Monday, April 18, 2011

Adventures in Journamalism (Daily Mail Vol. 2)

I'm not sure how the Daily Mail keeps getting away with writing such dreck, but today's edition tells us that the U.S. is in huge trouble and must get it's fiscal house in order immediately. Well, some of this is true. In the long run the government needs to raise taxes (on the wealthy would be a good start) to pay for Medicare's costs and needs to figure out how to get Medicare's costs under control. But that's the long-run outlook and has absolutely nothing to do with solving any short term fiscal problems. The United States can continue to run deficits now while in a recession to help itself out of a recession, and the current budget deadlock between House Republicans and President Obama over the 2011-12 budget will do nothing to fix any long-run fiscal deficits. Only allowing the Bush tax cuts to expire and passing further legislation to strengthen the Affordable Care Act will do that. 

But the article says that the deadlock is what's causing problems. It also tells us that, because of those problems, the S&P might downgrade the US's debt rating but it doesn't ask why the S&P would even consider this... or even why the S&P is relevant as a ratings agency after their complete and utter failure to properly rate anything during the subprime debacle. 

In short, the S&P hasn't downgraded the US's debt and they aren't likely to do it because the US government currently can't default. It's impossible. The US government owns no debt denominated in other currencies; all of its bonds are issued in dollars, of which an infinite supply can be printed, if needed. So there is absolutely no risk of the federal government defaulting on any of its bonds (which would be the primary reason for a downgrade). The only risk to investors is that the US government actually has to print a bunch of dollars to pay off all of its debts and by doing so cause runaway inflation.

But without even looking at the economics of the issue, there still exists proof that you should never read the Daily Mail for economic or financial news again; because they're liars and deceivers. 

If the S&P was going to downgrade the US government's credit rating, what would be the first thing we'd expect to see? A rise in interest rates on the US government debt right? Why? Because when a company (or in this case, a country) has it's credit rating downgraded, people stop buying that company's (or country's) bonds and therefore those interest rates rise. But what happened today? Absolutely nothing. In fact, interest rates on US bonds fell today as more investors bought the federal government's debt. Clearly investors aren't the least bit worried about the US government's ability to pay its debts. But if you read the article, it doesn't mention the rates on US government bonds at all. Not once. Anywhere in the article. Instead, it talks about the stock markets around the world all dropping, all of which have nothing -- absolutely nothing -- to do with the US government's credit rating.

Here's a direct quote from the article which aims to deceive:

Elsewhere, the Dow Jones plunged 183.68 points (1.49 per cent) to 12,158.15 in the first three minutes of trading as the ratings agency raised the alarm bell giving a strong vote of no confidence in America’s ability to tackle its deficit.
I don't know how a financial reporter could write that sentence with a straight face. Because what the reporter actually should have said was, "Elsewhere the Dow Jones plunged as investors fled stocks and plunged more of their money into US government bonds despite the S&P's idiotic statement that they might downgrade the United States' credit rating. Clearly investors are giving America a strong vote of confidence in its ability to tackle its deficit."