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S&P's $2 Trillion Math Mistake
Last friday Moody's S&P announced that they had downgraded the U.S.'s credit rating (leading to a pretty huge discussion on Slashdot I might add). Since then more interesting news has come out, suraj.sun writes "In a document provided to Treasury on Friday afternoon, Standard and Poor's (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error — a basic math error of significant consequence — S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one. S&P incorrectly added that same $2.1 trillion in deficit reduction to an entirely different baseline where discretionary funding levels grow with nominal GDP over the next 10 years. Relative to this alternative baseline, the Budget Control Act will save more than $4 trillion over ten years — or over $2 trillion more than S&P calculated. S&P acknowledged this error — in private conversations with Treasury on Friday afternoon and then publicly early Saturday morning. In the interim, they chose to issue a downgrade of the U.S. credit rating."
More lies...the debt will INCREASE by almost 8 trillion over the next 10 years. And probably more than that I can guarantee you! The S&P should have downgraded us a loooonnnggggg time ago.
And sorry it is no ones fault but ours.
regardless of the math, S&P's reasoning is sound. let's not try to find scapegoats, please. the U.S. is hurtling at full speed towards a deficit meltdown, and quibbling over S&P's math doesn't change the fact that the country needs to come to terms with it ASAP.
Somebody correct me if I'm wrong, but at current spending levels, cutting $4T over 10 years still has us running a deficit. Considering that this deal was politically the best we could do, it's easy to agree with S&P's pessimistic view of our political budget woes.
"Ask not what your country can do for you." --John F. Kennedy
There was a time when people worried about who had the largest nuclear arsenal.
This kinda reminds me of that "1000 vs 10,000" nuclear weapons discussion. Everybody is dead after 1000 bombs go off. It isn't like 10,000 bombs are going to kill you that much more.
The point being the economy is still going down the tubes...
It was S&Ps rating system that the banks gamed with repackaged mortgages in the first place. Fuck um.
How long before the media points that out? Think they will?
Yeah, these are the same people that gave mortgage backed securities a AAA rating right up until it was blindingly obvious that they were wrong.
S&P in their report had essentially 2 issues:
a) They had questions about the budget strategy over the medium term.
b) They believed that political risk in the United States had increased substantially.
Given that we had 50+ US congressmen arguing that a sovereign default was either no big deal or desirable I can't see how one can disagree with (b). Political risk has substantially increased.
(a) is more questionable. The US economy is very large and the US ultimately does own a printing press. But the United States because of political divisions is simply unwilling to engage in the actions required to end high unemployment nor willing to reduce the government to the size needed if we intend to maintain a much lower labor participation rate than we had been.
So I can see both sides for (a), but (b) is the big factor. I think the Obama administration in trying to attack S&P based on secret conversations is simply failing to address the depth of the real problem. Whether their story is true or not, S&P is not wrong to notify investors that treasuries have risks they did not have 5 years ago.
It isn't basic math, or any math at all, really. Despite massive quantities of data analysis and some of the most mind bending graphs ever devised, plain old emotion still rules most financial markets and most certainly rules things like applying "AAA" versus "AA+" to some piece of paper.
These people everyone is amped up about changing the US' rating are the same people who entirely failed to foresee the biggest economic collapse most of us have ever lived through. They were handing out AAA ratings, to mortgage backed securities that no one other the guy who invented them could even understand, just a few months before they became almost completely worthless. The fact that anyone still trusts S&P and their ilk is illustrative of the fact that emotion rules this game. They've proven with math that they know no more than anyone else.
"Sacrifice for the good of The State" - The State
http://krugman.blogs.nytimes.com/2011/08/07/i-heard-it-through-the-baseline/
Not to be silly or anything but it deserves to be downgraded.
AAA is supposed to be rock freaking solid. You do not worry about it.
This up to the wire biting your fingernails crap is *NOT* AAA material. If you saw the last 3 budget rounds being this sort of fiasco (which it was) would you want to invest in it?
If you have to worry about it then it is not AAA material. It is still 'good' credit. But something you need to keep an eye on so AA+.
The rating system was subjective in the first place. As seen by the AAA ratings they were giving out to 'too big to fail' institutions right before they failed. In many ways s&p helped create the very mess they are downgrading the US gov for. As the US gov covered their bets...
But then again, most mortgage owners have a reasonable plan to get out of debt in a certain time. For instance, my mortgage will be fully paid off in 15 years, and even assuming I default before that, the bank can sell the house and get their money back, so it won't disrupt anything else.
Can the US government claim the same ?
Fonzi rates US debt "Aaaaa..." and gives it a thumbs up.
I wonder which agency carries the most weight though. I suspect it is S&P, though I'm not sure.
We have a huge cultural problem. Most people don't care about any of the important things. Of the people who care, fewer still are educated. Of the people that are educated, many are polarized in to incompatible philosophies. This is leading to paralysis. I hate to say it, but more and more the idea of dividing the union just makes more sense. The belief that the Federal government should be doing all that it does makes the US too big and too diverse to govern in a reasonable way.
I don't mean any of this in a doom and gloom kind of way, just saying I think it makes a lot more sense. Everybody knows the US is majorly divided on how we should do just about everything, largely based on geography.
If I can just reach out with my words and touch a butthole, just one, it will all be worth it.
You seem to be implying that S&P is secretly acting on behalf of the Democratic Party in support of President Obama's re-election campaign, which I find to be an interesting point of view.
The rest is even more confusing.
WALSTIB!
He says the government's performance is sure not AAA, but he'd rate the debt as AAA.
Remember: Ratings on bonds is supposed to be how likely they are to default. Nothing has changed that makes the US more likely to default.
http://www.cnbc.com/id/44056326
Please see their original report and press release. Here are some quotes from the August 5th press release:
"The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy."
"Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. "
Their explanation didn't suddenly switch to political. It was there all along, yet so few pundits chose to focus on it.
The total debt US has is way too high anyway, if a person had same sort of debt load they would be insolvent.
That is a pretty astounding thing to say. Most people who have a mortgage have a far higher debt load than the US government, and sub-prime victims excepted, the vast majority of home-owners do not go insolvent in the process.
When the government has already borrowed to over 10x it's annual income and continues to borrow yearly at almost double its income, I can assure you it acts NOTHING like a normal person. If I had a $500,000 mortgage and only earned $50,000 a year but had a car note that cost me $100,000 a year... you think creditors would get anywhere near me! AAA?? More like FFFFFFFFFFFFFFUUUUUUUU.
The common mistake with the "debt to gdp ratio" is that the federal government doesnt have a valid claim on every dollar in the GDP. They have a claim to what they have levied in taxes (it says so in our constitution). So saying "oh debt to gdp is better than anyone with a big mortgage" is like saying "oh the rest of the guys at my company all own a Porsche, i am just a janitor and my paycheck is 1/10th any of theirs but I can afford to get one too because WE all make TONS of money!"
The CBO assumed discretionary spending will grow at the rate of inflation. S&P assumed it grows with GDP. Both of these are perfectly valid assumptions (if any complaint is to be made, they're both too optimistic since historically the growth in discretionary spending has far exceeded both measures); a legitimate alternate choice of economic models is not an error. This is the Obama administrations typical "all reasonable experts agree" tactic of painting legitimate differences in opinion as disengenuous.
As for S&P's "acknowledgement", it was more along the lines of "we just reported your long term unfunded obligations are $211 trillion and you lack the political will or ability to do anything about it. And you want to have an argument over whether it's really $211 trillion or $209 trillion? If it's that improtant to you, we'll use your numbers, but you're completely missing the point here."
The new standard: we're all poor.
I happen to be on the side of "spend less", but it is a perfectly legitimate opinion to want to spend more AND collect more. The Democrats aren't advocating raising spending while lowering taxes. Frankly, that sounds like what the Repubs did under Bush II.
W..w..W - Willy Waterloo washes Warren Wiggins who is washing Waldo Woo.
Yes, because the position of the Democratic party (and all Democrats) is that basic. "SPEND MORE!"
It must be a simpler, more straightforward world in which you live.
Most every Democrat I've heard has talked about the desire to do some spending cuts in combination with some array of revenue increases. Sometimes they differ in what they think should be cut or protected (Medicare, Social Security, defense, whatever), which can then lead to internal disagreements among Democrats that might make it look like the entire party doesn't want to cut anything; the same holds for revenue increases, I'd say. I'd hope that over time they could come up with a plan that at least most Democrats could get behind that would be part spending cuts/reforms and part revenue increases.
On the Republican side, there are certainly some I've heard talk about the need to reform the tax code and (at least) start cutting out tax expenditures. I'd say that those Republicans are in the minority, mainly because of the no increased taxes pledge and the Tea Party pressure from the right of the party.
I wouldn't mind the "cut spending" pressure coming from the Tea Party if the people pushing hardest for that didn't also seem to be entirely incapable of compromise. Compromising isn't something to be frowned upon, it's how both parties could leave with a deal they might like (or at least dislike equally). As I see it, the Tea Party's anti-spending stance is one that we need - it's the execution that is lacking.
> Democrats want less government spending as a percentage of GDP [1]. The TEA Party wants to destroy government [2], unions [3], and the US economy [4].
FTFY.
Sources: [1] http://en.wikipedia.org/wiki/File:US_Federal_Debt_as_Percent_of_GDP_by_President.jpg
[2] http://www.contractfromamerica.com/Idea.aspx
[3] http://en.wikipedia.org/wiki/2011_Wisconsin_protests
[4] http://www.standardandpoors.com/ratings/us-rating-action/en/us/
Join the window installer's union, where prosperity is a brick throw away!
Let me break it down to the most basic of concepts:
Democrats want the government to spend more. The TEA Party wants the government to spend less.
Who do you think is right here?
In a global recession on the verge of depression? The Democrats, hands down.
Although 'the Democrats' misrepresents that side of the argument. Sane economists and a few lawmakers want to increase government stimulus. Some Democrats are stupid, however, and want to spend less, just not as much less as the Tea Party. The president, unfortunately, is among the latter.
Genocide Man -- Life is funny. Death is funnier. Mass murder can be hilarious.
Yeah, and God Forbid the people that can afford to give a little more to help the country that allowed them the opportunity to become wealthy in the first place actually do so. They didn't write those big bribe checks...oh, I'm sorry, campaign contributions... to have someone turn around and raise their taxes and cost them an extra percent a year. I mean, what is that, a few thousand dollars less a year? How will they ever survive?!
I'm all for spending cuts, but without taxes being raised on the wealthy, it's just more of the same BS. Tell the people living on 12 grand a year in the projects that it's time to tighten their belts so that the asshole speculators on Wall Street can get away with their ridiculously low effective tax rates. Oh, but I forgot, all that paper being traded back and forth "creates jobs". That's why these there's so many jobs out there now, right? That's why these companies are all sitting on record amounts of cash in the bank both here and abroad, meanwhile they're laying people off left and right...
This is just Part II of the extortion scheme that started with the bailouts as the rich try to snatch up an even bigger piece of the pie than they already have.
Democrats want the government to spend more. The TEA Party wants the government to spend less. Who do you think is right here?
A plague on both their houses!
From what I read here, outside of the USA, where the media are less partisan when covering internal US issues, the Democrats want the government to spend LESS, and the Tea Party wants the government to spend LESS too. They disagree a little on which parts of government should have most cuts.
Also, the Democrats want to increase taxes a little, to narrow the gap between government spending and income.
The Tea Party DO NOT want to increase taxes to narrow the gap.
Both are proposing that the government spend more than it raises.
Did I miss anything important?
Paul "Say no to feeping creaturism"
1) Plan on gaining 100 pounds.
2) Gain 75 pounds.
3) Congratulations. You have a weight loss of 25 pounds.
Except for ending slavery, the Nazis, communism, & securing American independence, war has never solved anything.
You can run the numbers all you want, cook them every way but over-easy, and produce a powerpoint presentation of them that would make even the most die-hard quant choke. But at the end of the day, it's all about confidence. All those dollar bills in your wallet are only as valuable as we collectively agree they are. This can range from "Not worth the paper they're printed on" to "Holy shit, this is the best currency in the world!" But it all depends on confidence. U.S. currency (and bonds too, for that matter) has no real objective value.
The U.S. government takes in so much in revenue each year, and outlays so much in spending. Right now spending way outpaces revenue. Could that economy be balanced? Probably. But who knows what that balanced economy would even look like, or whether it would even work. Maybe even trying to balance the U.S. economy would turn the U.S. into a second-world country, hopelessly spiraling towards collapse. Maybe the U.S. economy is doomed to collapse no matter WHAT we do. In that kind of situation, what are those dollars worth? Who the fuck knows. It's all a question of how much confidence you have that the U.S. economy WON'T collapse, that the government WON'T default on its debts.
Right now, the world has a lot of confidence in the U.S. But recent political events put this seriously into question. Republicans have a vested interest in keeping the U.S. economy in the shitter through 2012 (to help their party's political ambitions). And, more importantly, they have shown their ability (and willingness) to best the Democrats politically at almost every turn. They have a great deal of party discipline and the determination to keep the U.S. economy down. This puts the chances of an ongoing, and possibly much more serious, recession as very high. S&P was just recognizing that fact, along with the fact that it's highly unlikely that either party at this point will ever be able to get the U.S. debt under control without some kind of default.
SJW: Someone who has run out of real oppression, and has to fake it.
Any time I see a 10 year budget I get a good chuckle. We don't even have a budget for this year.
I love Jesus, except for his foreign policy.
Government: We planned to increase the budget deficit by $4 trillion next few years, but now we're only increasing it by $2 trillion! We cut spending by $2 trillion dollars!
S&P: You still increased spending. You didn't cut anything. You still spend almost twice as much as you make. You are no longer credible.
Government: Traitors! Terrorists! Hostage takers! Can't you idiots in private industry do math?
Pathetic. Even the slashdot title of this article is complete rubbish.
6th Street Radio @ddombrowsky
Which isn't the way Congress did this. What they did was "We spend X trillion on this now. In ten years we expect to spend 5X trillion on this. If we instead decide to spend only 4X trillion in ten years, we've saved X trillion."
Roughly comparable to me saying "I can't afford my house note (this is theoretical, since I paid my house off ten years ago). I was planning on buying a vacation home in the Hamptons. Instead, I will buy a vacation home in Canada's cottage country. I have therefore saved money."
"I do not agree with what you say, but I will defend to the death your right to say it"
Considering how petty Congress is being about the entire issue, I would downgrade the damn rating as well. From their ( S&P ) standpoint, the leaders of the USA are willing to put the entire economy at risk while they squabble about their own little pet issues.
:|
We ( the US ) obviously can't get its act together by ourselves. Congress proved that. It took the threat of a downgrade before we finally decided to get semi-serious about the issue. Personally, I would consider the S&P downgrade as a warning shot across the bow. In effect "Get your sh*t together or suffer the consequences".
We shouldn't REQUIRE a GD debt increase to begin with. If our idiot 'leaders' would learn to spend less than they take in, we wouldn't NEED a debt ceiling at all. S&P sees this, as does the rest of the world. The leadership isn't interested in reducing their spending and, as a result, S&P made the right decision. This isn't a sustainable path. At some point it WILL come falling down around you. Why the retards in charge can't figure this out is beyond my ability to explain.
Personally, I hope the other rating companies follow suit. It will take that level of threat before my elected morons finally quit bickering and note the cliff edge they're dancing on. Maybe ( and it's a longshot ) they'll be able to get this train back on the right track. Maybe.
Given their track record, I'm definitely not counting on it. . .
...the same people who entirely failed to foresee the biggest economic collapse most of us have ever lived through. They were handing out AAA ratings, to mortgage backed securities
This suggests that it was merely incompetence on the part of the rating companies, when outright fraud would be the more apt term. They gave out those AAA ratings not because they're boobs, but because their customers - the big investment banks - were paying them them huge fees to do just that. The fact that no one's even been investigated, let alone prosecuted, for this continues to amaze and practically guarantees a repeat performance in the future.
Intended or not, corporations saw Social Security as a excuse to drop employee pensions (and take the difference as profits). At one time, even "menial" workers got decent pensions as part of their employment package. After 30 years of downsizing, rightsizing, off-shoring and union-busting, most people's only options for retirement are to gamble what little savings they have on the stock market (we all know how that worked out) and fall back on Social Security for the rest. The problem is not the "entitled" poor and retired, it's the entitled corporations who have sucked this country dry and given nothing back.
Support Right To Repair Legislation.
Well, first a positive note : America's not nearly as bad as most other nations that grace this planet. China, while currently better than America, isn't without debt problems. But America's better off than Europe when it comes to debt. Yet Europe is better behaved than Turkey & middle east, who are in worse shape despite massive influxes of money.
But still that would mean that on the average, Americans ... did never even intend to repay their debts. Welfare states were created, knowing full well they were doomed. People trading their income now, in the form of taxes, for health care, study help for their kids and pensions that won't come, except for the first ones who enjoyed these benefits.
And yet lots of generations had the option of turning the tide, and didn't. Not just in America, but in Europe, the middle east, and Asia, lots of people had the option of stabilizing the system by choosing to take responsibility instead of shoving the bill to their kids, and all chose wrong.
The real question is, now that the cat's out of the bag, how long do we pretend we can put it back in ? The system has failed, and while this obvious truth can still be denied, it will reassert itself soon enough. Though I do hope we can pretend a while longer, I have a family to take care of, and despite the rosy pictures implied in leftist and progressive propaganda if we simply take the money from the bankers, we all know that their promises of wealth, brotherhood and justice for all will turn into the wars, concentration and slaughter camps they turned into last time.
I would simply suggest to take the lessons of history to heart : when public opinion does not just jabber about evil bankers, but actually attacks them in numbers, do what millions of people forgot to do before world war 2 : run ! Run to a place with sufficient food, home produced food, without multiculturalism (which will soon be nothing but a fancy word for ethnic wars), and preferably a nation without military alliances. Stay far away from any large American city, get the fuck out of Europe (the EU, not Switzerland), get the fuck out of the middle east, get the fuck out of Africa, or if you must, at least stay out of Northern Africa and the Saharan countries.
I don't know who will rise, it depends on many factors. I guess it will be whichever decent nation manages to not get destroyed, and I frankly seriously doubt it will be China.
Political posturing and the political circus has contaminated sound judgement in the US.
If deciding how to spend tax revenue isn't a central, complex political issue, what IS? You think there's some obvious "sound judgment" that everybody intuitively knows but it's been covered up by master politicians?
You are sitting on a multi-billion dollar fleet...
The fact that the only spending problems you pointed out are related to the military makes you sound really biased. A credible solution is going to involve cuts everywhere.
As a European commenting on our domestic policy, you apparently aren't getting the full story or are choosing to ignore it.
Oh, but it does. The president must sign or veto each spending appropriation. And Obama has approved and encouraged plenty. Wikipedia can show you that since Obama has entered office the rate at which the debt is growing has increased substantially.
You blame defense spending for all our woes. Defense spending is still high, but not historically out of line for the past 50 years and it is set to decrease in the next few years. Well, except for interest on debt, which is stupidly high.
You know what else costs a gigantic pile of money? Entitlements. Here's another picture for you that is showing what is happening on that side of things. Note that historically it is only increasing. At least defense spending had had a cut once in a while, but entitlements are not sustainable at their current growth rate. But don't worry. Obama has nothing to do with this. It's just a coincidence that we use the word "Obamacare". Really.
So no, Obama isn't the only one to blame. It is insane to think that he is. But saying that he has nothing to do with the problem at all is similarly pathetic.
That is not at all what the TP wanted to do. They wanted to cut spending so that we were still meeting debt obligations but cutting back on everything else. Your analogy is flawed. What the TP wants is to order dinner at a restaurant but then leave off the expensive dessert at the end so that they can afford to pay the entire bill.
Love sees no species.
"All you need to know about rating agencies is that in May 2010 Moody’s still rated Greece triple-A." - Mark Steyn
I don't doubt that Mark Steyn said that, but what he said is false. In April 2010, Moody's lowered Greece's rating from A2 to A3, which is definitely not the same as Aaa. It is closer to "junk" rating than a triple-A rating. It is also worth noting that less than two months later, in June, Moody's cut the rating all the way to junk status, Ba1.
Note to self: Stop putting jokes in my insightful comments so I can get something other than +1 Funny!