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S&P Says US Should Act to Protect AAA-Rating: Report

Posted by WARREN MOSLER on August 27th, 2010

David,

Please do the world a favor and spill the beans.

Please make it clear to the news media ability to pay is not in question, no matter how large the numbers may get.

The US, as issuer of its currency, is not the next Greece, Ireland, or California.

Please tell them ‘funding the debt’ consists of nothing more than debiting a Fed reserve account and crediting a Fed securities account.
And paying down debt, as happens with every maturity, is nothing more than debiting a Fed securities account and crediting a Fed reserve account.

Willingness to pay is an entirely different issue.
Congress can default by not extending the debt ceiling, for example. But that’s an entirely different matter.

Krugman finally came around a few weeks ago conceding ability to pay was not the question.

So now that a Nobel Prize winner is saying it, it’s safe for you all to go public with it?

Let the President know the US has not run out of money, and that there is no such thing.

We have enough real problems in the world without adding this nonsense.

Best,
Warren

S&P Says US Should Act to Protect AAA-Rating: Report

Aug 26 (Reuters) — The United States government needs to take steps to preserve its top AAA-rating, a Standard & Poor’s Ratings (S&P) official told Dow Jones newswire in an interview published on Thursday.

The measures taken in response to recommendations President Barack Obama’s commission on fiscal responsibility would be crucial in the view S&P takes on the U.S. credit rating, he said.

“It is very important for the credit standing of the United States that the Congress considers very carefully what the fiscal commission proposes,” John Chambers, chairman of S&P’s sovereign rating committee, was quoted as saying.

“It is very important for Congress to take the required steps.”

S&P maintains the United States’ top AAA rating with a stable outlook, meaning there is not a significant chance of a change in the near future.

However, it has repeatedly warned about the gigantic deficit and the debt burden in the world’s biggest economy, calling it a challenge for the government.

David Beers, S&P’s global head of sovereign ratings said in a July report the U.S. does not have unlimited fiscal flexibility and the best-case scenario for the U.S. would be for its debt-GDP ratio to peak at around 80 percent, although there was a chance it could exceed 100 percent.

“So we don’t think these political decisions on tackling the public finances can be put off forever,” Beers said in the report.

Chambers also disagreed with Ireland’s criticism of its downgrade in the Dow Jones interview.

Chambers said S&P does not consider the bad loans the government’s asset management agency is buying from banks as liquid assets in the near term, but added further rating action was unlikely in the near term.

On Tuesday, S&P cut Ireland’s long-term rating by one notch to ‘AA-’, the fourth highest investment grade, and assigned the country a negative outlook saying the cost to the government of supporting the financial sector had increased significantly.

That drew criticism from the National Treasury Management Agency which said it disagreed with S&P’s view that Ireland faced substantially higher costs to bail out its ailing banking sector.

“In terms of the specific analysis by S&P, this is largely predicated upon an extreme estimate of bank recapitalization costs of up to 50 billion euros,” the NTMA said. “We believe this approach is flawed.”

12 Responses to “S&P Says US Should Act to Protect AAA-Rating: Report”

  1. Jim Baird Says:

    “Congress can default by not extending the debt ceiling, for example.”

    Actually, they can’t. The 14th amendment states: “he validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

    Any U.S. bondholder who didn’t get paid could sue in Federal court, and the courts (assuming they decided to actually follow the text for a change) would order the Treasury to pay.

    Reply

    beowulf Reply:

    Jim, you’re correct of course. However, you’re not looking at what’s unique about section 5 of the 14th Amendments… its the only limitation of free speech written into the US Constitution (“the validity of the public debt of the United States, authorized by law… shall not be questioned”).

    We’d all agree that S&P dropping Uncle Sam’s AAA rating would adversely affect the value of Treasuries, to give one example among thousands, just think of the “widow and orphan” funds that’d be required to liquidate their government bonds because of this reckless act. The consequences, this economy, may lead to social unrest. If it does, don’t think for a second the politicians are going to stand up and take the blame, they’re going to give the angry mob directions towards 55 Water Street. The validity of the public debt shall not be questioned.

    Hmm, since we don’t have to sweat the pesky 1st Amendment, if S&P crossed that line, what criminal law could the US Attorney indict S&P and perhaps Mr. Beers with— yes, this will do nicely.
    18 US 1361. Government property or contracts

    Whoever willfully injures or commits any depredation against any property of the United States, or of any department or agency thereof, or any property which has been or is being manufactured or constructed for the United States, or any department or agency thereof, or attempts to commit any of the foregoing offenses, shall be punished as follows:

    If the damage or attempted damage to such property exceeds the sum of $1,000, by a fine under this title or imprisonment for not more than ten years, or both; if the damage or attempted damage to such property does not exceed the sum of $1,000, by a fine under this title or by imprisonment for not more than one year, or both.

    In other words, David, if you insist on pissing on the Constitution, try to keep total losses under a $1,000.

    Reply

    WARREN MOSLER Reply:

    japan got seriously downgraded and it didn’t seem to hike yields

    Reply

    WARREN MOSLER Reply:

    yes, you could sue, but it would still be a default if govt missed a payment

    Reply

    beowulf Reply:

    Actually, a bondholder has a couple of options, let’s say its a week before payment is due and Congress has adjourned for the year and won’t be back in DC in time to increase the statutory debt limit, the bondholder could go to court anytime up to the day of payment claiming anticipatory breach of contract as well as a violation of the 14th Amendment.

    The bondholder would petition the US District Court for (and would receive) a mandatory injunction ordering the Treasury to pay on the specified day. Since a constitutional obligation always overrides a statutory obligation, the court order would require Tsy and (its fiscal agent) the Fed to process the payment as if there were no statutory debt limit.

    Of course Tsy could pay even without an injunction and without tripping over the statutory debt limit by simply minting and depositing sufficient platinum coins (and then immediately sweeping the Mint Enterprise Fund to Tsy miscellaneous receipts).

    I imagine the fastest way would be to use existing silver or gold bullion coin dies (or those for bronze medals; our friends in China would love the Dalai Lama piece) to mint unique platinum coins. The Secretary can value these at whatever denomination he chooses*, $1 billion, $50 billion, $100 billion, etc. Congress will have wished they’d stayed in town to increase the statutory debt limit. :o)
    http://www.usmint.gov/mint_programs/medals/?action=medal&ID=26

    *31 USC 5112(k) The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

    Reply

    Ramanan Reply:

    “Of course Tsy could pay even without an injunction and without tripping over the statutory debt limit by simply minting and depositing sufficient platinum coins ”

    Only one coin needs to be minted. It can be hand-delivered to the Fed as you once put it. The Fed has to accept this and credit the Treasury general account with an equivalent amount. The Treasury can then pay the bond holders as usual.

    Reply

    Calgacus Reply:

    Yes, the point is that the executive branch would have to actively collude with Congressional antics to default. The initial bond issuance authorization, not some later debt ceiling is the law that the President is bound to uphold, just as if the bond authorization had been the subject of a later law repealing the ceiling. What is more interesting is just how the Treasury would act, which Beowulf and Ramanan explain, and just what Federal obligations are binding like this. The courts have ruled on some non-bond examples, but have not said exactly what ones are binding.

    Here are some other legal links:

    United States v. Winstar Corp. et al. (95-865), 518 U.S. 839 (1996) http://www.law.cornell.edu/supct/html/95-865.ZO.html

    which says .” [I]t is clear that the National Government has some capacity to make agreements binding future Congresses by creating vested rights, see, e.g., Perry v. United States, 294 U.S. 330 (1935) http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=us&vol=294&invol=330 ; Lynch v. United States, 292 U.S. 571 (1934). http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=us&vol=292&invol=571 ” although “the extent of that capacity, to be sure, remains somewhat obscure.”
    and quotes John Marshall “if an act be done under a law, a succeeding legislature cannot undo it. The past cannot be recalled by the most absolute power.”

    APPLICABILITY OF SECTION 163 OF DIVISION B OF PUBLIC LAW 111-68 TO PAYMENTS IN SATISFACTION OF PRE-EXISTING CONTRACTUAL OBLIGATIONS is the ACORN opinion I mentioned http://www.justice.gov/olc/2009/obligations-public-law11168.pdf – so the Obama DoJ is not out to lunch on this kind of matter, and would surely yap at the Treasury to act. My personal preference for the visage on the Trillion Dollar platinum coin would be that Great American, Bugs Bunny, but that’s me.

    I think there is infinitely less to worry about the federal government deciding to default on a bond payment it owes you (or your estate)- for it takes money seriously – than there is about it proclaiming you are an Evil Terrorist – and deciding on a whim to murder you with no evidence, due process or legal authority at all – the Anwar Al-Awlaki (and other) cases.

  2. Calgacus Says:

    Jim: This clause of the 14th Amendment has been tested in a line of cases, most applicably Perry v. United States in 1935. Perry wanted to be paid in gold and wasn’t, so some would say the US defaulted, but he got all the $ due him. We aren’t on a gold standard, so that is not relevant. As the Supremes said, since bonds are considered property, defaulting violates the 5th Amendment too.

    So, yes, Warren is wrong when he says “Congress can default by not extending the debt ceiling”. The debt ceiling law cannot be interpreted to repudiate constitutional obligations. The Supremes have said that by taking on a firm obligation, earlier Congresses can bind later ones, unlike in an absolutely sovereign Parliamentary system. It’s an interesting question what the Pres would have to do – maybe indulge in an MMT recommended – no bonds spending program.

    It would be quite difficult for the Congress and the President, conniving together, to default on a bond. If the President determines that (an interpretation of ) a law violates the constitution, he can ignore it. Just last year, Congress passed a law that seemed to repudiate obligations to ACORN which were less solid than bonds. Citing this stream of cases, the DoJ said that the law could not be interpreted that way, and said to pay ACORN.

    Spent some time researching this, so flogged it on a few blogs.

    Beowulf: Do you think that the “widows and orphans” fund managers would be liable if they just ignored a downgrade, notwithstanding a contract, because of the 14th amendment clause?

    Reply

    beowulf Reply:

    Cal, that’s a good point. I believe state attorney generals (who regulate nonprofits and trust funds) would quickly produce legal opinion letters that securities backed by the full faith and credit of the United States would always be viewed as the safest kind of investment, regardless of bond rating scores.

    Reply

    Tom Hickey Reply:

    Remember President Bush referring to the SS Trust Fund as “just” a bunch of IOU’s stuffed in a file cabinet somewhere, implying that the funds had been spent and the government wouldn’t be paying them back?

    Reply

    WARREN MOSLER Reply:

    the tsy is considered to have defaulted if it misses a payment by as little as one day.

    that can happen, however illegal it might be.

    Reply

  3. Rodger Malcolm Mitchell Says:

    David Beers, S&P’s global head of sovereign ratings said in a July report the U.S. does not have unlimited fiscal flexibility and the best-case scenario for the U.S. would be for its debt-GDP ratio to peak at around 80 percent, although there was a chance it could exceed 100 percent.

    And this man has a high position in a respected ratings firm! Is it any wonder the ratings agencies screwed up so badly, helping to cause the recession. Beers is a perfect example of the Peter Principle: He has been promoted way, way past his level of competence.

    Rodger Malcolm Mitchell

    Reply

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