Saturday, August 6, 2011


Making good on their long-standing threat, S&P yesterday downgraded US debt, for the first time in history. Somehow they must have concluded from the Teacaner (Tea Party/Republican) strategy that extortion works.

More amazingly, they admitted to having made a 2 trillion dollar arithmetic mistake in their own calculations. And that, by far, is not the most farcical aspect of this attempted shake-down.

S&P and other grossly wrong prognosticators have been screaming for years that the Federal debt would make interest rates and inflation explode. No such thing has happened; the opposite has occurred. S&P, Moody's, and other credit ratings agencies' shortcomings, errors, and biases have been exposed by the facts.  Now, they are pulling out all the stops in a desperate maneuver to pull their pants back up, by making interest rates go up.

Anyone who can spell economics knows that the premium paid on debt is in direct relationship to risk. Banks primarily use credit scores to determine risk. That is why your credit score counts when you go to a bank to make a mortgage.  A score of 670 might fetch a loan at 6.5%, while a score of 790 gets money at 4.3%.

But when it comes to premium pricing of government debt, investors world-wide look at a world of  factors other than the dubious pronouncements of ratings agencies, and other scaremongers.  They know that S&P, Moody's, and others have a dismal track record in assessing the risk of public debt. They have a profound and demonstrable private vs public debt bias in favor of the private.

They never take into account the permanent nature of public entities, as contrasted to private companies.  Consequently, they routinely rate the likes of Enron,  Lehman, Borders Books, you name it - maybe even Studebaker, as solid and sound investment risks, while disdaining and downgrading  Michigan's state or Japan's national credit worthiness. 

Problem is that private companies have a way of going poof and disappearing, leaving creditors holding nothing but thin air and bad promises. Public entities tend to stick around in perpetuity and make good their debts, together with the promised rate of return. Last reports have it that Michigan is still with us, while Studebaker is nowhere to be found.

This dynamic explains why the interest on Japanese national debt fell, and has stayed down and low, following on a brief spike from the S&P and Moody's downgrade, more than a decade ago. So much for the credit we should grant advice from these Bozos. 

Likewise, the interest rate paid on US Treasury bonds has been low and dropping throughout this ginned-up "crisis" of debt driven catastrophe.

The current interest rate on 30 year Treasuries is 1.25%.  And the 10 year inflation protected Treasuries pay a scant .38%.  That's right, only about one-third of one percent for the entire 10 years, while  assessing negative interest (in other words, taking some of the principle of the investors money)  for the first 5 to 7 years. 

This is essentially free money. For the U.S. government not to take advantage of this "depression era" free money climate to stimulate the economy, rebuilding ancient, decrepit and failing infrastructure systems, or making progress on developing anti-climate change energy technologies, is simply immoral. 

What should we do, wait until some very distant future date, when interest rates really may go up to painful levels, before we borrow to fix all these systems and do all these things which will not fix or do themselves? How needlessly and mindlessly painful that would be.

But there are those who insist that in order to feel better, we first have to inflict more pain.

It reminds me of Mercurochrome.  Mom used to say that it hurt, and it really did, because it was killing off the bad germs. She said it would make the bo-bo heal and get better.  Turns out, the germ killing alcohol in it was really only there to carry the toxic mercury laden active ingredients in the solution.  It has since been banned in the United States. Sorry, Mom. I know you meant well, but your treatment was worse than the injury.

As for the pronouncements and prescriptions of S&P, Moody's, et al, I cannot give them such a pass.  They are consciously out to serve the interests of their plutocrat clients. They make the Mafia look like the Girl Scouts.  And they're not selling cookies, they're selling advice more toxic than mercury poisoning.

The corporate class is awash, nay, drowning in money. Hence, we see the truly perverse move by NY Mellon Bank to start charging fees to their largest depositors, just to take the cash off their hands, while keeping it safe and accounted for. They have no place to put this money to earn a return sufficient to offset the cost of simply baby sitting it.  They really, really want to see the interest rate on US debt spike, so that they can lay-off this burdensome money.

They need a place to put the money which will defray the handling costs. It's like the bookmakers of years gone by who would lay-off bad bets at the racetrack, so as not to risk losing money of their own.  The only private sector alternative would be to have businesses invest the money to create new value, hire people, and stimulate consumer confidence and demand.

That is what the economy desperately needs. But that absolutely will not happen because that  would be too much like real work, and involve some risk.  And that is why the government, and only the government, can step in now to get us on the road to recovery.  Anything else is mindless, counterproductive pain.

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