Saturday, August 06, 2011

Q: What does the S&P downgrade of U.S. debt mean?

A: Not much. Prices are set by the market, not by S&P. All S&P did was point out what everybody already knew -- that the Teabaggers in Congress are willing to hold the good faith and credit of the USA hostage to getting their way. And S&P didn't even get their math right while doing so.

So: Will this affect sales of U.S. Treasuries or the interest rate paid on Treasuries? Uhm.... no. If you're someone looking to park a few million dollars worth of retirement fund, where are you going to park it other than U.S. Treasuries? Greek public debt? ROFL! I suppose you could buy German sovereign debt, but there's not enough of that to fill demand and it's denominated in Euros, not dollars, which adds a currency exchange cost to the transaction. For better or for worse, Treasuries appear to be the only even reasonably-safe debt instrument available in quantity to buy right now. Furthermore, the only place you're going to see a teabagger 16 months from now is going to be in a pride parade, not in Congress, so investors looking at the long term will basically ignore the teabagger contribution to our economic woes and behave as if adults will be elected to Congress in 16 months. Given that, you'll still have just as many buyers flooding Treasury auctions... which will continue to keep interest on Treasuries low.

So anyhow, if the teabaggers retain control of the House next election, *then* you'll see people moving out of U.S. sovereign debt. But that's a big -- and unlikely -- "if".

BTW, this also explains why Germany is forcing austerity measures upon Greece and Spain that virtually guarantee default on their sovereign debt. By driving money away from the sovereign debt of those two nations, Germany drives its own borrowing costs down because where else are those Euro buyers going to go? Russia? ROFL!

- Badtux the Economics Penguin


  1. I always enjoy your expositions of things economic. Can you explain whether this is correct?

    If US dollars are issued by somebody whose credit rating is AA+, I wonder how any corporate debt denominated in US dollars can be rated any higher than AA+. Does this mean there are no AAA-rated securities south of Canada now?

  2. Joe, sovereign debt has nothing to do with corporate debt, and dollars are issued by the quasi-independent Federal Reserve, not by the U.S. Treasury. I thought about adding a section addressing why corporate debt was not going to substitute for sovereign debt for the purposes that people buy U.S. Treasuries, but then refrained because the post was already getting too long. But to make it brief, corporate debt with acceptable risks (i.e. from stable corporations with a good long-term outlook) is issued by corporations that have massive profits and massive cash reserves and thus there isn't a whole lot of long-term on the market from them (just short-term debt that they roll over regularly to smooth out their cashflow), the only long-term corporate debt out there in any large quantities is debt of companies that probably won't be around in 10 years and thus not a replacement for 10-year Treasuries.

    Hopefully that clarifies things?

    - Badtux the Economics Penguin

  3. I see this as the first step in the rentiers' plan to extort more money from the United States. A single tick downward in the rating from a single credit agency isn't going to be a disaster. But I predict there will be more.

    The "bond vultures" -- a more appropriate word than "vigilantes," which has better connotations -- are going to use the downgrades as an excuse to extort higher interest rates eventually. I can see fascist China and other large creditors as demanding extra money, or concessions, or somehow using the rating to muscle out what they want.

    Yes, I know the United States can pay its debts in money that it prints itself. But if Saudi Arabia (or even Canada) sends a boatload of oil to the U.S. in exchange for promises of green pieces of paper, it can demand more pieces in exchange for the T-bills that it buys to repatriate the payment. Ultimately that just leads to more macroeconomic inflation, though. So Saudi Arabia can take its higher interest in the form of an extra fighter jet, or more nerve gas to use on its restive population.

    This will also be a boon for the rich people who have parked their money in T-bills. Every 10 basis points count when you're sitting on millions in government debt. It would be great if it resulted in more money for retirement funds and average savers, but my cynical self says that's not gonna happen.

  4. Bukko, the problem with your notion is that the Federal Reserve can -- and will -- buy U.S. Treasuries en-masse if so-called "bond vigilantes" try driving up U.S. interest rates. So trying to perform such speculative pump-and-dump with U.S. public debt is a loser's gig, because before you can get to the dump stage, the Fed will have already driven down borrowing costs again.

    Which brings to mind the question, why hasn't the ECB done that with Greek, Irish, and Italian debt? My answer to that is simple: The ECB is dominated by Germans doing things for the benefit of Germany. Who benefits if Greece, Ireland, and Italy default on their public debt? What nation has 80% of GDP in public debt that would be an instant favorite place for bond buyers to put their money if those other EU nations default? Who benefits? Once you understand that, you understand what's happening in the Eurozone right now.

    - Badtux the Economics Penguin

  5. Re: Teh RedFez buying bonds from the Trez -- problem with doing that is that for your externals like oil, French wine, cheap plastic crap from China, people are going to want to get paid with something valuable. If they're getting paid with infinitely printed green pieces of paper, or infinte digital 1's and 0's that are issued at 0.1% interest by the Trez/Fed complex, the smart outsiders are going to want something different. Like gold, or food, or white wimmens for their harems. Maybe they'll settle for higher interest rates for a while. But if you stiff them on interest, while inflating the amount of currency, eventually they'll baulk.

    Plus, my paranoid mindset believes higher interest rates are all part of the game. Who says the Fed/Trez WANTS to hold interest rates down? Doing that would not be in the interest of the CorpLizO'lords. (Corplizolords?) I can hear The Fed saying in the future "Sorry, but we simply HAVE to extort more money from you in interest. The ratings agencies are forcing us."

    Again, my tendency is to believe there's a grand plot to enserf the sheople. Higher interest rates based on credit downgrades fit perfectly with that. If it can be done with the credit card accounts of ordinary people, who shouldn't it work with the productive capacity of an entire nation?

  6. My gosh, if the depression happens will the Penguin have to sell his tux and wear bib overalls?

  7. The penguin already has bib overalls, or the modern equivalent, and the farm to wear them on. Just sayin ;).

    - Badtux the Farm-ownin' Penguin

  8. I see you still are a snarky and economical penguin.


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