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.