Austerity now!

You may have heard yesterday about how Standard and Poor’s, the same rating agency that took copious amounts of cash to cover up Big Shitpile, is now playing Chicken Little over the U.S. debt. I hope you’ve been reading me long enough to know this is all part of the big Austerity! dance:

At least one economist burst out laughing on hearing about the S&P announcement. “They did what?” exclaimed James Galbraith, a professor of economics at the University of Texas in Austin, who formerly served as executive director of the Congressional Joint Economic Committee. “This is remarkable! It certainly will confirm the suspicions of those who have questioned S&P’s competence after its performance on the mortgage debacle.”

S&P, as well as the other two big ratings firms, all notoriously failed completely to spot the looming disaster of the banking collapse and financial crisis, and famously issued A ratings to mortgage-backed securities that later proved to be virtually worthless paper, as well as to the banks that had loaded up on the financial dreck.

As Galbraith explains it, “US debt consists of bonds issued in US dollars, which I assume the S&P analysts know. How can the US possibly default on its own currency? The obligation is in nominal dollars, which is to say when the bond retires, the US issues a check in dollars to cover it.”

Since the US prints its own currency (or actually just issues electronic payments to create new money) whenever it needs it, as Galbraith puts it, “As long as there is diesel fuel to power up the back-up generators that run the government’s computers, they will have the money to back their own bonds.”

Anticipating such a criticism, S&P issued a FAQ sheet about its decision, and in answer to the question of how a country could default on bonds issued in its own currency, writes, “We consider having the world’s reserve currency to be a strength to the U.S. government’s credit profile. However, there can be reserve asset demand for the currency of a sovereign that is experiencing a weakening of its credit profile, as in the case of Japan (AA-/Stable/A-1+), which Standard & Poor’s downgraded most recently in January 2011.”

This however, just dodges the question, because after all, the Japanese Yen is not a reserve currency. Oil, for example, is not priced in Yen, it is priced in dollars. Third world countries, when they issue debt not in their own local currency, generally use dollars, not Yen, except for instance when they are funding a project involving Japanese companies.

So what’s going on here?

There would seem to be only two possibilities:

Either S&P has been pressured by powerful Republicans and/or Wall Street Bankers to issue this warning, in order to add to national hysteria about the national debt and win more drastic cuts in social programs, or S&P is simply blowing it again.

“Political shenanigans cannot be ruled out,” says Galbraith. “That’s what lawyers would call the ‘rebuttable presumption.’ After all, who benefits? The Republicans and perhaps the banks. But of course the other possibility is that S&P doesn’t know what it’s talking about, and after their disastrous missing of the mortgage bubble, that’s quite possibly what it is.”

Galbraith is too kind when he refuses to point out the other possibility: that the White House wants protective cover for their newest incarnation of the Catfood Commission.

Wall Street wants austerity, damn it, and their political handmaidens will do whatever they have to do to help them get it. Remember what Digby said: Eric Cantor has already said the GOP freshmen will vote to do it, and Democrats know it. So anything the Democrats insist they have to compromise is nothing but a cover story for what they already want to do.

Hard to say what (or who) is behind this particular announcement, but I’m pretty comfortable telling you it’s just more political kabuki.

Let me remind you that bankers actually like the recession. They like the falling wages and the weak job market. The only thing that really worries them is inflation, and only because it raises wages and depresses the value of their holdings. Don’t trust anything that comes out of their mouths, or the feckless minions who sell their souls to them.

5 thoughts on “Austerity now!

  1. Yeah, isn’t it ironic – the whole system will probably collapse this summer sometime as the financial sector loses control (or what they thought was control) of everything. Expect inflation, chaos, rioting in the streets and (i hope) the hanging or beheading of the clowns that caused this whole mess – rating agencies, wall street hedge fund scam artists, all the way to Washington and our complicit Congress, President and Supreme (kangaroo) Court. Let’ eat the rich!

  2. Unfortunately Galbraith, for all his laughing, gets it wrong. The fact that the US issues debt in its own currency does not mean it can’t default. There are a great many examples of countries that have defaulted on local currency debt. Jamaica in 2010 is the most recent example.

  3. Gabriel, what is there about Jamaica which is comparable to the US? Seriously?

    They both have English as their dominant language?

    One is a very small island and one is a continent spanning large nation?

  4. I can see banksters/Wall Street telling S&P they better do X or Y if they want to continue getting business from them, and that could affect S&P’s behavior.

    I can see a portion of Wall Street/banksters/uberwealthy corporatists playing the same game with them.

    I can see Obama going along with this.

    I don’t see Obama alone being powerful enough to get them to do this.

    So, who knows what the reasons are? The effect is something the Koch Bros, Pete Peterson, and their ilk like, want. We know that Obama is pretty tight with Pete Peterson; who knows about the Koch Bros? Given the Obama set up the Obama/Peterson Cat Food Commission and it didn’t work out all that well, I can see him liking this do-over big time.

  5. Jawbone,

    What is comparable is that both have their own currency. Galbraith argues that the US can’t default because its debt is in its own currency. Jamaica proves that wrong. And it’s not just Jamaica. Russia, not a small island, also defaulted on its own currency. There are plenty of other examples.

    Unfortunately this is one meme, that countries can’t default on their own currency, that has spread across a lot of bloggers but they are all wrong.

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