Ignore the Raters
April 19, 2011
– Comments (24)
There are serious problems that America has to deal with (Massive unemployment, Reforming our healthcare system [either streamlining it from the top down, or breaking it apart], Determining the right size of government [will this crisis lead to a growth or shrinking of our government?]). And having a lively and sometimes heated debate about these issues is necessary and productive.
... However it is productive only insofar as the arguments remain factual.
And those that use fear mongering about a potential US Federal Government default are either a) Being highly disingenous and trying to stir up a lot of emotion and misconceptions in comparing the US to Greece, or b) show that they have no idea how our monetary system actually works.
The US Government, as sovereign issuer of its own currency, can never be financially constrained to default on its debt. Never. Neither can Japan, Australia, Great Britian, etc. This is completely different than the Eurozone countries, which are currency users of the Euro, not issuers. Which is why comparing the US, Japan, etc. to either Greece, Portugal, Spain, Germany, etc. displays a complete lack of understanding about the how our currency systems are fundamentally different.
What should the Credit Default Swap rates on US Government debt be? ..... 0.000%
So when we debate about the role of government and what monetary and fiscal stances should be taken, we must consider:
Is massive inflation a risk? Yes
Is hyperinflation a risk? Yes (although I would argue not likely based on current macro conditions).
Is US Federal Government default a risk? NO.
We have to move past these fictitious economic concerns so that we can debate the points that actually matter, disabused of the false notion that we are somehow Greece and that the bond vigilantes will no longer support the US Government. That is how it works for Greece and any other EU country. That is not how it works for the US and Japan.
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Ignore the Raters
By L. Randall Wray
http://www.nytimes.com/roomfordebate/2011/04/18/is-anyone-listening-to-the-standard-poors/ignore-the-raters
L. Randall Wray is a professor of economics at the University of Missouri-Kansas City and a senior scholar at the Levy Economics Institute of Bard College. He is the author of“Understanding Modern Money,” and blogs at New Economic Perspectives.
In what appears to be an attempt to influence the political debate in Washington over federal government deficits, Standards & Poor’s rating firm downgraded U.S. debt to negative from stable. Yes, the raters who blessed virtually every toxic waste subprime security they saw with AAA ratings now see problems with sovereign government debt.
The best thing to do is to ignore the raters — as markets usually do when sovereign debt gets downgraded — but this time stock indexes fell, probably because of the uncertain prospects concerning government budgeting. After all, we barely avoided a government shutdown earlier this month, and with S.&P. joining the fray who knows whether the government will continue to pay its bills?
Mind you, this has nothing to do with economics, government solvency or involuntary default. A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.
Similarly Chairman Alan Greenspan said that Social Security can never go broke because government can meet all its obligations by “creating money.”
Instead, sovereign government spending is constrained by budgeting procedure and by Congressionally imposed debt limits. In other words, by self-imposed constraints rather than by market constraints.
Government needs to be concerned about pressures on inflation and the exchange rate should its spending become excessive. And it should avoid “crowding out” private initiative by moving too many resources to our public sector. However, with high unemployment and idle plant and equipment, no one can reasonably argue that these dangers are imminent.
Strangely enough, the ratings agencies recognized long ago that sovereign currency-issuing governments do not really face solvency constraints. A decade ago Moody’s downgraded Japan to Aaa3, generating a sharp reaction from the government. The raters back-tracked and said they were not rating ability to pay, but rather the prospects for inflation and currency depreciation. After 10 more years of running deficits, Japan’s debt-to-gross-domestic-product ratio is 200 percent, it borrows at nearly zero interest rates, it makes every payment that comes due, its yen remains strong and deflation reigns.
While I certainly hope we do not repeat Japan’s economic experience of the past two decades, I think the impact of downgrades by raters of U.S. sovereign debt will have a similar impact here: zip.
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