On the S&P Downgrade

So S&P downgraded the US.  Big deal.  It should have happened long ago, and many other sovereigns deserve to be downgraded as well.  Now if you want my summary views, positive and negative one the rating agencies, they can be found here:

I have another set of writings as the financial guarantors were downgraded.  I was one of the early callers that the guarantors were nor AAA.  I made the same call on the GSEs.

My point is that the initial downgrades of a AAA entity come hard, but once they come, they come with vigor and speed.  S&P has cleared the way for Moody’s and Fitch to downgrade as well.  The cost for them to downgrade is a lot lower now, and they can go lower than Aa1/AA+ if they choose.  Without significant change, the ratings of the US go lower from here.

Now, some will say that there are no limits to what amount of debt a nation that controls its own currency could issue.  Typically, these are radical Keynesian economists, that like Keynes, have a simplistic model, but no sense of human nature or politics.  What could happen:

  • A blocking coalition against inflation elects a congress against additional borrowing, forcing a crisis versus demanded spending.
  • A constitutional convention removes the Fed, and/or repudiates external debts.
  • We could have another situation like the last one, and this time it doesn’t resolve, and we have a technical default.

The thing is, politics matters.  If we have a fiat currency, then it is politically driven.  If our politics with respect to debt repayment are unstable, then we don’t deserve a AAA.

But much as I don’t like the t-party, I do not blame them for this outcome.  I blame Obama, Bush, Clinton, Bush, Reagan, Carter, Nixon, Johnson, Kennedy, Eisenhower and CONGRESS.  They have overspent. They have created many useless programs.  They have created burdensome programs, they have turned medical care into a zoo of red tape. THEY HAVE NOT CARED FOR THE FUTURE OF THE NATION, BUT ONLY THE PRESENT!!

They have engaged us in wars that we have no business fighting.  I have not been in favor of any war we have fought since my birth in 1960.  Shrink the Defense department, please, and all the contractors that parasitically suck on it.  Shrink entitlements as well, we will not be able to afford Medicare.

It is amusing to see certain “wonks” who are not, trumpet Obama plundering Medicare to claim that he eliminated expenses there.  Do the liberals care that he is eliminating care to the elderly, because fewer doctors, and no quality doctors will serve them?

Most of the changes made in the recent agreement were an illusion. Few specific cuts were made, and a deficit commission would find changes, or else across-the-board cuts would happen.   But given the polarization in politics, who thinks that there will be easy compromise in the future?  I don’t.


Now as a bond manager, I tell you there should be little change from the change in ratings. Why?

  • The rating of the US is still AAA, which is the average of Aaa/AA+/AAA
  • Downgrades of bonds rarely result in price changes on average.
  • Whenever major sovereign downgrades occur, covenants, collateral haircuts, investment guidelines, risk-based capital charges, etc. all get changed to make sure that nothing happens as a result.  Why? Ratings are an opinion, nothing more.  No one wants actions to occur on a sovereign because of a downgrade.

There are a lot of naive people speaking and writing about the downgrade as if it means something big, and they have never managed bonds in their lives.  I am not the be-all or end-all on this topic, but I would encourage people to read the opinions of those active in the bond markets before making definitive statements that have no reality behind them.

Events like this have happened before, and the US is still AAA for now. Prudent fiduciaries will make adjustments to reflect that AAA is not the standard for making investments, capital charges, etc.  There is no crisis here.  Don’t act like there is one, because there is none.


US vs Moody’s, S&P and Fitch