iCharts Discussions

[marne.vivek]

Economists and others weigh in on S&P’s decision to put the U.S. sovereign rating on a negative outlook.
– The sentiment “no big deal” seems correct to me. I am worried about the particulars of the solution to the long-run debt problem — who will end up paying most of the cost of closing the budget gap — but one way or the other the political process will deal with this problem. Also, it’s important to remember that the US debt is a promise to pay dollars, and we can print as many dollars as we want. That could be inflationary, and the inflation can undermine the real value of those bond payments and cause other problems, but that is not technically a default. –Mark Thoma, University of Oregon

–This announcement was not about the debt ceiling; in fact, the debt ceiling is not even mentioned in the S&P release. In sharp contrast, the reason why US government ratings came under pressure in 1995-96 (Moody’s put parts of US government debt on negative watch) was the debt ceiling impasse at that point. This means that even if the debt ceiling debate were to be resolved in the near term, it would not be enough to restore the outlook to stable… The key to a stable outlook is that there be a concrete plan for deficit reduction that needs not only to be agreed upon, but also put in place by 2013. As noted earlier, this will be very challenging. –Barclays Capital Research

– It is a bit hard to believe that investors sold off U.S. stocks because they became fearful in the wake of the S&P report, but then suddenly wanted to buy dollars and also were willing to hold Treasury bonds at a lower yield… It is also worth noting that S&P has a horrible track record for judging credit worthiness. It rated hundreds of billions of dollars of subprime backed securities as investment grade. It also gave Lehman, Bear Stearns, and Enron top ratings right up until their collapse. Furthermore, no one was publicly fired for these extraordinary failures. Investors are aware that S&P’s judgment does not mean very much. –Dean Baker, Center for Economic and Policy Research

– The political realities in the nation’s capitol suggest that it will be very difficult to achieve the type of entitlement and tax reform necessary to put the deficit on a credible declining trajectory. The President’s speech last week was probably part of the reason why S&P decided to take this action. By staking out his position on entitlements vs. the House majority view on tax hikes it is clear that politics will get in the way of any meaningful debate and compromise, forcing the rating agencies’ hand in this matter. –Steven Ricchiuto, Mizuho Securities

– It should be noted that even if the U.S. were to lose its AAA rating, the end of the world may not be nigh. We do not want to dismiss the implications, because it is most certainly a big deal, however the experience of Canada and Japan show that the lose of a AAA rating is not a death blow. If governmental finances can be adjusted (in the case of Canada) or domestic participants continue to find the debt attractive (in the case of Japan), higher yields on a sustained basis are not assured. –Dan Greenhaus, Miller Tabak

– What [S&P] says doesn’t seem too silly: It lays stress, rightly, on political gridlock. The point should be that the US is perfectly capable both of running large deficits now and getting its fiscal house in order over time; but not if the parties cannot agree on any kind of solution. What we do to spending this year or next is irrelevant. That said, it’s worth remembering that S&P downgraded Japan in 2002… Japanese bonds became known as the “trade of death”, because people kept betting on an interest rate rise, and it kept not happening. So, no big deal. –Paul Krugman, Princeton University

–The S&P’s action shines a powerful spotlight from a respected independent organization on the often rancorous fiscal policy debate and effectively serves notice to all policymakers that failure to strike some sort of agreement on a process to address these long-run issues could have dire consequences. Both sides of the policy debate, however, are likely to use this “shot across the bow” as vindicating their own particular but very different approaches. But the markets’ reactions to the “negative” outlook will also provide a tangible metric of the consequences of maintaining hard-line positions. In that regard, S&P’s actions could help advance the process toward a long-run strategy. By entering the debate in this way and at this time, S&P has served a useful public service by putting all parties on notice that words and actions in the political debate have consequences. –Nomura Global Economics

– This revision is about a ratings change that could occur several years from now. That is a long time in regard to macroeconomic trends and their impact on the budget. Remember that the current deficits are more about recession and war and both should turn in favor of a smaller deficit in the next several years. The big health-care related structural deficits that balloon the debt load are 10 to 20 years out. This isn’t to say nothing should be done today, but in the short-term thinking of the market, barring another recession the deficit should be smaller in the next several years – especially with some sort of reform coming out of the current negotiations. –Steven Blitz, ITG Investment Research

– S&P seems to think that Congress and the Administration could reach agreement on the outline of a deficit reduction plan, but that there is plenty of reason to be skeptical about how long it might take to put a plan into place or whether it would ever actually be implemented: If U.S. policymakers do agree on a fiscal consolidation strategy, we believe the experience of other countries highlights that implementation could take time. It could also generate significant political controversy, not just within Congress or between Congress and the Administration, but throughout the country. We therefore think that, assuming an agreement between Congress and the President, there is a reasonable chance that it would still take a number of years before the government reaches a fiscal position that stabilizes its debt burden. In addition, even if such measures are eventually put in place, the initiating policymakers or subsequently elected ones could decide to at least partially reverse fiscal consolidation. –Nancy Vanden Houten, Stone & McCarthy Research

Source: Wall Street Journal

[opportunist]

An economist is a person who predicts what is going to happen and when it does not happen explains why it did not happen

These guys are engrossed in petty impact assessment of the current downgrade by S&P. In fact I think they are missing the forest for the trees. America has a huge international debt and gross federal debt of USA is now touching 100% of GDP !!! (http://en.wikipedia.org/wiki/File:US_Federal_Debt_as_Percent_of_GDP_by_President.jpg) What it means is that US is just depending on the faith of its believers to pay back. Huh!

The dollar may lose its value unless backed by something more concrete (like Gold and other such national assets) than hollow assurances of Washington.