Blog on the Run: Reloaded

Friday, August 12, 2011 8:37 pm

If we HAD high inflation and U.S. debt wasn’t downgraded THEN, why is it being downgraded NOW?

Filed under: Evil,I want my money back. — Lex @ 8:37 pm
Tags: , , ,

In the late 1970s, the U.S. had a big problem with inflation — not as big as, say, Argentina, or post-World War I Germany, but by U.S. standards, huge. Inflation topped 11% in 1979.

Did Standard & Poor’s and the other ratings agencies downgrade the federal government’s debt back then? Why, no, they did not. That debt remained AAA grade, just as it did up until the other day.

But … but … but … the reason Standard & Poor’s downgraded U.S. debt the other day was because they were afraid the national debt was getting out of control and would lead to inflation, right?

Well, that’s what S&P implied, and it’s certainly what the national media and economically illiterate right-wing nutjobs wanted us to think. However, the fact of the matter is that 5-year Treasury notes are currently paying negative real interest rates. It is literally cheaper right now, taking (lack of) inflation into account, for the government to borrow money for five years to do stuff than to pay cash for that same stuff. And that’s the markets’ doing, not the government’s. So, clearly, bond markets do not perceive inflation to be a near-term or medium-term threat.

So why did S&P downgrade U.S. debt? Yves Smith offers a plausible explanation: payback:

The S&P downgrade looks to be politically motivated. The President had several routes by which he could have circumvented the debt ceiling restriction and almost certainly would have used one of them if the debt ceiling talks had dragged on so long that it became difficult to make interest payments out of tax receipts. McGraw Hill, which owns S&P, is headed by Terry McGraw, a prominent figure in the Business Roundtable, which has stated that it wants Social Security privatized. S&P has used its muscle to its advantage in the past, such as a state effort in Georgia in the early 2000s which would have reined in predatory lending and in turn reduced the issuance of private label mortgage backed securities. Rating them was a very profitable business for all the rating agencies. S&P torpedoed that initiative by refusing to rate bonds with Georgia loans in them. That forced Georgia to back down and killed other state efforts underway. Had these laws been in place, it is almost certain the subprime crisis would not have risen to a global-economy-wrecking event.

We now live in an era in which some of our most powerful institutions are perfectly willing to blow up the economy for short-term gain and the opportunity to place bets on the ensuing disaster. The rule of law, if you are big enough and rich enough, has gone by the boards; the umpires, to use Chief Justice John Roberts’s metaphor from his perjured confirmation testimony, have gone beyond calling balls and strikes to taking a side.

That side is not the president’s. The greater problem is that unless you are fabulously wealthy, it is not yours, either.

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