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I know that the credibility of these ratings agencies took a hit during the credit default swap era, and also more recently with Silicon Valley Bank, but Fitch makes some disturbing statements about the economic future of the US. We still are highly rated, AA+, but we have lost the coveted AAA rating.
I will link to Fitch, but for the tldr crowd, here’s some damning excerpts:
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”
And… “In Fitch's view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025. The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.”
I know that the credibility of these ratings agencies took a hit during the credit default swap era, and also more recently with Silicon Valley Bank, but Fitch makes some disturbing statements about the economic future of the US. We still are highly rated, AA+, but we have lost the coveted AAA rating.
Back in 2010, Claire Hill of the University of Minnesota Law School wrote an interesting analysis of why and how the rating agencies got the sub-prime pricing so wrong. It was published in the University of Pittsburgh Law Review and available from the link below.
Hill, C., 2010. Why Did Rating Agencies Do Such a Bad Job Rating Subprime Securities? Scholarship Repository, University of Minnesota Law School, accessed from: https://scholarship.law.umn.edu/cgi/...culty_articles
She rejected the conventional wisdom answer that it was solely because the rating agencies are being paid by the issuers. She also attributes partial cause to the jockeying for market share and the belief that "quants" or "rocket scientists" could develop new instruments that would offer reward far greater than the commensurate risk. She labelled this as drinking the Kool-Aid of the brave new world of managed risk.
Another interesting example involved Moody's computer programming that determined pricing for collateralized debt obligations [CDOs] in which a single error in the code threw the results way off, overrating the CDOs by up to 4 notches. A committee was convened to discuss and correct the error, but rather than accept the new and much lower ratings, they made other changes to the code to get the same high ratings as before. One suggested change was rejected because "it did not help the rating".
Interesting stuff. Fitch's ratings are likely more honest than those of Moody's.
I have mixed feelings about this. I don't think downgrading credit by one notch is going to mean a lot. On the other hand, this didn't need to happen. The continually jocking that goes on in Washington over raising the debt ceiling isn't helping anyone. If a political party wants to object to a budget, the time to do that is during the budgeting process not when it comes time to pay the nation's bills.
I know one factor the credit agencies take into account is not only the size of a budget, but the willingness (or lack of will) of a nation to tax its citizens to pay for those expenditures. Its a question of taxing as well as spending.
I know that the credibility of these ratings agencies took a hit during the credit default swap era, and also more recently with Silicon Valley Bank, but Fitch makes some disturbing statements about the economic future of the US. We still are highly rated, AA+, but we have lost the coveted AAA rating.
I will link to Fitch, but for the tldr crowd, here’s some damning excerpts:
“The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.”
Sorry, there's nothing in there that's damning.
The sheeple are overwhelmed by propaganda and disinformation by the Media and to get the desired knee-jerk reaction the Media just has to scream, "Debt default! Social Security!" and that induces the panic the Media wants.
Educated intelligent people know differently.
Spending comes in two flavors: Mandatory and Discretionary.
Foreign debt obligations fall under mandatory and more than that, federal statutes say foreign debt obligations are paid before all others.
There is zero likelihood the US would default on its debt obligations. That would require the government collect virtually no revenues at all during a given month. The stupid governors shut down their economies during STUPID-19 and the government still collected revenues each month so that should give you some idea what it would take for the government to collect virtually no revenues at all.
After foreign debt obligations comes mandatory domestic obligations like Social Security.
Social Security is self-funding from the FICA payroll tax. Benefits are paid from FICA revenues garnered in the previous month. In the event insufficient revenues are collected, which has been happening 9 months out of the year for the last 7-8 years, in theory, cash from the General Fund is used to buy back the non-marketable treasury securities but when there is no cash available, the non-marketable treasury securities are converted straight away to marketable treasury securities (and usually at a lower interest rate).
So, we can see the Media is crying, "Wolf!"
About $2 TRILLION of the federal budget is discretionary spending that doesn't have to be paid.
Discretionary spending includes foreign contracts which are not the same thing as foreign debt obligations, and like domestic contracts, the contract can be cancelled, or left unpaid, or partially paid.
Discretionary things that don't have to be paid like most of the welfare benefits include the following reported wasteful spending items like the $13 million for a hydroelectric power facility in Old Harbor, Alaska so that 216 can have electricity, and $5 million for the Copper Peak ski jump in Michigan (why?) and $3 million for a "feasibility study for recreational swimming in the Potomac River" and $36.4 million for the Max Westheimer Airport near the University of Oklahoma which isn't even in the top 200 airports nationwide for passenger traffic.
Asking Fitch and Moody to rate US securities is like asking the fox to guard the hen house.
You should be paying attention to what others are saying, like the EU Central Bank, and the Bank of England.
China, India, Brasil, Germany, Hong Kong, Korea, et al do not rely on Fitch or Moody's.
Perhaps no one has noticed, but China only holds $859 Billion now. At one point it was more than $1.3 TRILLION.
Quote:
Originally Posted by Teak
Back in 2010, Claire Hill of the University of Minnesota Law School wrote an interesting analysis of why and how the rating agencies got the sub-prime pricing so wrong. It was published in the University of Pittsburgh Law Review and available from the link below.
Back in 2010, Claire Hill of the University of Minnesota Law School wrote an interesting analysis of why and how the rating agencies got the sub-prime pricing so wrong. It was published in the University of Pittsburgh Law Review and available from the link below.
Hill, C., 2010. Why Did Rating Agencies Do Such a Bad Job Rating Subprime Securities? Scholarship Repository, University of Minnesota Law School, accessed from: https://scholarship.law.umn.edu/cgi/...culty_articles
She rejected the conventional wisdom answer that it was solely because the rating agencies are being paid by the issuers. She also attributes partial cause to the jockeying for market share and the belief that "quants" or "rocket scientists" could develop new instruments that would offer reward far greater than the commensurate risk. She labelled this as drinking the Kool-Aid of the brave new world of managed risk.
Another interesting example involved Moody's computer programming that determined pricing for collateralized debt obligations [CDOs] in which a single error in the code threw the results way off, overrating the CDOs by up to 4 notches. A committee was convened to discuss and correct the error, but rather than accept the new and much lower ratings, they made other changes to the code to get the same high ratings as before. One suggested change was rejected because "it did not help the rating".
Interesting stuff. Fitch's ratings are likely more honest than those of Moody's.
Thanks for posting the above. I will read the article with interest.
I do note, however, that the article's author (Claire A. Hill) lacks the mathematical sophistication to opine on some of the issues above. She has a BA and MA in Philosophy from the University of Chicago - so she clearly is intelligent. But she does not not have a degree in Mathematics, Economics, Mathematical Economics, Physics or the like. Realistically, the only way to evaluate quantitative risk management & the Quants is actually to be a Quant.
Based on history, I also don't think there's much to worry about with this news. It did, however, cause a drop in some of the stocks I had on buy alerts. Silver linings.
Based on history, I also don't think there's much to worry about with this news. It did, however, cause a drop in some of the stocks I had on buy alerts. Silver linings.
The vast majority of stocks in both my portfolio and watch lists are down.
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