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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."
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
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.
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 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."
Nothing has changed that makes the US more likely to default.
I would strongly disagree.
Almost all bond issuers can only default by not repaying the principle and interest. I do agree with you that is infinitely unlikely, since the US Govt can simply print the money on demand. Of course no one expected the USSR to collapse when it did, so, its slightly more likely the USA could collapse now.
The failure mode is the US is one of the few bond issuers who controls global inflation. What exactly is the difference, financially, between "not repaying" and "repaying a hyperinflated nominal value"?
Real world example: You buy a 10 year, $1K t-note. I agree completely the odds are excellent, although not quite 100% perfect, that in 10 years you'll have your $1K plus a tiny bit of interest returned to you. I disagree in that the odds are pretty high that due to high to hyper inflation, that $1K t-note will only be worth approximately one restaurant meal.
That is an inflationary default.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
Nah, I think we need tax reform more than anything. Every other time in history we've raised taxes in war time to pay for it; that is, until Bush II comes along, he does the opposite, goes to war and lowers taxes. Add to that idiocy the enormous amount of speculation going on, the obscenely low tax rates on income from hedge funds, and the fact that multi-billion dollar corporations not only pay no effective tax at all but collect checks from the government in the form of refunds...
Sorry, but let's cut the bullshit. All this talk about raising taxes on the wealthy "killing small business" is crap. Something like 80% of businesses in this country bring in less than $75,000 a year, the statistics are all on the various government agencies that do the reporting. All this crap about taxes "hurting business" is just more emotional game playing. Then we hear about how it's all a liberal agenda to foster "class warfare", c'mon, we're already at war. It's the problem of the corporate mentality...no system can grow indefinitely. But the corporate cycle demands growth every single quarter, as do the investors in our economy. But that's unsustainable...and current events show this to be true. Business is hitting the point where there is very little wealth left for them to suck up and now they are simply looking for more creative ways to suck.
Atlas is shrugging, all right, but it's not the wealthy that are shrugging, it's the poor, who as they get more desperate are going to start reacting with force. It's a historical inevitability. Crime is going through the roof all over the U.S. and it's because there is no opportunity. For all the "stimulation" of Big Business the tax payer has been paying for none of the fucking wealth is trickling down. The businesses are sitting on it, the largest companies are all sitting on record amounts of cash both here and abroad. Meanwhile, they're laying people off and then crying how the little in taxes they do pay is hurting them and they need more of a break. Yeah, right.
Ayn Rand was just another person trying to justify to the masses why it's okay for one person to have more wealth than they could spend in 100 lifetimes while others starved outside of the gates of their compound. It was disingenuous then and it's disingenuous now. We've got 30 years of "Trickle Down" and nothing to show for it but more debt and social problems. Time to give "Trickle Up" a shot now...that is, if they're not afraid of actually having to compete again...
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.
> 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!
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.
The poor? Those guys with government housing, free health care, food stamps, welfare, WIC and government cheese? The guys with a PS3 and an Xbox on their 42" LCD TV?
You know, it amazes me how many people think being poor is just so awesome...
As someone that's actually been poor and lived in the projects, (really poor, not "my parents can't afford to buy me a car for my 16th birthday" poor) that's a bunch of crap. More right-wing propaganda to justify their moral bankruptcy and not being satisfied with what they have, nor grateful that they are successful enough not to be in that position. I went to sleep every night listening to gun shots, police sirens, dogs barking, and helicopters, watched families get torn apart by drugs as they sought some escape from their dismal existence, seen fist-fights break out over job openings at McDonald's and Walmart because there's nowhere else to work. Yeah, that sure is an awesome lifestyle. Highly recommend it...if you want to grow up without a childhood.
Meanwhile, the right finds that one guy out of a thousand that made it out and broke the cycle and holds him up as being some sort of proof that anyone can do it, conveniently ignoring how ridiculously lucky that guy really was. Throw 1,000 darts at a dartboard and you're probably going to get a bullseye, but that doesn't count for shit when the other 999 are embedded all over the bar.
While I agree wholeheartedly that our government is ridiculously corrupt and that the people of this country no longer have representation (unless they make $250,000+ or are one of those new "people", i.e., a major Corporation), I don't think we need to leverage our financial solvency strictly on the backs of the poor and disadvantaged. Cutting these social programs isn't going to effect the crack dealers and hustlers in the ghetto, it's going to hurt the kids, the elderly, and the infirm. The kids that the right all professes to care about when they're railing against Planned Parenthood, they're the ones that are going to go hungry. What the hell did they do to deserve their lives? They were born to the wrong mother and father so screw 'em, that's what they get for being poor? Yeah, right...
But, by all means, keep talking about that awesome welfare existence. It helps identify those that truly have no clue what they're talking about...
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
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.
You mean those crime-ridden hell-holes that your wise and benevolent government built for you as part of the myriad of social programs that you're vehemently arguing against cutting?
Yeah, those ones, because (and I'm sure this is going to blow your mind) it is still better than being homeless and living in a car, or on the fucking street. Where do you think these people are going to go? Oh, right:
the alternative isn't poor people starving and dying in the streets, it's poor people getting married to support their children in low-cost private housing, instead of being raised by government-subsidized single mothers only to become bastards who commit rape, robbery, murder, and other mayhem.
Really? It's that simple?! Oh my God!! Hey guys, looks like Mike here solved the problem with poverty in the US, we just need to pair them up and make them get married, then they will magically have all the means to raise those kids just fine without any assistance! We'll just put them in all that low-cost private housing! You know, all those decent neighborhoods filled with benevolent landlords that are waiting to receive all the people from the projects with open arms? How could we forget about them?!
You have no concept of what you speak of. The vast majority of the people in those situations didn't choose to be there, they ended up there due to circumstances outside of their control. With all the stories of people losing their homes and shit, with all the people getting laid off, are you seriously still holding to that ridiculous notion that only the dregs of society and the undeserving are desperate or on government assistance? Have you ever actually met a poor person, or do you just see them on TV and read about them in the paper?
The biggest tragedy is all the people calling for the end to social security. In civilized cultures the elderly are revered and taken care of because they raised us and everything we have today was built upon their hard work and sacrifices when they were our age. They take care of them because they fucking deserve it and because it's the morally right thing to do. Anyone that's calling for those cuts, go down to Walmart and look at that 80 year old people greeter that is handing out shopping carts and struggling with stickers due to their arthritis. Really look. If you can do that and not be completely ashamed, then you are a far colder man than I, and frankly, if that's the type of society you want to live in where we can't even take care of our forebears, then I want no part of it.
I mean, what the hell did we spend all these billions defending our country if we can't even take care of our own? We have fucking veterans sleeping under bridges. We can't even take care of the people that risked their lives to defend the country that made these assholes rich and they're supposed to "tighten their belts"?!
Man, what I would give just to lock a group of millionaires in a room with those "bastards" and have them justify why they can't pay a few more percentage points a year in taxes...I bet they could suggest a few ways they could trim their budgets without fucking over the disadvantaged...
"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!
I'm not gonna bother picking out each assertion you made and responding to it like you did, but the reason why we do not allow things to revert to how they were at the birth of the industrial age when there were no social programs whatsoever is because it is in the interests of the greater good to provide these basic things.
The alternative is to end up with situations where you have large quantities of street rats banging on car windows at every intersection in every major city in the US, crime skyrocketing, property values plummeting, urban blight, disease due to poor living conditions and malnutrition. Basically, look at how the poor live in Mumbai or Rio, or hell, even here in the US in cities like Detroit and Cleveland. Those people are getting assistance and look at how bad off those areas are. Can you even imagine what it's gonna look like when they're cut off? Detroit is gonna burn to the ground.
Now, I'm sure I'll get some sort of "so?" response to that, or how it's their own fault for being lazy, or whatever the hell sin they committed to end up poor (since nobody has ever had problems outside of their control, like illness or job loss), but regardless, getting them aid is better than playing the "survival of the fittest" game that you seem to be championing for. This isn't a third world country; there are plenty of them to choose from if that's what you're looking for. Hell, I bet your money will go pretty damn far there, too, and I doubt there'd be too many tears shed if more like minded people followed suit, but that's not the type of country that so many people have given their lives defending.