfect rating to the USA... because the USA debt situation isn't perfect. I mean, we judge human beings the same way - noone's perfect. Why should we be any different towards the USA? Just because it supports democracy, has an emotional national anthem, and has a rich history? NO.

Standard and Poors are Traitors http://standardandpooraretraitors.tumblr.com/

Mistake or deliberate market manipulation?

One could argue the two are not mutually exclusive; I think the timing of the downgrade was selected by S&P committee to encourage a QE3 push. I think the facts of the downgrade (less revenue then spending for the foreseeable future) have been true for a long time.

Uhh, neither. The Treasury claims it was a "mistake", but personally I can't see how anyone could possibly still consider US bonds to have the highest possible rating.

However, if for some reason you did think that, then Hanlon's Razor would apply.

Since the U.S. bonds are all denominated in the same money that it controls, and the federal government has huge assets and potential revenue streams, I'd put a risk of default quite low; low enough to get an AAA, anyway.

The federal government pretty much can't default unless it actively chooses to, given the huge number of options for servicing debt at its disposal (cutting spending elsewhere, raising taxes, printing money, selling land). So it's almost entirely a political question of how high you think the chances are that the government will choose to default rather than use one of the other options. I would rate that pretty low. But it's not really an actuarial question either way; it's a guess about policy.

But that is exactly why they downgraded us. Given everything you listed, we still were within days of default, thanks to how paralyzed the political process has become in Washington.

We were within days of the debt ceiling, not of default. Plenty of things could have been shuffled around to meet all debt payments (including some politically useful ones like stop sending SS checks, don't pay the troops, etc).

Doesn't the inability to pay even some of your debts, means you're in default?

Doesn't the inability to pay even some of your debts, mean you're in default?

It depends on what you mean by "debts"; you're only in default from the finance industry's perspective if you fail to service bonds/loans/etc., not if you fail to make other payments you've promised. For example, if IBM stopped paying its employees' salaries, or stiffed its suppliers, but continued servicing its bonds, it wouldn't be in default. S&P is specifically rating the chance of a default on bonds.

If I cancel lawn service and the housekeeper for the week so I have money to pay the mortgage, I am not in default.

Tea Party. Given how the Tea Party has paralyzed the political process.

"process in Washington" makes it sound like inclement weather. It's poeple.

Actually I don't think this is the case. The US uses treasury bonds like you or I would use a credit card, they sell bonds take the money and pay bills. They pay them off by exchanging them for cash at a later date. So essentially when we're at the debt ceiling we nominally can't sell any more t-bills so the only money the government has available is money from revenues coming in. Pretty much instantly forced to live without your credit card.

Now since the current budget actually spends more than is expected in receipts, that means things that were already approved and budgeted would not have the funding to pay for them. But in the unlikely event that the debt ceiling had not been raised the government would switch to a priority system of paying (effectively cutting spending).

Its my understanding that at no time has the US ever been at risk of 'default' in the sense that a bank wants its money and the holder of the note can't pay. But it might have been in danger of suddenly withdrawing from Iraq and Afghanistan. Since at 2 B$/day (one estimate I've heard) that is over 700B$/yr of money we would probably prioitize not to spend.

If we pay our bills, we're not a credit risk. that's what the rating is based on. and we always pay our bills.

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