Aug 06 2011

LQD: The AA+ rating is valid, but the S&P case is intellectually dishonest ~ Mosler

(10 am. – promoted by ek hornbeck)

Burning the Midnight Oil for a Brawny Recovery

“LQD” is an abbreviation I first encountered at EuroTrib: it means “Lazy Quote Diary”.

The quote from Warren Mosler:

Credit ratings are based on ability to pay and willingness to pay.

David Beers of S&P knows this and has discussed this in the past.

So why then did David T. Beers decide to downgrade the US on ability to pay, and not explicitly on willingness to pay?

Sure looks like a case of intellectual dishonesty.

And I have no idea why.

So much for his legacy.

Well, its a very short post, so fair use restricts it to an even shorter quote.

But this is the gist of it: no issuer of its own currency is ever forced to default on debt issued in its own currency.

Think about it: if your family’s IOU’s were accepted by the bank to repay debts … could you ever run short of the means to pay your debts?

What would an honest downgrade have said? Below the fold.

The argument for a downgrade is this:

The only credit risk is that the sovereign issuer of currency is unwilling to pay its debts, as Mosler says. An honest downgrade would be, “in voting down a clean extension of the credit ceiling, the majority in the House of Representatives of the United States demonstrated a willingness to consider defaulting on its debts as a bargaining ploy to get what it wants. This implies a risk of default greater than 0, and so US debt doesn’t deserve the “absolutely no risk of default” rating of AAA.

The argument against a downgrade is this:

Even in the manufactured debt ceiling crisis, there was never any reason to believe that interest would not be paid on Treasury Debt nor that Treasury Debt that matured would be redeemed at its face value. What the Government would have done ~ for no good reason, since it has the legal authority to mint coinage with face values in the billions, which on deposit in the Fed would have allowed payment to have been cleared without requiring the issue of debt ~ would have been to miss appropriated payments which it was not legally bound to pay.

So as far as what S&P are rating, the actual payments on the actual Treasury bonds, bills and notes that Congress permitted the Treasury to issue … there was no risk.

However, 10 years is a long time in politics, and 10 years of this bullshit, who can tell. So while its hard to make a case that bills and notes should be rated below AAA, AA+ for 10 year bonds may be a bit more plausible.


Bottom line, though, S&P is still lying to people when it pretends that the rating is about “ability to pay”. Its only ever about willingness to pay for a government issuing debt in the currency it issues.

Midnight Oil ~ Read About It


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  1. BruceMcF
  2. TMC

    at the bias of Standard & Poors. Their reputation is not exactly stellar and there are those who think this downgrade from them will not hurt the US.

    Dean Baker: How to Think About Standard and Poor’s Downgrade

    Standard and Poor’s downgrade of U.S. government debt captured headlines across the country and around the world. It is a newsworthy event, but primarily as another colossal failure by a major credit rating agency.

    First, it is worth mentioning the important background here. S&P, along with the other credit rating agencies, rated hundreds of billions of dollars of subprime mortgage backed securities as investment grade. They were paid tens of millions of dollar by the investment banks for these ratings. We know that concerns were raised by their own people about the quality of many of these issues. This was at the least astoundingly incompetent. It was quite possibly criminal.

    This raises the question of whether S&P fears an investigation and possible prosecution. In such circumstances the desire to curry favor with powerful politicians could certainly influence their credit rating decisions. There are also rules affecting the credit rating agencies in the Dodd-Frank financial reform bill. The desire to have these rules written in a favorable way could affect the credit rating agencies’ decisions. It would be nice if we could just assume that the credit rating agencies make their rulings on an objective assessment of the evidence, but we can’t.

    (emphasis mine)

    I’ve been watching Al Jazeera this morning and most of the big European investment firms fell that S&P is not a credible ratings agency anymore and that their “opinion” of the US credit is just that an “opinion” and not necessarily a valid one considering their history

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