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USA: That ratings agency downgrade meeting (Scoop)

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Paul Mason | 10:47 UK time, Tuesday, 19 April 2011

INT. DAYTIME: High above the capital city of a major country two credit rating executives, their sleeves rolled up, their Blackberries switched to silent, stare at each other over a desk:

"Hey boss we got another one o' those countries getting close to our proprietory benchmark for too much debt!"

"Bring it on! What's the deficit?"

"9.5% of GDP"



"What's the political complextion of the government?"

"Mmm. Tough to tell: got a pinko head of state but a tough minded legislature full o' fiscal hawks."

"So a notch or two downgrade should bring 'em into line? Can we do that before lunchtime?"

"Yeah, but there's a problem. They're about as close to being a 'true sovereign' as you could get. Their currency's pretty crucial to the global economy and they can print it."

"So they're not pegged to the dollar?"

"They are the dollar. The country's called America."

"Yikes. I see the problem. Technically speaking this America place prints the global currency of last resort so it can inflate away its own debts, devalue the currency, impose the cost o' crisis onto everybody else."

"Yeah well that's what they did last time."

"There was a last time?"

"Sheesh I was forgetting, you came thru on the fast track from business school. You don't remember the Plaza Accord? 1985?"

"Heck I was 10 years old!"

"OK well, the 101 version is: the US negotiated with Japan and Germany to depreciate the dollar by 50% relative to their currencies enabling them to recover from recession and slash their trade deficit."

"Cool and the Germans and Japanese just agreed?"

"Yup. America had moral authority and Germans and Japanese were seen as rising power, a bit like China now."

"Great Google-bee! Ay-and what happened to them."

"Well the Japanese suffered a property boom and bust and then..."

"Ah, that bit we did do at B-school. Boom, bust, stagnation. Wow. So this America place: they can just boss the world around and tell 'em what to do. They can use their global-status currency to offset the costs of fiscal adjustment and basically make other folks pay the cost while they go on spending?"

"Well this is the problem. That's a moot issue now. These guys spend, what, something like $700bn a year on defense? But for some reason now they've taken to not invading places. They've got supposed allies all over the earth who don't seem to do their bidding. There is, well, a slight sense of the unravelling of global power."

"Okay this is serious. Has the president guy got a deficit reduction plan?"

"Plans to eliminate it over a 12 year period. It's a long timescale but pretty tough."

"And the legislature?

"Some of em believe the world was created 3,000 years ago! They'd run a budget surplus tomorrow if we asked them."

"And this place is triple-A, right?"


"And the technical chance of them defaulting on their debt is?"

"Well unless some kind of alien invasion happens, leading to civil war and mass starvation, dengue fever, millenarian sects take over the seats of power etc. Zero."

"So whadda we do?"

"OK, well there's an election coming. And they keep having these ridiculous political stand-offs over ideological differences in the budget, leading to all kinds of weird threats to shut down the state."

"No kidding?"

"So while the technical possibility of default is zero - there is a greater than technical possibility that we, ourselves, will take em down a notch because of all these political shenanighans. Political paralysis is real, no?"

"Ah! I am getting a lightbulb above my head."

"Yup. We could put em on negative watch."

"We could."

"We could put pressure on them to eliminate the deficit faster than planned by issuing an 'outlook negative' warning. Which is, as you know, a warning that we ourselves could issue a warning."

"But that could be seen as political pressure: intervening into the political debate in the most powerful country in the world. Do we really want to court controversy after all that stuff with the banks?"

"That's very wise boss. That's why you are the boss."

"So whadda we do?"

"I propose we wait and see what S&P do, first."


  • Comment number 1.

    It's much more than Plaza this time around.

    Even if the Chinese seriously engaged with the US about rebalancing, the much bigger issue is the size of fictitious capital artifically supporting the rate of profit.

    A serious understanding of value shows that printing money does not add any real value.
    It just inflates asset prices & hides the fall in the true productive rate of profit.

    But in a vain attempt to stop capital devaluation, the US (& others) will just debased their currencies.

    Hence a decline in output as well as hyper-inflation.

  • Comment number 2.

    Two Krugman links:

    The source of much of the latter is this:

    It really is worth reading - ok it's the US, but we aren't immune to transatlantic transmission of insanity.

    Oh - and this - it may only be gossip, but YEUCH!

  • Comment number 3.


    Isn't this what Max Keiser (aided by Stacy Herbert) has been YELLING about but which never gets a mention on here?

  • Comment number 4.

    Very funny.

  • Comment number 5.

    Well written!
    I have the opinion that Standard & Poor is not too far from a downgrade. After all there's the US continuously rising budget deficits and 14 trillion in debt.
    David Beers, Global Head at Standard & Poor's, has said that it's time to put a "negative" outlook on the US AAA rating. S&P in fact has called the United States a “material risk” if the US leaders do not get far more intense about reducing deficits.
    What, I wonder, would be the impact on global financial markets?
    Moody's too is talking negative. Moody's has said that if an agreement is not reached and meaningful implementation does not begin soon, this would make the US fiscal profile weaker than peer ‘AAA’ countries.
    Overseas investors hold about half of the outstanding marketable US debt, including $1.5 trillion held by China.
    Is the world ready for an American downgrade?
    This could come sooner than we think...

  • Comment number 6.

    so who exactly ownes America? Are they so much in debt they have had to sell off all the family silver...

  • Comment number 7.

    @1 Your language is far too loose to demonstrate or engender "a serious understanding". The US has not suffered hyperinflation by ANY definition since the WWII, and probably not since the Civil War.

    Printing money is not supposed to "add value": in a modern society, money is meant to be a medium of exchange rather than a commodity, though undoubtedly some speculators treat it as such. In modern societies, for better or (more likely) for worse, most money is created privately by banks as credit. The crisis of 2008 destroyed a significant amount of this privately created liquidity, leading governments to try to inject it back via QE. The way they did it was very flawed, as it helped the banks much more than the economy. The result being that there is still inadequate liquidity for economies like the UK and US to function properly. The fact that there is still downward pressure on money wages demonstrates this - and is a counter-indicator to hyperinflation.

    I'm not saying that there isn't inflation, there is. But it's not there for the same reasons, or to the same severity as it was in the Weimar Republic, naughties Zimbabwe or the revolutionary US.

  • Comment number 8.

    I find it all obsurd.

    These are the same credit rating agencies that labelled sub-prime toxic bilge mixed with a sprinkling of gold dust as AAA.

    Yet even now, they carry so much weight that even if they raise one eyebrow 2mm when talking about US debt afew 100 billion is wiped off global stocks and no doubt many peoples livleyhoods along with it!!!

    Why would anyone make critical financial decisions based on their track record alone let alone considering the fact that most of these guys sit in offices in wall street or the city and the chances of such advice being biased in some way is extremely high.

    If anyone needed proof of the existence of parallel universes this must be it, they do not inhabit anything I would recognise as reality thats for sure.

  • Comment number 9.

    Krugman blog April 18 2011:

    "OK, so Standard and Poors has warned that it might downgrade the US one of these days. At first read, what it says doesn’t seem too silly: it lays stress, rightly, on political gridlock. The point should be that the US is perfectly capable both of running large deficits now and getting its fiscal house in order over time; but not if the parties cannot agree on any kind of solution. What we do to spending this year or next is irrelevant. That said, it’s worth remembering that S&P downgraded Japan in 2002 — and here’s what happened [see graph in blog]. Japanese bonds became known as the “trade of death”, because people kept betting on an interest rate rise, and it kept not happening.
    So, no big deal."

    How's your 2011 prediction going that the Japanese government will suffer from a bond market strike? I'd say not well, thankfully.

  • Comment number 10.

    #7 Sasha Clarkson

    Try explaining the Keynesian conception of value.
    That measuring rod that underpins all explanations of how capitalism works.

  • Comment number 11.

    Is the US in default - claim from Timothy Geithner?
    No, but the US continues to spend even though it has broken through the debt ceiling.
    You read that right! The United States has surpassed the debt ceiling faster than they predicted; this appears to be how things work in Washington: Debt ceiling? What's a debt ceiling?
    Freshly released figures re total debt from the Treasury are bound to put Moody's into a foul mood.
    Because the total debt is now $14,307,336,580,992.31. The debt ceiling is pegged at $14.294 trillion. The breach: $11B and growing by the minute.
    So where is the Notice of Default from the American Govrnment?
    By some nefarious accounting practices, the actual debt that counts for legal purposes is the debt “subject to the limit”, which is $52 billion less. In other words, as of right now (today), the US Treasury has only $41B to play with, even in accordance with its own dubious bookkeeping.

  • Comment number 12.

    @10 What's it worth to you? ;-D The marginal utility to me of the extra effort is negative unless I have an incentive.

    A big problem is when people use common words in an uncommon way. The labour theory of value is of little economic use, because it does not use the word 'value' in a commonly understood way. Indeed, 'labour' and 'value' become almost tautologous. Given that people can labour, but produce nothing that anyone wants, 'value' is not really useful when so defined. It is better to consider the marginal utility of spending your time doing something rewarding or useful instead.

  • Comment number 13.

    I was wondering about this earlier when I saw what I thought was quite a perceptive point on a different blog.

    "Just a Thought

    The worlds biggest debtor nation is rated AAA/A-1+ but the world’s biggest creditor nation is rated AA-……….?"

    Explain the logic of that.

  • Comment number 14.

    #12 Sasha Clarkson

    Surely the point is to try & understand how capitalism works.
    Marx has an explanation, Keynes has an explanation, others have explanations.

    What explanations are better?

    You at present think Keynes, I think Marx.
    By examing the arguments of each we can try & open our minds to the others point of view & either accept it or put a constructive argument against it.

    I am a human being who currently thinks Marx has the best argument.
    I am not a born Marxist who must remain a Marxist until my last breath.
    Just as a scientist who holds to a particular theory of the universe can change his mind in the light of new evidence, or a more thoughtful reassessment of existing evidence, so can I.
    I would hope you can too.

    But the impression I get is deep hostility to the ideas of Marx but without engaging with those actual ideas.

    This is why I ask you again to consider value.

    Why do you say that, "The labour theory of value is of little economic use, because it does not use the word 'value' in a commonly understood way."?

    Why should marginal utility be better?

  • Comment number 15.

    Much funnier than Orwell ever was

  • Comment number 16.

    YOU WAN'T LOGIC? (#13)

    The New World Order Currency is to be printed on Möbius Strip. It will never run out.

  • Comment number 17.

    @14 DVR You are obviously a very decent person and I am sorry to have been flippant.

    A problem I have again and again with Marxism and Marxists is jargon, and the way jargon both shapes and confuses thought. BTW, as a mathematician still involved in some teaching, I also have this problem with mathematics. A simple example: lots of kids have a huge problem with 1/2 x1/2 = 1/4. Why? Because emotionally, the word "multiplication" implies getting bigger, but that doesn't happen with proper fractions. "Timesing" sounds less posh, but is nearer the mark.

    Back to "value": in common usage, the "value" of something, is what it can be exchanged for, what it's worth in terms of something else. Marginal utility comes in because there isn't a fixed exchange rate. My plumber could work far more hours than he does, but he chooses not to, as after he has provided for all his needs and some of his luxuries, the marginal utility (to him) of more free time is greater than that of more money. It's the law of diminishing returns. (He also charges less to people who are polite, pay on time, and treat him and his assistants with respect.)

    The labour theory of value is almost a moral term, how we should value a commodity, and it is usually not connected with the exchange reality of value. It is fine as a statement of moral principle, though its practical flaws are fairly obvious. The problem is when someone using one meaning of the word has a conversation with someone using another meaning of the word, and they don't realise or accept thet they are talking of different things. What's even worse is when someone confuses the two meanings of the word in their own mind, as with my mathematical example, because an emotional connotation interferes with the perception of a word's meaning.

    As Barrie is fond of pointing out, we are all apes confused by language, at least to some extent. Unless the intent is to use language to coerce thought, as in Orwell's Newspeak, or like Lewis Carroll's Humpty Dumpty, we must ensure that we use words in a way that others accept or at least understand our meaning.

  • Comment number 18.

    #17 Sasha

    Thanks for your response.

    I accept your point about language & different people applying different meanings to the same words.
    We often end up arguing because we are talking at cross purposes.

    It's hard for me to sum up the first two or three chapters of Marx's Capital.
    It's also very hard to read, especially chapter 1.

    David Harvey has a good book called "A Companion to Marx's Capital" which is a good way in, if you wanted to.

    But I'll have a go at explaining Marx's labour theory of value.

    Firstly, it differs from Ricardo's.
    His was based on concrete labour time - the amount of actual labour that went into a product.
    This classical labour theory wrongly thought you could aggregate all concrete labour time to get to the total value produced by a society.

    Marx introduced what he called socially necessary labour time.
    This could not be known until exchange in the market.
    For a product to have an exchange-value (a price) in the market it also has to have some use-value (satisfy a desire/need).
    Some products may not be sold & the labour time extended on them has been wasted.
    Some products may be in high demand & sell for an extortionately high price.
    But Marx abstrated from fluctuations in supply & demand - he went with the long-run demand-supply equilibrium so revered by the free-marketeers.
    So abstracted for fluctuations in supply & demand & focusing on the reproduction of society, total exchange-value is the aggregate of socially necessary labour time.
    In otherwords, the aggregate of all prices is equivalent to the aggregate of all socially necessary labour time.
    Value - aggregate prices - are a reflection of socially necessary labour time.

    But here's a complication.
    For Marx there are values & exchange-values (prices) & they can diverge.
    Money can be thrown into the system & not used for productive purposes but just to inflate asset prices - fictitious capital.
    This artifically inflates reported profits, but it cannot go on for ever.
    Sooner or later the economic fundamentals reassert themselves & there is a crisis.

    This is why, for me, value is so important because without it you don't have an objective, endogenous theory of crises.
    You end up resorting to 'animal spirits' or 'wrong monetary policy'.

    All this is not to say marginal utility theory is nonsense.
    MU makes perfect sense in microeconomics.
    It is just no use for explaining aggregate prices or value.

  • Comment number 19.

    As long as banks can just 'create' money out of thin air we will continue to end up in the mire.
    In the U.K. we should stop the banks having this facility and just have the BoE 'create' the money.

    It's all debt anyway....


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