Monday, August 8, 2011

Mr. Crankypants Presents Remedial Economics 101

If you think that this morning's stock-market plunge is a validation of S&P's rating downgrade for U.S. debt, you don't understand the purpose of the ratings

Just a quick recap of the first morning of stock trading after S&P downgraded the rating of U.S. debt from AAA to AA-Plus. Here are the numbers from this morning's open to noon:

Dow 11,120.42 -324.19 -2.83%
Nasdaq 2,438 -94.54 -3.73%
S&P 500 1,157 -42.79 -3.57%

Bonds & Currencies
10 Year Yield 2.38% -0.17

Stocks down, bond rates down, cats & dogs living together, MASS HYSTERIA! Total validation for the S&P downgrade and the national debt as our #1 problem, right?


The decline in the rate on 10-year treasury bonds means that money is flowing into U.S. debt, not out. When more money tries to buy something the price -- in this case the interest rate -- goes down. S&P's rating was for U.S. Treasury bonds, not for stocks. Investors are actually moving their money out of stocks and into U.S. debt.

Why? Because what the smart money fears is not a U.S. debt default. The smart money fears the absolute sluggishness of a stagnant economy. Our nation's problem is not debt at 2.38%. Our problem is high unemployment and a lack of growth.

And from what I have heard out of Washington and on the news, both today and over the past few months, there are an awful lot of politicians and commentators who either have never studied history and basic macroeconomics, or who have chosen to ignore history and basic economics in favor of shilling for their pet policies.

So here's tip #1 for you today.

If you hear a politician or commentator saying today that the stock-market plunge validates the view that our economy's problem is our national debt, that person is either ignorant or lying to you. Either way, you should ask yourself if he or she really has your best interests or the nation's best interests at heart.


  1. P.S. Why did Mr. Crankypants feel the need to chime in? I give you Exhibit A, the top headline on CNN Money at the moment:

    'Sell first, ask questions later'
    12:52PM: Stocks follow deep declines in world markets, as investors react to S&P's move.

  2. Lets not overlook that S&P in their initial release made a 2 Trillion dollar error, and then revised their reasons for the downgrade when Treasury pointed out that minor faux pas.

    S&P at this point has zero credibility on the reasons for their downgrade, but if you want to listen to them, they said "We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act."

    This was a downgrade that was a direct result of the Tea Party playing political games with the full faith and credit of the US. Of course the Republicans are blaming Obama for it, and Obama is of course not blaming the Republicans who were the direct cause of the downgrade, but Washington in general, because he for some unfathomable reason thinks that he can still work with them in a reasonable manner.

    Bah! A pox on all their houses.

  3. No, not a pox on all their houses in this case.

    I'm no fan of the negotiating skills and tactics that Obama and the Dems have shown ever since the Tea Partiers took over the House in 2009, but in this case the Dems genuinely tried to negotiate and put a lot of compromises on the table at an early date, and the Republicans consistently refused to negotiate, moved the goalposts, and shouted from the rooftops that they would prefer to default than imagine letting one cent of revenue trickle through the doors.

    The media tries so hard to be evenhanded these days that assorted commentators keep portraying it as a "both parties failed to compromise and negotiate" thing, when it was really a "one party tried to negotiate while the other threw an enormous anti-tax temper tantrum and pushed the country to the brink of insolvency" thing.

    This was 100% the Tea Party downgrade. Sometimes one party genuinely deserves the pox, and that's the case here.

  4. The problem is that Obama has governed to the right of Nixon since his inauguration and he starts every negotiation from a center right perspective. This isn't true only since 2009. He did the exact same thing when both the house and senate were controlled by democrats.

    The list of things that he says that he's for and that he actually fights for seems much smaller than the list of things that he's willing to take heat from progressives for.

    This negotiation was a betrayal of core Democratic principles. Social Security is financially secure for a couple of more decades and should never have been a part of the discussion, however Obama is the one who offered it up. Obama was also the one who first put both Medicare and Medicaid on the table for cuts. If you're going to compromise, you need to stake out your position first, not adopt the other sides positions as your starting point.

    Another point that should be discussed is that he had two legal options to use to play hardball with the Republicans. He could have used the 14th amendment as a very large club and told the Republicans that either you negotiate for real, or I'll state that the debt ceiling is unconstitutional, and keep paying the nation's debts and we can fight it out in court. Obama unilaterally disarmed and declared that he wouldn't do that.

    Additionally, another option that he could have employed was to print a few one trillion dollar platinum coins and deposited them in the fed and gone on his merry way and told the Republicans to come talk to him when they wanted to act like adults. However, he also unilaterally decided that he wasn't going to do that.

    Here's an article describing those options in more detail and others that Obama chose not to use.

    Since he chose not to use any of his other legal options, and chose to dance to the Tea Party Tune, Obama bears a good amount of fault in this as well.

    And what did all of this get us? Our debt was still downgraded. The Tea Party and the Republicans rightly see that holding hostages works, because Obama caves in the end. A Super Congress for which the Republicans have guaranteed they will make no compromises on revenue and for which the Democrats are saying nothing is off the table.

    Meanwhile, every single person involved has failed to mention that there is not a spending problem in Washington, but that there is a revenue problem that GOES AWAY if they don't do anything, and just let the Bush Tax cuts, expire. Those same Bush tax cuts that Obama promised to end and which he agreed to extend for a short extension of unemployment benefits. Yet another hostage that the Republicans took and held and that Obama gave them everything they wanted for.

    No. A pox on both their houses. The Republicans for being willing to destroy the nation in order to bring down Obama's presidency. Obama and the Democrats for allowing them to continue to play the same game time after time.

    Even Charlie Brown eventually figured out that Lucy was just going to pull the ball out right before he kicked it. I no longer have any faith that Obama will figure out the same thing with the Republicans. I expect that he will continue to negotiate with the Tea Party Terrorists giving them everything they want along the way.

  5. Whoops, here's the link to the article.