S&P, I Don’t Get It

S&P, I Don’t Get It

Okay. I understand that our finances are a mess and our political system is broken. We just missed a good chance to improve things significantly, and we chose, instead, to improve things marginally. Several times, our leaders snatched defeat from victory. Neither side could say yes. Yet, they did the minimum and avoided default.

The United States of America pays its debts. It may not pursue sound fiscal policies. It may not be a paragon of fiscal virtue. But it will redeem its bonds. It’s finances may be in tatters, but its credit is not in doubt. It might be, theoretically, if it didn’t have its own currency and its own central bank. But it does have them, and we are the United States of America.

Isn’t a credit agency suppose to opine on the probability of a debtor paying its debts? What difference does it make that it looks silly getting in a position to do so? What difference does it make if the central bank is called upon, or if monetization of its debt leads to inflation? Not that it will. A credit agency doesn’t grade fiscal rectitude. It doesn’t grade inflation probabilities. It’s suppose to grade the probability of the repayment of its debts.

Downgrading the United States of America doesn’t make up for top ratings for mortgage backed securities filled with toxic subprime mortgages. Two wrongs don’t make a right. Enough damage has already been done. Looks to me like Standard and Poor’s is well named.

Comments (18)

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  1. Stephan says:

    Cool down. The only mistake was the US Treasury wasn’t playing by the rules. The US Treasury must stop free-riding on its credit ratings. If it pays S&P for being rated like everyone else does a S&P AAA rating would be no problem whatsoever.

  2. David Chester says:

    A country whose total debts are growing may well use its more recent loans to return is past debts. But you can hardly say with justification that because some of the debt is being paid back its OK. This is because the total debt is continuously increasing. A point will be reached when the amount of interest being used to cover the debt will exceed the national income coming from from tax payers etc.

    Today the American government is incapable of recognizing the need to do something serious to change this situation. Unless a major policy change is agreed and implemented, the social standing of the US will continue to plunge down until it is a zero-rate power with debts nobody want to accept.

  3. Mr. McTeer,

    Many economists argue that Fed purchases of Treasury securities can overcome the depressive, ‘crowding out effect’ of excessive US Treasury debt.

    Fed purchases of Treasuries, however, are not the same as permanent retirements and/or cancellations of Treasury debt. For starters, Treasury must still pay interest on the debt, even when it is held on the Federal Reserve’s Balance Sheet.

    Furthermore, it seems to me, a large inventory of bonds on the Fed Balance Sheet represents an overhanging threat of future bond sales from the Fed. That threat of massive sales of Treasuries from the Federal Reserve Bank could exacerbate the risk averse physchology of the markets, rather than having the stimulative effect that is intended by the Fed purchases.

    The only way for the Fed to supply permanent stimulus, through open market operations, would be for its purchases to be treated as permanent retirement of US Treasury debt, rather than temporary holdings that can and will be sold in the future.

    Do you agree with this assessment? Is it possible for the Fed to effect ‘permanent retirements’ of US Treasury debt and thereby reduce such fears of future sales, and the interest payment obligations of the US Treasury? Have such measures ever been contemplated, or used before, in US history?

    Jonathan L. Gal
    Algae Fuels Entrepreneur
    Rockwall, TX

  4. David Chester says:

    In reply to Johanathan I don’t agree that this way of postponement is good and I reckon that it will inflate the currency. Whilst this is inevitable it is very far from what is desirable and like other debter nations the US must reduce its expenditure and increase its taxes until its national budget is not only balanced but in the Red, so as to pay back what it owes.

    A good way of taxation is to follow Henrey George’s 1879 proposal in “Progress and Poverty” and tax land values. There are several aspects about this summarized below:

    14 ASPECTS of LAND-VALUE TAXATION affecting Government, Land Owners, Community and Ethics

    3 aspects for GOVERNMENT

    1. LVT, adds to the national income. .
    2. The cost of collecting the LVT is much smaller than for income tax and other production-related taxes.
    3. With LVT, the national economy stabilizes and no longer experiences the 18 year housing boom and bust cycle.

    6 aspects affecting LAND OWNERS

    4. LVT is progressive, the owners of the most potentially productive sites pay the most tax.
    5. The land owner pays his LVT regardless of how the land is used. When the land is leased to tenants most or all of the resulting ground-rent is the tax.
    6. LVT stops the speculation in land prices because any withholding of land from proper use is too costly.
    7. The introduction of LVT reduces the sales price of sites even though their value (or potential usefullness) may continue to grow.
    8. With LVT, land owners are unable to pass the tax on to their tenant renters, due to the competition for land use.
    9. With the introduction of LVT, land prices will drop. Speculators in land values will tend to foreclose on their mortgages and to withdraw their money for reinvestment. LVT should be introduced gradually. It allows investors sufficient time to transfer money to company-shares where their greater use will meet the increased demand for produce (see below).

    3 aspects regarding our COMMUNITY

    10. With LVT, there is an incentive to use land for production, rather than it laying idle or being partly used.
    11. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper because entrepreneurs have less difficulty in starting-up and running their businesses. Demand grows, unemployment decreases
    12. As LVT is introduced, investment money is withdrawn from land and placed in durable capital goods.

    2 aspects about ETHICS

    13. The collection of taxes directly from productive effort and commerce is socially unjust. LVT replaces this form of extortion by gathering the surplus rental income which comes without exertion. Consequently LVT is a natural system of money-gathering.
    14. Bribery and corruption cease with LVT. Before, this was due to the leaking of news of municipal plans for housing development.


  5. Jonathan L. Gal says:

    I am not suggesting “postponement”. That is what the current system does. When the Fed buys Treasuries in the open market, it is effectively ‘postponing’ the inevitable re-sale of the same securities back into the market.

    What I am suggesting is different. Better termed as “debt retirement” than “debt postponement”.

  6. I am opposed to the taxation of land, just as I am imposed to the taxation of other kinds of investment assets.

    I prefer the pure consumption tax (aka The Fair Tax), as we have here in Texas. It encourages savings and investment, helps people get ahead faster through working & saving/investing, and is much more efficient & non-invasive to collect (no individual tax forms and/or invasive IRS investigations into families & individuals).

  7. This quote from today’s Fed Statement illustrates my point perfectly …

    “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.”

    This is a stark reminder that the Fed could, at any time, turn from a net buyer of Treasuries into a massive, net seller.

    If I were a manager of US Treasuries, I’d be very concerned about this looming and growing threat of MASSIVE sales of US Treasuries from the Federal Reserve Bank.

    On the other hand, if the Fed had the power to buy and retire US Treasury Bonds, once and for all, then the threat of future sales of those bonds would not exist.

  8. Another approach might be for the Fed to segregate its open market purchases by “expected holding period”, which might help alleviate the fear of Fed selling in the bond market.

    For example, the Fed Balance Sheet might look something like this:

    Current Treasury Holdings (expected to be sold in one year or less)
    Medium Treasury Holdings (expected to be sold in 1-5 years)
    Long Treasury Holdings (expected to be sold in 5 or more years).

  9. Regarding taxation ….

    One of the biggest reasons that the economy is so soft right now is that Americans don’t save and invest as much as they should.

    If Americans saved and invested more, instead of borrowing & spending, then the capital markets would be much stronger and the economy would follow suit.

    As Richard Cheney used to say, “If You Tax It, You Get Less of It”.

    So, let’s stop taxing savings and investments altogether, in order to encourage more saving and investing by Americans.

    This has social benefits, as well, because those who save and invest will experience faster growth in living standards, because their savings will grow faster.

    One form of savings & investment is LAND. So, let’s not tax that any more than it already is.

  10. Stephan says:

    @Jonathan L. Gal
    Nice. Is this your Rentier Tax Manifesto with only # comments? What about the estate tax? Surely totally unproductive?

  11. David Chester says:

    Land is not intended for investment but is a gift of nature for use. If you would kindly read through the 14 points about land listed above, you may appreciate that the holding of land for speculation in its value or even as savings have negative effects on the whole macroeconomics system.

    Holding land out of use is unethical. This is because the land provides an opportunity for work to be performed or for people to reside, which the land-holder is stopping. Land speculation makes the competition for available land more fierce, raising the amout of rent that can be called for and raising the production cost of goods that are made on the land. This applies both for urban and rural holdings, the former being the most significant due to high land utilities and values in towns.

    High costs mean high prices, less demand and more unemployment. So there is an economic chain between the land speculator and the current economic crisis particularly with relation to poverty and homelessness.

    By taxing land values instead of earnings, purchases and capital gains, the tremendous drag on progress that land speculation causes will be eliminated. The only people to be adversly affected are the land owners whose lack of useful business activity and immoral gains from the public investment of tax-payers money in the surroundings are the reason for the present economic situation. Money is not the basic problem, land speculation is.

  12. I am not convinced by your arguments on the land tax. I am still firmly opposed to such a tax. The focus of taxation should be on consumption. FULL STOP.

  13. Benjamin Cole says:

    Good commentary.

    Yes, absolutely the United States can inflate. Sheesh, if we ran five percent inflation for five years, the value of the debt outstanding would be reduced in value by a little more than 25 percent.

    Oh shocking, you mean the rates of inflation we had when Reagan was president? Oh, horrors!

    BTW, check out the CPI. From July of 2008 to June of 2011, the CPI-U rose from 219.964 to 225.722, or a 2.62 percent increases in three years.

    And this July is likely deflation, due to oil prices.

    Why all the hysteria about minute rates of inflation in the right-wing? It speaks to a type of dementia.

    Ironically (and sadly) it was Milton Friedman who advocated aggressive and sustained use of QE in situations like we face today. He flat out told Japan to inflate.

    There are times when inflation is good, and now is one of those times.

    All the whimpering and pettifogging about debasing the currency comes from people with an unhealthy attachment to the symbols of money (gold or cash), as opposed to true wealth-building.

  14. David Chester says:

    Inflation is a dishonest way for the government to tax savers and to reduce the value of their invested sums. At the same time it reduces the effective magnitude of the sums that debtors owe. This form of policy is immoral and at no time can a policy of inflation be good for the country. All it can do is to postpone an existing crisis and make it worse later. It is no use, the money which is owed must eventually be paid back, even if the tax payer is the one to suffer for the government’s mistakes.

  15. Toby W says:

    To Determine the Budget and Taxes We Need, Study the 20 years of the Twenties and the Depression
    GOP had a surplus over the 1920s with a top tax of 25%, Hoover and FDR had high Depression tax rates and 3-5% GDP deficit spending for 10 years and unemployment was in the mid to high teens.

    The Keynesian stuff doesn’t work!



  16. @ Benjamin> To a working family who makes, say, $40,000 per year total, the increases in food and energy pricing, which you describe as “minutia” are much more noticeable and impactful. This is particularly true in Texas, and other large agricultural States, where commuting distances tend to be larger.

    If a couple makes $40,000 per year, their discretionary income after paying for “basics” for themselves and their children might only be $1,000.

    Let’s say they spend $800 per month on food for their family. That’s $9,600 per year. If that rises by 20% inflation, then their total food cost grows by $1,920 per year.

    That is actually 192% of their discretionary income. it wipes out the discretionary income and puts them in debt for the year.

    Hardly a “minutia”.

  17. David Chester says:


    For my part I am opposed to the so called “fair tax” because it is not fair or just at all. No actual tax is because it slows down the economy by stopping people from using their money in the way that they want. I promote Land Value Taxation because actually it is not a tax at all but a revenue, a charge for something owed to society. What it does is to make the land more freely available for common use or benefit. It collects the rent which a land owner badly obtains for not doing any work and the revenue collection allows this money to be better spent on the country at large.

    The Fair Tax hits the poor harder than the rich because the proportion their income that poor spend (rather than saved and invested) is greater. The Fair Tax is a Robin Hood tax philosophy which actually steals and is morally unjust too! The idea of some people needing to pay more than others for what they get is unjust. They presumably feel that they earned what they spend (even if this is not actually true). But a person whose speculation in land values is in fact working AGAINST the greater community, should rightly be “encouraged” by taxation to cease his immoral behavour.


  18. David Chester says:

    I imagine this is the final comment. Who can deny that the amount we are perspiring carries far more significance that what the speculators in land values are doing to our beloved country and its concerned citizens.