US credit rating: Wouldn't S&P, Moody's, etc LOVE an Executive Order invoking the 14th

[ProgressiveEconomist]

Amendment's Section 4 (See the LINK below for a primer)? Wouldn't the prospect that Republican debt ceiling shenanigans this year never could be repeated be seen as a guarantee of future payment of US debts with much more certainty?

IMO, if, as a spokesman for S&P reported on Kudlow this week, ratings agencies prefer the Reid plan to the Boehner plan because it prevents a replay of the debt ceiling drama before 2013, wouldn't they prefer a solution which likely prevents ANY future debt ceiling drama even more?

Has anyone seen or heard anything in the media about this point?

All I've seen are MSNBC snippets of the Kudlow S&P interview and an excellent NY Times column on current legal opinion about Section 4 (at http://www.nytimes.com/2011/07/25/us/politics/25legal.html?pagewanted=print ).

For those of you who saw the entire Kudlow S&P interview, did the subject of the 14th Amendment come up? If so, what was said?

[Cirque du So-What]

1. I am not an economist

but is it possible that this could work against the US government credit rating just as readily? The credit agencies could interpret the willingness to invoke the 14th Amendment as a sign that the US government will continue to print money to avert default come hell or high water. I don't know - I'm just asking, and I'm certainly not going to advocate one way or the other, uninformed as I am. I took 200-level macro & microeconomics as an undergrad, and I considered them both to be the most boring, useless classes ever!

[ProgressiveEconomist]

2. Good point. But wouldn't an independent Federal Reserve continue to fight inflation at least

as hard as before any Executive Order on debt repudiation?

And wouldn't excessive accumulation of debt still have the same effects on driving up interest rates as it does now?

But you've made an exellent point about how disallowing repudiation of debt might interact with other aspects of our financial system.

Have I reassured you at all? Thanks for posting.

[Yo_Mama]

3. Absolutely NOT

Because the reason that we are going to be downgraded is not a failure to raise the debt ceiling, but because our debt/GDP ratio is way too high and our constant deficit just keeps getting bigger.

The whole reason we are having this battle about the debt limit this time when we didn't before is that before raising the debt limit without passing cuts wasn't going to get us downgraded, AND NOW IT IS.

If you want to believe that the issue is some silly law about the debt limit, fine. But only ignoramuses believe that. The issue is the total debt. And the total debt is too high for us to maintain a good credit rating.

June 1, 2006, total debt was 8.3 trillion, but Debt Held By The Public (total borrowing) was 4.9 trillion.

Right now total debt is 14.3 trillion, but Debt Held By The Public (total borrowing) is 9.7 trillion. And as soon as the debt limit is raised, it's going to be over 10 trillion.

And oh, yeah, each year we run deficits over one trillion. So nobody believes we won't default. The only issues are when and how.

If Congress does what DU wants and the president has proposed, and if the president signs it, we are going to be downgraded.

Only massively cutting spending AND raising taxes will prevent a downgrade. But we're also in the early stages of a recession, so....

There are no good options left. We are a trillion dollars in deficit so far this fiscal year (runs through Sept 30th). The president's budget proposal was to keep borrowing a trillion dollars a year. Get a grip.

[ProgressiveEconomist]

4. "Only ignoramuses believe that" Nice manners, Yo_Mama!

You said one thing that's interesting:

"before raising the debt limit without passing cuts wasn't going to get us downgraded. And now it is".

Why do you think this sudden rater concern over debt has occurred at the bottom of the business cycle?

Are rating agencies ignoring the automitic deficit-expanding consequences of recession, and the automatic deficit-shrinking consequences of recovery? Are rating agencies now interfering with the stimulus policies that have gotten every recessionary economy back on track?

[Yo_Mama]

5. Truth is good

There is no sudden rater concern over the debt.
http://www.treasurydirect.gov/NP/BPDLogin?application=np

There is a lot of sudden debt. As of January 2nd, 2009, our total government debt was 10.7 trillion. Our total Debt Held by the Public was 6.3 trillion.

Currently our total official government debt, which includes the various funds for highway, SS, Medicare, federal retirements, etc, is currently 14.3 trillion. Our Debt Held by the Public is 9.47 trillion, and it's going over 10 trillion as soon as they raise the debt limit. Our nominal GDP last quarter was 15.1 trillion. As soon as the debt limit is passed, total debt goes up to about 14.8 trillion. That takes us so close to 100% that it's not even funny, and oh, yeah, we keep borrowing a trillion dollars a year more.

Nor is this the bottom of the business cycle - we are more than two years out from the end of the recession, and no one has admitted the new one. And btw, that is one reason why we will be downgraded very soon - because the agencies won't want to wait until the recession is admitted.

So this isn't a "sudden" concern. It's a massive rise in debt.

You just can't expect these ratings firms to lie for you, and even if they wanted too, they wouldn't. Because right now they have to downgrade all these other countries, and it sure is going to look bad if they sit on their butts and wait until we get to 120% of GDP before moving, isn't it?

Anyone who's a real progressive cares very much about the facts. The facts tell us what we have to do to reach our goals. Allowing people to lie about those facts is agreeing to eventually screw the people who are terribly dependent on these government programs.

The ratings firms have been telling us these things for years. Why do you think we always hear this stuff about these programs not being sustainable? All the political rhetoric? Obama ran for office promising to raise taxes and deal with these problems. Each year that he doesn't, the problems get worse.

The ratings firms would be doing us no favor to lie about this any more. Our credit rating is a lie, and this latest refusal to deal with matters is just making it obvious. Right now we can act and preserve the programs for those who most need them. Oh, yeah, defense contractors are going to be hurting. Well guess what, they did under Reagan and the country survived. But some poor old retiree can't afford to take it, and if we let this slide much longer we are going to get to the point at which we cannot adjust.

Would you prefer that the ratings firms had downgraded us last year when the government was entirely Democratic?

I think ratings firms have done a terrible job, but that's no excuse for continuing to do a terrible job. It might have been cheaper for creditors if they had warned on Greece years ago. Certainly Greece would have a better economy now if it had been forced to cut back a lot earlier.

Italy's going to default. Spain may. Ireland will. Portugal will. In ten years, France may be where Italy is now. Greece has. Why do you think the credit ratings firms shouldn't tell the truth about the US?

[ProgressiveEconomist]

6. Ratings firms grade on DEFAULT RISK, not on debt per se. DEFAULT RISK

is much more sensitive to months of threats to not raise debt ceilings and actual pledges to vote agianst raising debt ceilings than to increases in debt in a time of 9.2 percent unemployment.

See the graph of year-over-year and month-over-month bets on country credit default at http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=439x1589014 .

Debt from Bush-authorized TARP expenditures and Obama tas cuts and stimulus spending rose most in FY 2009. But the market's tally of bets on default only spiked AFTER FY 2009.

What has changed more recently? IMO, it is unprecedented political abuse of debt-ceiling votes. And the end of such abuse IMO will end the kinds of politically-generated spikes in country default risk we've seen in recent months.

[ProgressiveEconomist]

7. Kick!

[Yo_Mama]

8. Yes, but total debt has everything to do with default risk

Mathematically, when a country is growing at 2-3% a year (most optimistic estimate), and Debt Held by the Public is 100% of GDP, it means that the country can't borrow any more, because sustaining their debt/GDP ratio is pretty much going to take all the growth each year to pay off the interest on the debt.

We are nearing a mathematical tipping point. It is true that right now Debt Held by the Public is still way below 100%, but that won't be true long, and indeed S&P's scenarios clustered at about 130% around 2020, aka Greek levels.

They can't wait until that happens to downgrade us. If politicians passed a plan to sharply curtail future deficits, they would act differently. But we have no such plan and they see the inability to put forward such plans (by any political party) as demonstration that we plan to be Greece, and indeed that's where we're headed.

They'd be fools not to downgrade us. We are no longer an AAA risk. We are planning to run up this debt and default on it.

[ProgressiveEconomist]

11. Good point about debt/GDP ratios. But DEFICIT/GDP ratios are countercyclical--

they rise automatically during business-cycle declines and fall automatically--and deficits often become surpluses--during business-cycle recoveries. Tax revenues climb automatically, even without changes in rates and loopholes, and recession expenses for food stamps etc automatically go down dramatically during recoveries

If in the future the economy runs the kind of surpluses we saw under Bill Clinton, debt/GDP ratios will decline dramatically and your scenario won't play out. Remember, Bill Clinton put us on track to wipe out the publicly-held debt ENTIRELY, and second-term Obama and future Democratic presidencies can get us back on that track.

You've got to consider future trends in the numerator as well as in the denominator of debt/GDP ratios. The bottom of the business cycle is exactly the WRONG time to attack long-term structural debt problems, Trying to do so starves the economy of needed stimulus, depressing economic growth needlessly.

[badtoworse]

9. The ratings agencies would most definitiely NOT like it

If Obama were to invoke the 14th Amendment and unilaterally authorize the issuance of debt, he would almost certainly be sued immediately (The filings have probably been drafted already). The suits would claim he lacked the constitutional authority to do that and would seek to enjoin him from proceeding. The issue would wind up in front of the SCOTUS and I would bet heavily that the SCOTUS rules against Obama. If Obama defied the courts, he would be impeached and most likely convicted.

Let's consider some practicalities: How would Moodys or S&P rate the debt? Unless and until the SCOTUS were to rule that the debt was authorized, the ratings agency would have to rate the issue as speculative (that is far below investment grade). Who would buy such debt? Would you buy a bond if you weren't sure the issuer had the legal authority to issue it? Well nobody else would either. Assuming there were buyers, how would it be priced? Let's be realistic, the 14th Amendment is not a solution.

BTW, I'm inclined to agree with Yo_Mama about the risk of a downgrade and ultimately a default. He failed to mentioned a more immediate threat that might be worse - the loss of reserve currency status for the dollar. If and when that happens, the value of the dollar against whatever vehicle takes its place will drop like a rock. The cost of imported goods (like oil) would rise very quickly and very sharply. We would be in essentially the same situation as the Greeks are in now and the cuts we would have to make then will make the stuff being discussed now seem meager. The party is over - we really do need to start living within our means.

[ProgressiveEconomist]

12. See reply #6 above. How do you think an EO invoking the 14th would affect QUANTITATIVE

measures of DEFAULT risk? Are you suggesting bets in favor of DEFAULT would rise rather than decline?

You're talking about second-order effects while completely ignoring the FIRST-order effect of preventing future repetition of the unprecedented debt-ceiling stunt Republicans have pulled this year.

And who would have standing to sue the President over a 14th Amendment Executive Order. The lower House alone, without the Senate? IMO, only a Joint Resolution of Congress would provide standing for Congress to sue, and Senate Democrats won't allow such a Joint Resolution.

More likely than a lawsuit IMO is impeachment proceedings doomed to a NO vote in the Senate. IMO, better an impeachment crisis than a global financial crisis, even though it would provide even more months of Republican posturing during an election season.

[badtoworse]

13. Since I believe no one would buy the debt, it would have the same effect as doing nothing

[ProgressiveEconomist]

14. "No one would buy the debt". Sure you want to stick with that?

[badtoworse]

15. What rating do you think the agencies would assign?

You might be right with your assessment of a lawsuit and you might be wrong. The agencies do not like uncertainty when rating an issue and I can't see the issue getting an investment grade rating, let alone a AAA rating.

[ProgressiveEconomist]

16. I don't think rating agencies would act immediately--they'd hang back and monitor

interest rates, "tails" of Treasury auctions, and credit default swap activity.

I expect these quantitative measures of Treasury bond quality to improve from their current levels, and therefore ratings agencies would find downgrades hard to defend.

[badtoworse]

20. I didn't say that all Treasury debt would be downgraded,...

just the unilaterally issued (by Obama) debt. Do you think the ratings agencies would put the new bonds (let's call them the the Obama bonds) in the same class as existing bonds? Your suggestion that they would take a wait and see attitude suggests that to me, but I don't believe that is a reasonable expectation. Up until now, treasuries have been backed by the "full faith and credit of the US Government". Since it's questionable whether Obama has the authority to so bind the government, it's likely that the Obama bonds would be rated substantially lower until the issue was finally decided. I don't see how it could be otherwise. Even if the ratings agencies failed to rate the Obama bonds, it's inconceivable to me that investors wouldn't view them as being significantly riskier. They would want a substantially higher interest rate, if they bought them at all.

Let's say the Obama bonds did sell, but were ultimately ruled to be unconstitutional by the SCOTUS. Would that throw us into immediate default? Would the government have to redeem them? When? Could Congress vote to authorize them retroactively? What would be the impact on the governments ability to service other debt? I don't know the answers to these questions and no one else does either. That's the point. The OP questioned whether the rating agencies would love Obama invoking the 14th Amendment. I'll stand by my "No" answer. You're trying to argue that the quantitative risk of default would be lowered. With so much uncertainty, how could anyone have any confidence that you are right? In any case, my gut tells me you are wrong.

[ProgressiveEconomist]

24. Country credit ratings generally ONLY are relevant for new and for rollover debt.

Investors can redeem bonds at maturity for a known asset value. But most choose to "roll over" debt into new issues. For example, $500 billion matures next month, and investors must choose whether to demand their principal or roll over.

For those who demand cash, the Treasury must issue new bonds to different investors, but the amount of "new" debt remains the same.

Given the term structure of US debt, with no thirty-year bonds having been issued for years until recently, a fairly high percentage of the debt rolls over each year.

So your distinction between "new" and existing debt therefore is much less relevant than you may think.

[badtoworse]

27. I'll accept that, but it really doesn't invalidate my point.

With their legal status questionable, I can't see them being rated investment grade and I believe investors would be reluctant to buy them.

I thought some more about your point that invoking the 14th amendment would quantitatively reduce the chance of a default and on the off chance that Obama would succeed, I suppose that's true, at least in the short term. In the longer term, if the plan were to fail, it would likely increase the chance of a default. In my opinion, the plan would not survive a legal challenge, so I think it would make default more likely, but I don't know how you would quantify that given the amount of uncertainty in how and when it would play out.

[ProgressiveEconomist]

26. Kick!

[TNLib]

17. Thanks for the info That's exactly what I wanted to know

:yourock:

[ProgressiveEconomist]

18. "Loss of reserve currency status"--Isn't that kind of a 4th-order influence on DEFAULT RISK--

the basis of country credit ratings?

[badtoworse]

21. Call it whatever you want. It would still be a catastrophe.

Editted to add: I'm hitting the sack. Nice discussing this with you.

[tritsofme]

10. Wouldn't there be incredible uncertainty surrouding the validity of the newly issued debt?

If the SCOTUS were to declare the new debt unlawful, would that have the same practical effect of a default?

I don't know enough about the issue to say for sure, but these have to be major concerns.

[ProgressiveEconomist]

19. The world is full of uncertainties. Those that affect country credit ratings have to do

with DEFAULT RISK.

How would market bets on US debt defaults respond to an order from the country's Chief Executive that repudiation of past debts would NEVER occur, compared to the surrent situation of dozens ofRepublicans pledging to vote against any debt celing increase?

Would uncertainty about the prospect of a US defualt INCREASE rather than decrease in response of an Executive Order from the President. That's what's relevant, and I think not.

[SnoopDog]

22. Moody's is part of the scam...

America in not in financial crisis. We are the richest country in the world.

Downgrading 'America' in nothing but a ploy to have Americans accept the cuts that they will do to the middle class.

[Rosco T.]

23. Harry Truman did it... so why can't Obama? n/m

[stklurker]

25. 2nd thread

This is the 2nd thread you have spun this garbage, Truman did NOT use the 14th to raise the debt ceiling.. Post something to back it up or stop posting this drivel