Saturday, August 6, 2011

S&P Decides that Publicly Setting Fire to its Credibility is a Good Thing

Not content with simply being a useless organization, S&P decided to draw attention to itself yesterday by lighting what remained of its credibility on fire. S&P downgraded the USofA's credit rating last night from AAA to AA+, and the move drew a lot of attention, natch.

Before I get into the stupidity of drawing attention to yourself when you've done nothing good in the last ten years, I'd like to note that S&P has been telling us the federal government's credit was AAA-rated for a long time. But now they're saying its not. However, this doesn't mean they were right in either respect. S&P has proven they're not qualified to pass judgement one way or the other. So all this downgrade will do is draw more (unwanted) attention to a pointless and broken system of which S&P is a part. And, what the heck, the morons even misplaced a paltry $2 trillion(!) in the process of making the downgrade.

So what's going to happen now? A lot of experts are contending the government's borrowing costs will rise because of the downgrade. The fearmongerers are warning us to expect a surge in bond rates, which will, in turn, produce a surge in mortgage rates, credit card rates, auto-loan rates and the like.

But the US economy is still in the grip of a painful recession and a liquidity trap. So the flight to safe assets will continue until the economy strengthens, and the market won't care one fig about S&P's new rating. Instead its much more likely that the market will go on assuming US government bonds are the safest of safe bets and the downgrade won't register as a blip on most radars. There's a precedent for this as well. Japan, which went through a similar recession (with accompanying liquidity trap) in the '90s and early '00s (and is really still going through it) had their credit downgraded by the ratings agencies. The downgrade came because Japan's federal debt as a percentage of GDP was rising (mostly because the Japanese government was trying to fight the recession and liquidity trap... just like we did with the stimulus in 2009 and with massive government spending in the New Deal and the run-up to WWII in 1930s and '40s.  

So here is a chart of the historical bond rate in Japan. Can you spot the downgrade? It was in April of 2002 when the ratings agencies lowered Japans's credit rating from AA to AA- (which meant the world's second-largest economy had a credit rating on par with Malta and the Czech Republic). But look, just look, at what happened after the downgrade: the 10-year bond rate skyrocketed to nearly 0.9% (and by skyrocketed, I mean, fell). By the way, Japan's 2002 downgrade came on the heels of S&P maintaining an investment-grade rating on Enron right up until their collapse.

So now S&P is has proven once again that they're not only useless but this move will likely also prove that they're completely ineffectual as well. They are a pointless vestige of a broken system and not only that, but they have an ideological agenda and a harmful bias against public-sector debt.

Look, the US does have a long-term deficit and funding problem. Rising healthcare costs threaten to create an unsustainable budget deficit for the federal government (starting, perhaps, in 2020) but certainly not now.

The government is running a large deficit right now, but deficit spending in the teeth of the worst economic collapse since the Great Depression should be encouraged. The federal government should, and easily could, spend lots of money to push the economy out of this recession, then raise taxes and fund itself much more healthily once the economy is on track and booming again.

During the Great Depression, the levels of federal government spending as a percentage of GDP was much higher than it was at any time in the last three years (even with Obama's stimulus). And keep in mind that the government spending that pushed us out of WWII involved building tanks, planes and bombs which, after the war, had no economic usefulness whatsoever. As I've said before, the government could have built all those tanks, planes and bombs and pushed them into the ocean and it would have still pulled the country out of the Great Depression. This runup to the war, when the country was at full employment, but was building nothing of economic value, basically proved John Maynard Keynes' 'money-hole' assertion.

In Chapter 10 of General Theory, Keynes said the the government could bury bottles of money at the bottom of a coal mine, cover it up and have workers dig out the money. He argued that this wouldn't be the most effective form of stimulus but it would be better than nothing. Judging from the postwar boom of the 1950s and '60s when the country experienced two decades of GDP growth at annual rates 4.14% (the best two decades of economic growth in the country's history), I'd say his theory was proved correct.

But I digress. We don't have a short-term or medium-term deficit problem. But S&P was in a rush to prove that their pathological government-hatred runs as deep as the wingnuts' and Tea Partiers'. But the latter two groups have no credibility when it comes to understanding, well, anything. Is that who S&P really wanted to lump themselves in with? As I said, the sooner the ratings agencies are swept into the dustbin of history and replaced with a system that rates bonds and debt independently, the better. 

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