Populist movements don't build themselves ...

... It doesn't matter what the "horse race" outcome of the campaign is, if we fight the campaign. Fighting it, we learn how to fight. Learning how to fight political battles, we become citizens again. Becoming citizens again, we reclaim the Republic that lies dormant beneath the bread and circuses of modern American society.

Saturday, August 6, 2011

LQD: The AA+ rating is valid, but the S&P case is intellectually dishonest ~ Mosler

Burning the Midnight Oil for a Brawny Recovery

"LQD" is an abbreviation I first encountered at EuroTrib: it means "Lazy Quote Diary".

[http://moslereconomics.com/2011/08/06/sp-downgrades-us-on-ability-to-pay/ The quote from Warren Mosler]:
Credit ratings are based on ability to pay and willingness to pay.

David Beers of S&P knows this and has discussed this in the past.
So why then did David T. Beers decide to downgrade the US on ability to pay, and not explicitly on willingness to pay?

Sure looks like a case of intellectual dishonesty.
And I have no idea why.
So much for his legacy.

Well, its a very short post, so fair use restricts it to an even shorter quote.

But this is the gist of it: no issuer of its own currency is ever forced to default on debt issued in its own currency.

Think about it: if your family's IOU's were accepted by the bank to repay debts ... could you ever run short of the means to pay your debts?

What would an honest downgrade have said? Below the fold.

The argument for a downgrade is this:

The only credit risk is that the sovereign issuer of currency is unwilling to pay its debts, as Mosler says. An honest downgrade would be, "in voting down a clean extension of the credit ceiling, the majority in the House of Representatives of the United States demonstrated a willingness to consider defaulting on its debts as a bargaining ploy to get what it wants. This implies a risk of default greater than 0, and so US debt doesn't deserve the "absolutely no risk of default" rating of AAA.

The argument against a downgrade is this:

Even in the manufactured debt ceiling crisis, there was never any reason to believe that interest would not be paid on Treasury Debt nor that Treasury Debt that matured would be redeemed at its face value. What the Government would have done ~ for no good reason, since it has the legal authority to mint coinage with face values in the billions, which on deposit in the Fed would have allowed payment to have been cleared without requiring the issue of debt ~ would have been to miss appropriated payments which it was not legally bound to pay.

So as far as what S&P are rating, the actual payments on the actual Treasury bonds, bills and notes that Congress permitted the Treasury to issue ... there was no risk.

However, 10 years is a long time in politics, and 10 years of this bullshit, who can tell. So while its hard to make a case that bills and notes should be rated below AAA, AA+ for 10 year bonds may be a bit more plausible.


Bottom line, though, S&P is still lying to people when it pretends that the rating is about "ability to pay". Its only ever about willingness to pay for a government issuing debt in the currency it issues.

Midnight Oil ~ Read About It

Discussion at:
The Stars Hollow Gazzette
Agent Orange

1 comment:

Dustin said...

I heard Obama shrug and wonder openly if Social Security checks were going to get in the mail. The debt has gone from 60% GDP to 100% GDP in the past three years.

The idea we can just print more cash, so default is impossible is too clever by half. It's like investing in snowballs in hell, that you know will disintegrate and rapidly vanish.

Inflation is simply a way to retax wealth. You have to save before you invest, and we forgot that. The economy is not a perpetual motion machine, and borrowing to stimulate, going on the past thirty years, is actually the reason we're having a recession.

US T Bills are worth less if it's a sure thing we will print tons more money. That's why we're a AA+ nation, and really should be AA.