In case you missed the news from Friday night, S&P: downgraded the USA’s credit rating. And further undermining their credibility they apparently made a substantial math error in their calculations (via Reuters):

“The Obama administration attacked the credibility of the analysis underlying Standard & Poor’s decision to downgrade the United States’ top credit rating on Friday, saying it had found a $2 trillion error.

S&P was forced to remove the number from its analysis after Treasury officials discovered that the rating agency’s estimates of the government’s discretionary spending was $2 trillion too high, sources familiar with the discussions said.

There was evident dismay, and some anger, within the Obama administration at S&P’s decision to downgrade U.S. debt despite the errors officials said they had found in the calculations.

“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesman said after S&P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about growing budget deficits. For more on S&P decision.”

This has reached the point where the ratings agencies are essentially meaningless.  Not only is it ridiculous that we are rating the ability of the USA to pay liabilities denominated entirely in a currency they can print, but between the credit crisis and this latest folly it’s hard to make an argument that these companies matter.

And it’s no longer just MMTers who are making this argument about currency denominated in USD’s which renders the solvency discussion a moot point and makes inflation the true focus.  Warren Buffett was interviewed on Fox Business after the ratings downgrade and sounded as though he’s been reading some of the MMT content (via Fox Business):

“I don’t get it,” Buffett told FBN late Friday night. In fact, Buffett reaffirmed his belief in the quality of the United States’ credit telling FBN, “In Omaha, the U.S. is still triple A. In fact, if there were a quadruple-A rating, I’d give the U.S. that.”

…”We just filed our 10Q and we have $47 billion in cash and cash equivalents. Well over $40 billion of it is in short end T-bills. (Tonight’s S&P downgrade) doesn’t tempt me to sell. We’ll stay right there.”

…”Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will. Now if you’re talking about inflation, that’s a different question.”
Buffett…pragmatic as always.  Unfortunately, these ratings agencies wield a big stick.  While downgrades could lead to forced selling and a potential short-term overreaction, I think Buffett has the exact right perspective.  This downgrade is 100% meaningless and any panic that could ensue would be a buying opportunity….

You can see more from Fox Business here:

Source: Fox Business

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. I assume everyone who thinks the US cannot default is selling US credit default swaps? Free money.

  2. So the Ratings agencies are now on top of it. Ha!
    If you ride a motorcycle you know what ‘high siding’ is. You make a mistake one direction, panic and over correct to the other direction and come off the bike on the high side. Believe me it hurts.
    Many years ago at the Summer Olympic Games a judge made an obvious bad call. The news commentator suggested that the Olympic committee needed to hire judges of equal quality or better than the atheletes.

  3. I have a question here…how is this not one of the most important decisions ever in the history of Finance and markets??

    Has not S&P basically just challenged and uprooted the most fundamental underpinning and theory in all of Finance – that being the idea that any and every “risky” financial security can be priced off of the 10 Yr treasury rate, which, it was assumed, could always be considered a “risk-free” benchmark for pricing given the most holy of holy assumptions that the US would never NOT have a AAA credit rating?

    Does this not mean that every college text book on finance I ever had to study needs to be rewritten? Does this not blow up the CAPM model? Does it not also blow up every global financial institution’s computer, risk and pricing models on Monday?

    Seriously, can we use the word “unprecedented” and the phrase “this time is different”, for the first time ever in the context of financial markets?

  4. Doesn’t the S&P rating violate the 14th amendment?
    The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned

    • Yes, this novatownhall post explains it quite well.

      Rep. Paul Ryan (R-WI) said that, if we do not bring down the public debt,  “We will have the riots in the streets, we will have the defaults, we will have all of those ugliness problems.”
      It is that “we will have defaults” phrase that raises red flags. This could very will be a statement that violates the Constitution. Unbeknown to most people, our right to free speech, secured by the First Amendment, is not absolute. We all know that slander, libel, and shouting “fire” in a theater are not protected speech (unless there really is a fire). But the truth is not an absolute defense. This is the exception. [the writer is assuming there WILL be defaults. His point is even when saying that is true, it still violates the constitution].

      When constitutional amendments are passed, they supersede whatever the constitution said before that amendment. The First Amendment says, “Congress shall make no law… abridging the freedom of speech.”
      However, the 14th Amendment overrides the First: “The validity of the public debt of the United States, authorized by law… shall not be questioned.”


      • That’s a mighty suspicious clause of the 14th Amendment; something a banker would sneak through.

        But why do MMT folks defend the National Debt since US Government borrowing is not even necessary?

        • I was actually wondering why the gong ho tea partiers are not commenting on why the S&P rating is unconstitutional. Where is the zeal – imagine if this was a challenge to right to bare arms.

      • The First Amendment is first for a reason; it is the bedrock constraint on federal power. “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

        Do you really think the Fourteenth Amendment section dealing with federal debt not being questioned is more than a remnant of Civil War finance and the Emancipation Proclamation? “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. But neither the United States nor any State shall assume or pay any debt or obligation incurred in aid of insurrection or rebellion against the United States, or any claim for the loss or emancipation of any slave; but all such debts, obligations and claims shall be held illegal and void.”

        MMTers, please be careful with the Constitution and the right of free speech; even “commercial speech” is protected. Do not associate yourselves with silly ideas that will impair the credibility of your core insights into monetary and banking operations, which are valid and need to be heard.

  5. Does anyone know if sovereign issuing its own fiat currency ever had a bond debt default?

  6. I’m slightly disappointed that only S&P downgraded and not all three.
    If it had been all three, then after no discernible reaction in the bond market
    the agencies would have been stripped of their last shreds of credibility.

    Now, people will say ‘well its because other two still have a AAA rating.’

    In any case, I dont know why MMT types would be upset about this; when nothing happens it will be another nudge away from the idea that the US can be insolvent.

  7. “This downgrade is 100% meaningless and any panic that could ensue would be a buying opportunity….”

    Cullen, does this “buying on panic” logic apply only to treasuries or it applies to equities as well? Thanks.

    • This is a Tsy specific comment. I should have been much more clear about this. As Niels mentioned above, this does have the potential to cause some other problems. But I don’t see any reason why this should effect US bonds.

      I should have said:

      “This downgrade is 100% meaningless TO US BONDS and any panic that could ensue would be a buying opportunity IN TREASURIES….”

  8. I can not help to write this

    Quote Cullen Roche

    “You’ve spent over a year here trying to push your agenda of fear based on outright wrong economics. If you want to live in a world of delusion and flat out lies then be my guest. But don’t try to scare other readers into believing your BS just so you can try to spread your ideologies. Not here.”

    Wrong economics, hmmmm.

    I assume Cullen Roche and mmters believe mmt is only “right economics.”

    First of all, i don’t mind people call me fool but I would be mad if people call me economist.

    I only know commonsense such as there is no perpetual motion machine.

    And there is no free lunch.

    As matter of fact, there is no science like economics, making endless mistakes still be considered science.

    There is no economics, like mmt which left so many holes to be filled yet challenged.

    Consider this, to make you believe that US will never go bankrupt Cullen Roche used to say “Government’s money is like alchemist’ gold. Can alchemist run out of gold? ”

    Are you serious? You can’t make this thing up. As their “right economics” is so right, it has to throw alchemy in to bridge their fantasy and reality.

    As the other day someone want Warren Mosler to be candidate of Noble Prize it just make me rolling on ground. Is this 21st century and what planet do we live at?

    Yeah, tomorrow I will declare that I found a “Modern Physics Theory” and I made a
    perpetual motion machine. Hey all haters, you don’t understand physics and your argument is straw men.

    • MMT is a strange, cultish belief system with totalitarian implications. The alchemist analogy is a good example of the MMT thought process. I’ve seen others like the one comparing the score of an ongoing sporting match reported on a stadium scoreboard with the creation of monetary units by government.(The contest is meaningless aside from the scores reported!) What the MMT folks are describing may be an accurate portrait of a fiat ‘system’ but more importantly, they unknowingly make the case for why it is wrong, harmful and must be changed.

      • totalitarian implications?

        If you live in USA, you live in a country that think to be the bully of the world. It’s like an empire, full of propaganda
        and bullshit everywhere, deception, fiction and others ways to impose your thought, like “export democracy” or “land of freedom”, and you talk about MMT like a totalitarian thought?

        really? I mean, to say that a government can guarantees a job, healthcare, education and other services, is totalitarian?

      • What the MMT folks are describing may be an accurate portrait of a fiat ‘system’ … Bastiat

        If you would think about it, fiat is the ONLY ethical government money form. Should it be legal tender, one way or another, for private debts? Certainly not but that’s another issue.

  9. Here’s something I think is sort of funny. S&P’s release expresses concern about the U.S.’s projected rise in debt-to-GDP from 74% now to 85% in 2021. The average ratio of liabilities to income for the remaining AAA American firms is 392%. When we take out the outlier, it’s 146.6%.

  10. Dear Cullen,
    Do you think the yield of 10/30 UST will be up or down in 3/6/12 month time frame?

  11. If the US continues as it has, as some point, other countries will denominate trade in something other than USD. Mr Buffett said “Think about it. The U.S., to my knowledge owes no money in currency other than the U.S. dollar, which it can print at will.”

    Considering the central status of the USD in world trade, the S&P downgrade is appropriate.

    As an aside, George Sorros is considered a brilliant investor as well.

  12. Is there really any doubt? The Oracle of Omaha understands the realities of MMT.

    7/8/11: http://www.bloomberg.com/video/72153912/

    8:20 “The United States is, we’re a very special place, there’s no question about it, and we will pay our debts in the end, so it is not like if we don’t pay, we can’t pay. We’ve got the right to print our own money, that’s the key. Greece lost the power to print their money. If they could print drachmas they’d have other problems, but they would not have a debt problem. And seventeen countries in Europe gave up the right to print their own money. That’s enormously important. And we’ve got the right to print our own money, so our credit’s good.”