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United States Loses S&P AAA Credit Rating 1239

Posted by timothy
from the don't-worry-the-next-19-generations-won't-mind dept.
oxide7 writes with this excerpt from the International Business Times: "The United States lost its top-notch AAA credit rating from Standard & Poor's on Friday in an unprecedented reversal of fortune for the world's largest economy. S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government's budget deficits and rising debt burden. The move is likely to raise borrowing costs eventually for the American government, companies and consumers."
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United States Loses S&P AAA Credit Rating

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  • I'd be more careful about this "we" you are throwing around so freely.

    "We" the people have for many years supported the existence of social security, medicare, public schooling, and other such programs which provide a pale imitation of the social net found in other developed nations.

    And what else can it be called but a religious article when you have people like Grover Norquist, famous for saying he wanted to shrink government with the objective of "drowning it in the bathtub," getting congressional Republicans signing pledges that they will never, ever allow any form of revenue increase ever? When Boehner walked out of negotiations because Obama refused to offer a deal consisting of nothing but spending cuts?

    What we are seeing here is the long-term Republican strategy of destroying the New Deal and everything that's come since by forcing the US into insolvency.
  • Re:Two things... (Score:4, Interesting)

    by rmstar (114746) on Saturday August 06, 2011 @03:37AM (#37004888)

    Credit rating is ideologically ignorant - it's a matter of high debt and inability to meet payments.

    No, in fact it is ideologically very non-ignorant, as it has an ideology that it is trying to push on the world. c.f. Krugmans commentary [nytimes.com] on the issue.

    It is also arguably irrelevant in many situations. You can compare us 10y bond yields [bloomberg.com] with, I don't know, greece's 10y bond yield or a bunch of orthers [wsj.com]. The world is not about to end on the US. It is quite possible that S&P have just made fools of themselves.

  • by copb.phoenix (1976866) <copb.phoenix@gmail.com> on Saturday August 06, 2011 @03:49AM (#37004946)
    What exactly does this mean for the citizens of the United States of America?

    Out here in Middle of Nowhere, West Virginia, the poverty margin is 80% of all households, and it only rises as the economy gets worse. For a quick comparison, in Clinton's era it was "only" about 17% of all households. No jobs, no hope for the government, shops keep closing because they can't make enough to stay open... So what's the next thing those disconnected people in Washington are going to do to Main Street?
  • by rwade (131726) on Saturday August 06, 2011 @03:50AM (#37004952)

    Obama has raised the national debt by over three trillion dollars. He added more debt in the first 19 months of his presidency than all presidents from Washington through Reagan combined. If Obama supporters are really going to try to pin everything on Republicans, they're going to be in for a big disappointment in next year's election.

    First of all, I don't know where you're getting "three trillion dollars" from. Would be awesome if you could, y'know, provide the source for this data.

    Second of all, the President didn't increase the debt single-handedly. You cannot point out any amount of programs that he himself pushed for that led to a deficit of $3 trillion since his first budget (the 2010 budget, since the 2009 budget was Bush's).

    Thirdly, the deficit would have been greatly reduced if not for the continued impact of the 2001/2003 tax cuts for the wealthy instituted by President Bush and his congress. Obama is opposed to this and claimed to try to get rid of these (although he didn't, really, in my opinion try that hard. He sold out, in my opinion). Anyway, this would have reduced the deficit.

    The bottom line -- you can't blame Obama for an addition to the debt of three trillion dollars. Did he preside over a three trillion dollar increase in the debt? Yes....well, maybe -- I'd still like to see the math on this. But George Bush presided over the worst terrorist attack the United States has suffered. Does that mean that he caused it? No -- any number of things led to the attacks; he was just the guy in the seat for when it happened. Obama is the guy in the seat during the period the debt increased.

    One other note -- the President doesn't get to choose what gets funded and what doesn't get funded. You know that there are programs that he wants gone, spending that he wants gone that the republicans insist on funding.

  • Ummm, yes, a lowish steady inflation IS a good thing. Without it, there's no incentive to continue investing money in the economy instead of under your mattress.

    Would you prefer deflation? The last time that was arranged we called it The Great Depression.
  • Re:Two things... (Score:5, Interesting)

    by im_thatoneguy (819432) on Saturday August 06, 2011 @04:14AM (#37005104)

    Or it's because we've weakened labor, deregulated markets protecting workers and passed 'business friendly' legislation which makes it cost effective to evade taxes.

    An argument can be made for both sides. Wages have fallen while productivity has climbed. Your claim that "high wages" are the cause of our GDP not being higher might be true, but it also means that you want to see our wages fall even faster-- so let me ask you a question: would it be worth it?

    We need to start having a large debate about our priorities in this country. Do we want to see the stock market continue to gain year over year at the cost of the average person's wages and security or do we want to put wall street first and hope that they take pitty on the average american and donate really nice food to the food bank.

    Businesses keep telling us that we have to compete with the chinese. I say, fuck that. There was a time when we made good wages, had healthcare and benefits and worked a 40 hour work week. I'm not sure why I want to follow any economic path that has us competing to lower our wages, work 60+ hour weeks without safety or environmental oversights and leaves us without any benefits.

    Protectionism might have retarded economic growth but if it was responsible for the quality of life for most of labor then maybe we need to strangle our economy.

  • by meburke (736645) on Saturday August 06, 2011 @04:54AM (#37005298)

    So many people on this list believe in probability, why is it so hard for them to understand that risk is mathematics, not politics.

    But start with money. What is money? Money is a measurement standard, used to measure whether people who are trading goods and services get fair value for their trades. Money can ONLY be spent or invested. (Currency, however, can be destroyed by melting or burning, etc..)

    The amount of money has to be stable against the amount of goods and services, or no one will trust it. The risk comes in two forms: First, people hold money in the hopes that they will be able to trade it back for a fair amount of goods and services. Since the US Government doesn't have any money of its own, it has to take away money that would otherwise be spent in producing and trading goods and services. If the government takes too much money, it diminishes the ability of the country to provide enough goods and services to trade with the people and countries holding the measurement. Ooops, now there's too much money and the prices rise to suck up the excess; the measurement is skewed. Big risk, puts downward pressure on the credit rating.

    Second, Debt: Now the government has borrowed against the future productivity of the nation, but it may have over-borrowed against the ability to trade enough goods and services in a timely manner to acquire enough money to pay the debt in a timely manner. The longer the money is owed, the higher the interest paid for a longer period of time. And the risk is that an irresponsible government, instead of keeping the money supply stable in relation to the amount of goods and services provided, may create/print money instead. The money is worth less and can buy fewer goods and services when the debt is finally paid. Again, fair measurement is compromised, and the more debt, the higher the risk of this happening. The higher risk, the more pressure on the credit rating.

    I've been asked to explain this before, so let me try: Suppose the government issued a finite amount of inches and you had to use them all somewhere. Today, if you buy a piece of lumber 24 inches long it will fit into the space you want exactly. But if the government issued more inches, and you had to use them up, then vendors would end cramming more inches into the same size of lumber. Now, if you buy a piece of lumber "24 inches" long, it might be too short to fit into that space. Or, if you do buy a piece long enough to fit into that space, you will end up with more inches. We depend on the measurement to be stable. We also depend on the lumberyard to be able to provide enough wood of the right type to accommodate our project. If the lumberyard messes with the measurement or the amount of lumber it can promise, then it becomes undependable and we start looking for other sources. Either way, the ability of the lumberyard to provide what we need is a probability, and the higher the probability the better the choice. The lower the probability, the more risky the choice.

  • by konekoniku (793686) on Saturday August 06, 2011 @05:05AM (#37005372)
    Two answers to your question.

    First, history plays a key role. The credit rating system started out this way (with letter ratings and modifiers) decades ago, and since then so much national legislation, international regulations, and corporate policies have been crafted around the existing system that it'd be very costly to change. For example, BBB- or higher is the legal definition of "investment-grade", and many financial institutions (insurance companies, pension funds, etc.) are legally barred from investing more than a certain percentage of assets under management in non-investment-grade securities. Similarly, Basel III and national reserve requirements assign different risk weightings to different credit rating levels -- AAA and AA may have a zero weight, for example (no capital is required to be held against the possibility of default for these classes of securities), while high-yield investments below C may have a 50% risk weight.

    There actually is one rating agency that does use a 0-100% scale, but their scale is actually more difficult for the people who actually use the ratings (fund managers, policymakers, chief risk officers, etc.) to understand since it does not correlate as directly to existing regulatory and legal definitions.

    Second, there actually are loss-given-default ratings like you describe, but they are assigned to specific securities rather than to companies as a whole. In fact, there are actually many different types of credit ratings. The one you hear most often is the long-term corporate issuer (or sovereign issuer) credit rating, but there are also short-term ratings, foreign-issuer ratings, loss-given-default ratings, etc.

    A company would typically have many of these ratings simultaneously -- e.g. a Canadian company may have an AA rating for CAD-denominated short-term bonds, a A rating for Canadian-dollar-denominated long-term bonds, and a BBB- rating for US-dollar-denominated long-term bonds. Moreover, although the company's US-dollar-denominated long-term bonds issued last week were rated only BBB-, they have a loss-given-default of only 1% because they are structurally senior in the capital structure to the rest of the company's debt, whereas the loss-given-default rating for its AA-rated short-term debt issued yesterday may actually have a loss-given-default rating of 85% because it is subordinated to ten other bonds.
  • True it's not the only thing, but remember that interest rates are quite correlated with inflation.

    One must also be very careful comparing economic conditions of the 19th century with those of the present, or any time since the abandonment of the gold standard. During the 1800s, the gold standard combined with the grip of the Industrial Revolution meant that the money supply was relatively fixed while the number of goods and services diverged, creating a strongly deflationary condition. Side effects of the Revolution are what enabled it to escape the "stuff money in the mattress, it'll be worth more later" trap. The 1800s were a time of wild economic instability; the lack of central regulation and damping meant the economy cycled from boom to depression every 15-20 years, marked by regular bank panics. By the 1900s the extremeness of the instability had reached the point that there were 6 banking panics in the span of 1890-1910, which originally motivated the creation of the Fed. This wild unpredictability, combined with highly depressed wages during the Guilded Age, effectively prevented most people from saving, thereby negating the savings trap.

    The situation today is very different. Wages are not so depressed that people can't possibly save money (though many choose not to - witness the insane negative savings rate in the years leading up to 2008), and many people are vested in the stock market. In 1929 when overextension of credit caused a crash, the sudden destruction of wealth caused prices to deflate. This, an abruptly bleak economic outlook, and the sudden unavailability of credit triggered a "don't spend now, it'll be worth more later" feedback loop - a deflationary spiral - and the resulting massive negative feedback imploded the economy. The same confluence of events occurred in 2008, and if it weren't for federal action (the bank bailouts, disgusting as they were, and exercising control over interest rates) we'd be trapped in the same negative feedback loop.

    I'll summarize it thus: A deflationary death spiral occurs when a major economic contraction causes deflation, and the combination induces mass withdrawl from the normal investment cycle. If it weren't for actions to ward deflation off, we'd be in that spiral now.
  • by rally2xs (1093023) on Saturday August 06, 2011 @05:29AM (#37005478)

    Yep - ignore the TEA party and keep spending. Get the debt up to 50 trillion dollars, get our credit downgraded to the basement so eventually we have to pay 10% interest on the debt, and that'll be $10 trillion a year that would have to go straight to the payment on the debt. Recovery would be impossible, and that would be the end of America. Divide it up and sell it to the creditors. But y'all just keep on spending... and spending... and spending. That's the thing to do. Listen to the liberals, they know best. The TEA party is crazy, they want a balanced budget amendment. Don't do that, it would make it harder to wreck that evil country, and send it into the pages of history forever. We need to kill the American economy so we can build the worker's paradise in its place, with free medical care, free housing, free cars, free food, free everything, paid for by :"the rich". They work, you ride for free. That's the way it should be, eh?

  • Since Fox News created a walled off echo chamber (not just saying "listen to us" but actively inculating the idea among their listeners, the GOP, that every other outlet is the Debbil), that's all that's necessary.

    And can we please stop with the "left wing media" nonsense? As Bill Kristol admitted, "The whole idea of the 'liberal media' was often used as an excuse by conservatives for conservative failures.’” Are we talking about the same CNN that positively jizzed themselves with excitement in the runup to Iraq War 2.0? Is there any media outlet in the US that treated the "death panels" lie with the scorn it deserved? Is there one that doesn't concede every debate to the Republicans before it begins, by using their terms?
  • by drsmithy (35869) <drsmithy@gmailFREEBSD.com minus bsd> on Saturday August 06, 2011 @06:09AM (#37005662)

    I suspect you're European; not that it matters, but it's important insofar as many Slashdotters who participate in discussions related to US politics who espouse similar beliefs to yours are often unaware of their own bias, which has helpfully been created by their respective domestic media.

    I am not the person you responded to, but I will echo their sentiment. I'm Australian, but I spent a couple of years living in the US (and worked for a US company for ~6 years, so dealt with a lot of Americans).

    There is no left-wing political force in America. There is the right (Democrats), the far right (Republicans) and the loony right (Tea Party). In no country except America would the Democrats be considered left-wing. This has been graphically demonstrated by Obama's kowtowing to the right's demands throughout his presidency.

    Personally if I were what passes for left-wing in the US, I'd be encouraging Michelle Bachmann to run for President and tell everyone to votefor her. The resultant social catastrophe for the 95% of Americans who aren't earning a couple of hundred grand plus per year might just convince them where their best interests lie.

  • Between 1800 and 1910, the United States suffered a banking panic an average of every 7.7 years.

    There were 7 depressive episodes in this time:

    The panic of 1819 was the first.
    The panic of 1837 resulted from overextension of credit; There was a deflationary spiral, 5 year depression, and record unemployment.
    The panic of 1857 was comparatively minor, and was shortcircuited by the Civil War.
    The Long Depression lasted from 1873-1879; Heavy industrial output fell 25%, overall output fell 10%, and waged were mauled by 25% to as much as 50%.
    This was followed by a boom, then the Depression of 1882-1885 and the banking panic of 1884.
    The panic of 1983 was considered the worst depression in US history until the Great Depression; Unemployment was in the low teens for 6 years.
    The Klondike gold rush initiated a boom, until the Panic of 1907 crashed the NYSE fifty percent year-over-year...

    And are you seriously asserting that the government was responsible for the crash of 1929, other than by its failure to restrict wild speculation by bankers (sounds familiar)?
  • by The Master Control P (655590) <<ejkeever> <at> <nerdshack.com>> on Saturday August 06, 2011 @06:35AM (#37005758)
    Except that there have been only two times since 1970 that the budget did not result in a deficit. Both occured under Democrats.

    The deficit's growth has been interrupted once since Reagan started it... by Clinton. The Republicans actively took it upon themselves to destroy this rather than end the debt which is so horrible and will be the destruction of america^w^w^w^w^w^w^w^w^w^w^w because Reagan proved deficits don't matter.

    Without causing mass suffering due to major withdrawl of services during bad times, there is one thing that will reduce or even meaningfully dent the deficit today (other than passively waiting for recovery and the restoration of normal incomes and associated tax revenue): Raising tax rates. And the Republicans fanatically oppose it, while screaming like banshees about the deficit.

    can we please have the <strike> tag so I don't have to count ctrl-w's?
  • by TheRaven64 (641858) on Saturday August 06, 2011 @07:42AM (#37006062) Journal

    Why do you blame Obama for not following a line of action that probably wouln't have worked

    Obama said he'd stop paying social security before he'd default on the debt. This was then spun as him saying he'd rather give money to bankers than to the poor. He should have played up the 14th amendment, saying that he'd rather pay the social security but he respects the constitution, and the constitution requires the US to meet its debt obligations even at the cost of hardship. This would have won him some support from the constitutionalist branch of the republican support base.

    I don't know what happened to Obama when he got elected, but all of the PR skill he demonstrated in the primaries seems to have evaporated.

  • by Billly Gates (198444) on Saturday August 06, 2011 @09:19AM (#37006638) Journal

    Well I can tell you that cutting taxes to inrease revenues also proves it does not work either. Every republican but Reagan thought it was extreme and Bush SR even called it vodoo economics before 1980. Now it is this strange cult and anyone who disagrees is a radical socialist. Economists do not buy it. If you cite Reagan, I will say it was not until the recovery hit 2 years after his tax cuts and cheap gas. The curve was mathmatical proven false unless the tax rate is very high.

    We gave tax cut after tax cut after tax cut. Hell half of the bailout went to tax cuts! Most Americans do not know this. Where are the new jobs it created?

    Our tax rates are not high to do business. Right wing ideology again. Our personal income taxes are the lowest in pretty much any 1st world country. Deregulation also started the great recession as banks started gambling on Wall Street and flipping loans rather than investing their deposits to small businesses. If you give a tax break that money will go to China and we will pay the difference in interest as it is lost revenue in red ink for the goverment.

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