Now the U.S. is AA+ according to S&P

[Packer16]

I think the Debt/GDP chart provides some good insights.  We have lowered the debt/GDP in the past and we did not fall off a cliff.  Its hard for me to believe that most programs cannot be modestly cut without a major impact.  This will force us to decide what is a want versus a need.  This will also have the impact of reducing the health care subsidy which should bring down healtt-care costs.  I hope we also look at education and lowers subsidies (gov't grants and loans) for degrees that cannot pay back loans after folks graduate.  I think loan/grant level should be tied to subsequent average earnings.  If we can change the tax system also it can be a win-win for everybody.

 

Packer

[libor.plus1]

How is this going to effect whether people buy Coke, iPhones and coffee, eat at restaurants, advertise on Google, etc?

 

its not, and thats why Coke, Apple, and Starbucks werent downgraded.

[NormR]

If the US has had its rating lowered then you have to lower everyone elses ratings in tandem.  Canada is totally reliant on the good credit of the US, as is China, the UK, Germany etc.  Ludicrous and meaningless bullshit.

 

Um, go back a few decades and make the same point about the U.K. ... 

 

Just because the U.S. is at the top of the heap at the moment doesn't mean that they can't spend like drunken sailors.

 

Time to tax more, spend less, default or some combo of the three.  Seems like inflation (sort of like a slow default)  is the preferred, and potentially very dangerous in the long-term, option.  But I think the wave of boomers will require a bit of the first two soon enough.     

[shalab]

In particular, immigrants of the business-class type visas that would invest capital and start small businesses.  They would need homes, automobiles, food, clothing, education, etc, and increase tax revenues.  Maybe even open up such visas to regions that have greatly suffered economic hardships such as Nevada, Arizona, Florida, Southern California, Michigan, etc.  Food for thought.

 

If the U.S lets the willing students stay back after their study, it will suffice.

[DCG]

How is this going to effect whether people buy Coke, iPhones and coffee, eat at restaurants, advertise on Google, etc?

 

its not, and thats why Coke, Apple, and Starbucks werent downgraded.

 

Exactly.

[txlaw]

It might be a good wake up call for the US, but it's a bad call, generally.  WEB is right -- it just doesn't make any sense. 

 

It's really crazy how many investment decisions depend on the pronouncements of these guys at the ratings agencies.   

[alertmeipp]

I think the downgrade is a wake-up call to the gov. There is no good or bad wake-up call as long as it does the job. WEB is right in saying that US can print, but is it fair to those who buy US debt?

S&P is not here to protect issuers but to protect those who buy US debt. Last week's Congress childish act has to be paid somehow, too bad we will be paying for it - both from US currency and stock equities devaluation.

 

 

 

 

[biaggio]

"Buffett sounded no alarm bells about the downgrade, going so far as to say it wouldn't have much effect on the markets Monday. "If nothing else takes place, meaning, if all other variables hold and there isn't say, a new problem in Europe, it won't make any difference.""

 

 

Do folks feel that there will be no effect on the markets Monday?

 

No effect is the opposite of my initial impression.

 

I agree that it makes no difference in the value of stocks, but I can t imagine that Mr Market will feel the same way i.e will Mr Market be more depressed on Monday.

 

If the markets react positively, then we have to be at a bottom of some sort.

[ERICOPOLY]

When Canada lost its AAA rating in April 1993, for instance, the country's stocks gained more than 15% in the subsequent year. The Tokyo stock market climbed more than 25% in the 12 months after Moody's downgraded Japan in November 1998.

 

http://money.cnn.com/2011/08/06/pf/sp_rating_money.moneymag/index.htm?iid=Lead

[opihiman2]

When Canada lost its AAA rating in April 1993, for instance, the country's stocks gained more than 15% in the subsequent year. The Tokyo stock market climbed more than 25% in the 12 months after Moody's downgraded Japan in November 1998.

 

http://money.cnn.com/2011/08/06/pf/sp_rating_money.moneymag/index.htm?iid=Lead

 

Well, two data points don't make a trend.  Besides, what the article forgot to cherry pick is that the Nikkei was down around 50% a few years later.  I believe the S&P was right about downgrading Japan--even more so since their debt to GDP has ballooned since then and their economy is still going nowhere.  Besides, the entire world is in a different place than 1993 and 1998.  I see more blow ups coming down the pike in the next few years. 

[Myth465]

The U.S. now has the same rating as Canada

 

OMG!  I didn't realize it was that bad!   :D

 

Lol

[Guest Dazel]

http://www.theglobeandmail.com/report-on-business/economy/moodys-renews-canadas-triple-a-rating/article2112783/

 

 

I believe Canada is triple AAA

 

Dazel

[scorpioncapital]

Actually I never understood the rating system because it doesn't take inflation into account. All long term sovereign debt should be rated junk status. All short term debt can most certainly be rated AAA. So there is just a gradient between AAA (short term) and C or lower (long term). This S&P downgrade is for long term bonds or a blended average?

 

 

[Guest Dazel]

 

Take a look at Japan's debt to gdp....and then take a look at their yields...this should not have any effect on the borrowing or interest rates in the U.S.

 

Dazel.

[Guest Hester]

This is a big political blow to the Obama Administration. Somebody needs to buy a click counter and count how many times Obama's eventual Republican presidential opponents bring this up.

[ERICOPOLY]

All long term sovereign debt should be rated junk status.

 

Then all long term corporate debt should be junk as well.

 

That doesn't provide a means for differentiating the ones that will only repay 50 cents on the dollar from the ones who will repay 100 cents on the dollar.  What the dollar will actually buy you is another discussion altogether.

 

 

[txlaw]

Actually I never understood the rating system because it doesn't take inflation into account.

 

But that's the point.  The ratings are not supposed to take inflation into account.  They're a measure of credit risk only, not the value of the promise on a purchasing power basis.

 

So S&P's downgrade makes no sense.  The US can print money whenever it wants to pay people back.

 

[scorpioncapital]

But credit risk is intimately intertwined with inflation. The US should be far lower than AAA in real terms and that's how I think credit ratings should be imparted to all countries - who is devaluing more or less. The rating should be a measure of rate of devaluation. So for example very few deserve close to triple A, maybe Japan.

 

Since government has the ability to print money, very few governments have long term credit worth anything. Companies have credit in so far as they can pay an interest rate to keep up with inflation, but their hands are tied as they can't print money.

[txlaw]

But credit risk is intimately intertwined with inflation. The US should be far lower than AAA in real terms and that's how I think credit ratings should be imparted to all countries - who is devaluing more or less. The rating should be a measure of rate of devaluation. So for example very few deserve close to triple A, maybe Japan.

 

Since government has the ability to print money, very few governments have long term credit worth anything. Companies have credit in so far as they can pay an interest rate to keep up with inflation, but their hands are tied as they can't print money.

 

Well, we define credit risk differently.  What you're talking about is credit risk and currency/inflation risk combined.

 

If we took your approach to ratings, every single corporate rating would have to change and would be much harder to do because the idiots at the ratings agencies would have to think much harder about their ratings.

 

Berkshire, of course, would be AAA.

 

[rranjan]

 

Since government has the ability to print money, very few governments have long term credit worth anything. Companies have credit in so far as they can pay an interest rate to keep up with inflation, but their hands are tied as they can't print money.

Well goverments across the world also don't have the luxury of printing money as they wish and pay the debt because they don't hold the debt in their local currency.

 

S&P was simply wrong earlier and they are wrong right now. Based on the criterion they use for default, I don't know why USA is not AAA. It's not that I will hold long term bonds here but I don't see the logic behind S&P action.

[txlaw]

S&P was simply wrong earlier and they are wrong right now. Based on the criterion they use for default, I don't know why USA is not AAA. It's not that I will hold long term bonds here but I don't see the logic behind S&P action.

 

Absolutely.

 

http://www.bloomberg.com/video/73607630/

 

S&P guy cites the recent political brinkmanship as the main impetus for the downgrade, since it calls into question our ability to solve these problems.  Awesome.

[ERICOPOLY]

Companies have credit in so far as they can pay an interest rate to keep up with inflation, but their hands are tied as they can't print money.

 

Their governments will print the money, so the future value of those dollars is "junk".

 

Worse, as you point out there is an additional credit risk because they can't print money of their own.  

 

So if they get into a bind, they might only pay you 1/2 of the "junk" dollars owed to you.

 

Best case, they repay 100% of the junk dollars owed to you, but that's no better than the govt bond, which is "junk".

 

Thus, if all sovereign long bonds are "junk", then ALL long debt is "junk" as well.

 

It would be odd if there were AAA corporate bonds denominated in US dollars but the US govt bonds were junk for the reason of long term debasement.  You'd have banks only able to hold high amounts of corporate bonds and very little govt "junk" bonds.  The world would be turned upside down!  At least in the govt bond scenario, you are certain to get back 100% of the dollar units, however valuable they may be.  In both cases, govt and corp, the dollar units have equal value.

[scorpioncapital]

"Thus, if all sovereign long bonds are "junk", then ALL long debt is "junk" as well"

 

A company can set the interest rate it pays to investors to compensate them for the loss of purchasing power, the market can demand only short-term loans or higher interest rates - and this will work fine because companies are not bankrupt, they have positive equity. The US government (see the report on another link on this site) is bankrupt, it has a substantially negative net worth and cash-flow, thus it cannot contract to pay substantially higher interest rates to compensate for the loss of purchasing power of the currency. As a result, sovereign debt is worth much LESS than private debt.

 

[NormR]

I agree that it makes no difference in the value of stocks, but I can t imagine that Mr Market will feel the same way i.e will Mr Market be more depressed on Monday.

 

Sell them stocks, go to cash!  Oh, wait a minute.  ;D

[ERICOPOLY]

"Thus, if all sovereign long bonds are "junk", then ALL long debt is "junk" as well"

 

A company can set the interest rate it pays to investors to compensate them for the loss of purchasing power, the market can demand only short-term loans or higher interest rates - and this will work fine because companies are not bankrupt, they have positive equity. The US government (see the report on another link on this site) is bankrupt, it has a substantially negative net worth and cash-flow, thus it cannot contract to pay substantially higher interest rates to compensate for the loss of purchasing power of the currency. As a result, sovereign debt is worth much LESS than private debt.

 

 

The government isn't bankrupt, it just is reluctant to cut it's spending.

 

We can cut our defense budget down to Canada's size.  We can make 72 the age of retirement with Social Security benefits.  We can stop subsidizing interest costs on home purchases as a means of collecting more tax.  

 

At this point the spending hasn't been reduced yet.  A person with $90k in debt and a $100,000 after-tax salary isn't bankrupt just because they spend $110,000 per year.  They can live on $99k per year spending and reduce the debt by 1/2 over 40 years.

 

To be bankrupt means that you go before a judge and after looking at your situation there is nothing to cut.