FacebookTwitterGoogle+RedditEmail

The Mystery of S&P Debt Ratings

by DEAN BAKER

S&P announced last week that it was upgrading its assessment of U.S. debt, shifting its outlook to neutral from negative, suggesting that it may restore its highest Aaa rating in the not-too-distant future. While we may all want to celebrate S&P’s vote of confidence in the financial health of the U.S. government, this might be a good time to again ask what S&P was thinking when it downgraded U.S. debt.

That is not a sarcastic question. When S&P downgrades a company’s debt or the debt of a government that does not issue debt in its own currency, the downgrade has a clear meaning. The downgrade means that in S&P’s assessment, it is now more likely that the downgraded company or government will not be able to pay off its debt. This means that holders of the bonds face an increased risk of bankruptcy or its equivalent, and may not get back the full value of the bonds.

However it is difficult to see what this means when applied to the United States, which does issue debt in a currency under its control. If the United States is borrowing $100 billion then it is promising to pay off its bonds with 100 billion dollars. Since the United States controls the printing of dollars, it is difficult to understand what S&P could mean when it downgraded the country’s debt. Did it mean that they thought it was possible that the United States government would forget how to print dollars?

There is a plausible, albeit remote, story of default. We did see a political impasse between President Obama and the Republicans in Congress two years ago that could have conceivably led to a situation where the government would be legally prohibited from paying off its bonds due to the debt ceiling.

It’s not clear that this was ever a real concern. After all, there are some legal issues surrounding the debt ceiling. (The constitution does state that the debt should be honored.) It is not clear what would happen if the president were to ignore the debt ceiling and continue to meet debt obligations and other expenditures mandated by Congress.

Also, it seems difficult to believe that even if we ever did reach the ceiling and a debt payment was missed that Congress would not respond quickly to the resulting financial turmoil. In that scenario we might see bond payments delayed by a few days, but it would be difficult to view this as a default.

More importantly from the perspective of the S&P downgrade, this would be entirely a political matter. The default or pseudo-default would not be the result of the government’s financial situation; it would be the result of political gridlock. If the increased possibility of this sort of political gridlock was the meaning of the S&P downgrade then it should have stated this fact explicitly. Instead it devoted most of the pages in its downgrade report to a discussion of the country’s financial situation.

Some analysts have claimed that the downgrade is based on S&Ps assessment that if the government were to continue to run large deficits then the Fed would eventually allow inflation to rise in order to reduce the real value of the debt. In this view S&P was not worried literally about default, but rather that the deficit situation would lead to higher inflation in future years.

There are two problems with this view. First, if the concern was an increased possibility of future inflation, then S&P should have downgraded every bond that was denominated in dollars. If the S&P sees an increased probability that inflation will erode the value of the dollar and that it is the basis for its downgrading of U.S. debt then it should similarly downgrade every other asset that will be paid back in deflated dollars. S&P did not opt to downgrade all other dollar-denominated assets, which would imply that the downgrade had little to do with inflation.

More importantly S&P has not been in the business of making inflation predictions. It did not downgrade government debt in the 1970s even as inflation rose into the double digits. Nor did it downgrade any of the bonds of private companies whose value was also being eroded by inflation at the time. In other words, if S&P’s concern was inflation and not default per se, this would be a major change in approach that it has never announced to the world.

In short, it is not easy to give meaning to S&P’s downgrade of U.S. debt. S&P could not really believe that the United States would ever be in a situation where it could not pay off dollar-denominated bonds and it doesn’t make inflation projections, so whether or not the debt burden might have led to inflation was beside the point.

The most remarkable part was that this downgrade figured so prominently in budget debates over the last two years. But of course we are talking about people who took the Reinhart-Rogoff 90 percent debt cliff seriously also. That is the sorry state of the budget debate in Washington.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on The Guardian.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
December 09, 2016
Friday - Sunday
Jeffrey St. Clair
Roaming Charges: Nasty As They Wanna Be
Henry Giroux
Trump’s Second Gilded Age: Overcoming the Rule of Billionaires and Militarists
Andrew Levine
Trump’s Chumps: Victims of the Old Bait and Switch
Chris Welzenbach
The Forgotten Sneak Attack
Lewis Lapham
Hostile Takeover
Joshua Frank
This Week at CounterPunch: More Hollow Smears and Baseless Accusations
Paul Street
The Democrats Do Their Job, Again
Vijay Prashad
The Cuban Revolution: Defying Imperialism From Its Backyard
Michael Hudson - Sharmini Peries
Orwellian Economics
Erin McCarley
American Nazis and the Fight for US History
Mark Ames
The Anonymous Blacklist Promoted by the Washington Post Has Apparent Ties to Ukrainian Fascism and CIA Spying
Yoav Litvin
Resist or Conform: Lessons in Fortitude and Weakness From the Israeli Left
Conn Hallinan
India & Pakistan: the Unthinkable
Andrew Smolski
Third Coast Pillory: Nativism on the Left – A Realer Smith
Joshua Sperber
Trump in the Age of Identity Politics
Brandy Baker
Jill Stein Sees Russia From Her House
Katheryne Schulz
Report from Santiago de Cuba: Celebrating Fidel’s Rebellious Life
Nelson Valdes
Fidel and the Good People
Norman Solomon
McCarthy’s Smiling Ghost: Democrats Point the Finger at Russia
Renee Parsons
The Snowflake Nation and Trump on Immigration
Margaret Kimberley
Black Fear of Trump
Michael J. Sainato
A Pruitt Running Through It: Trump Kills Nearly Useless EPA With Nomination of Oil Industry Hack
Ron Jacobs
Surviving Hate and Death—The AIDS Crisis in 1980s USA
David Swanson
Virginia’s Constitution Needs Improving
Louis Proyect
Narcos and the Story of Colombia’s Unhappiness
Paul Atwood
War Has Been, is, and Will be the American Way of Life…Unless?
John Wight
Syria and the Bodyguard of Lies
Richard Hardigan
Anti-Semitism Awareness Act: Senate Bill Criminalizes Criticism of Israel
Kathy Kelly
See How We Live
David Macaray
Trump Picks his Secretary of Labor. Ho-Hum.
Howard Lisnoff
Interview with a Political Organizer
Yves Engler
BDS and Anti-Semitism
Martha Durkee-Neuman
Millennial Organizers Want to See An Intersectional Understanding Of Gun Violence
Adam Parsons
Home Truths About the Climate Emergency
Brian Cloughley
The Decline and Fall of Britain
Eamonn Fingleton
U.S. China Policy: Is Obama Schizoid?
Graham Peebles
Worldwide Air Pollution is Making us Ill
Joseph Natoli
Fake News is Subjective?
Andre Vltchek
Tough-Talking Philippine President Duterte
Binoy Kampmark
Total Surveillance: Snooping in the United Kingdom
Guillermo R. Gil
Vivirse la película: Willful Opposition to the Fiscal Control Board in Puerto Rico
Patrick Bond
South Africa’s Junk Credit Rating was Avoided, But at the Cost of Junk Analysis
Clancy Sigal
Investigate the Protesters! A Trial Balloon Filled With Poison Gas
Pierre Labossiere – Margaret Prescod
Human Rights and Alternative Media Delegation Report on Haiti’s Elections
Charles R. Larson
Review:  Helon Habila’s The Chibok Girls: the Boko Haram Kidnappings and Islamist Militancy in Nigeria
FacebookTwitterGoogle+RedditEmail