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If the United States Loses Its Aaa Rating Will China Raise the Value of the Yuan Against the Dollar? Print
Thursday, 21 April 2011 04:23

This is the logical implication of the threats reported in a Reuters article, saying that China would cut back its investment in U.S. government bonds if the United States loses its Aaa credit rating. The article implied that this threat is something that would be scary to the Obama administration.

In fact, it should not be scary at all, since China is effectively threatening to do exactly what the Obama administration claims it is asking them to do. The Obama administration claims that it wants China to raise the value of its currency against the dollar. The way that China keeps the value of its currency down is by using the dollars it accumulates as a result of its large trade surplus to buy government bonds and other dollar denominated assets.

If China stopped buying government bonds, then the dollar would fall against the yuan (i.e. the yuan would rise), exactly what the Obama administration supposedly wants. This would make Chinese goods more expensive in the United States, leading us to buy fewer imports from China, and it would make U.S. exports cheaper in China, leading China to purchase more U.S. exports.

This sort of adjustment is necessary to get the U.S. economy on a stable growth path. Therefore this threat from China should have been viewed as a positive development. It was not reported this way.

 
The Washington Post Confuses Economic Recovery with Fears of Insolvency Print
Wednesday, 20 April 2011 08:09

The Washington Post told readers that when interest rates on UK debt rose from 3.0 percent in 2009 to 4.2 percent:

"It was a sign that the country’s creditors were beginning to get nervous that the nation’s debt was becoming unsustainable."

It doesn't tell readers how it made this determination. The more obvious explanation is that the UK economy had come out of the free fall that it and other major economies were in. During this free fall UK government bonds were one of the few trusted assets, which meant that they paid extraordinarily low interest rates.

A 4.2 percent interest rate, which is less than 2.0 percent in real terms, is still extremely low by any historical standard. For example, the real interest rate on U.S. government debt was 2-3 percent in the late 90s when the government was running budget surpluses. Lenders usually demand far higher interest rates on assets to which they attach considerable risk.

It would have been worth mentioning in this article (which explores the lessons that the UK holds for the U.S.) that hundreds of thousands of workers in the UK are currently unemployed so that the country could maintain its top credit rating.

 
Washington Post Wrongly Claims that the Republican Medicare Plan Will Have "Sizable Savings in Future Costs" Print
Wednesday, 20 April 2011 05:13

According to the Congressional Budget Office's projections, the Republican Medicare plan will actually lead to an enormous increase in health care costs. Its projections imply that the cost of buying Medicare equivalent insurance would rise by $30 trillion over Medicare's 75-year planning period. This amount is approximately 6 times the size of the projected Social Security shortfall.

Therefore the Post was incorrect in claiming that the Republican plan would lead to sizable cost savings, although the government's payments for Medicare would be reduced.

 
Washington Post Confuses Foreign Debt and Government Debt Print
Wednesday, 20 April 2011 05:00

In a front page article the Washington Post included an uncorrected comment from a random constituent of Representative David Schweikert asserting that if the government doesn't curb its borrowing that, "pretty soon foreign countries will be owning us."

Of course borrowing from abroad is determined by the trade deficit, not the budget deficit. The trade deficit is in turn determined largely by the value of the dollar. People who are concerned about foreign countries "owning us" should be yelling about the over-valued dollar, not the budget deficit.

The Post should not have printed this comment without correction. Many politicians and demagogues have attempted to exploit nationalistic and racist sentiments to push their agenda for deficit reduction. A responsible newspaper would not encourage this behavior.

 
Overstating the Importance of Temporary Employment in Germany Print
Wednesday, 20 April 2011 04:46

The NYT told readers that:

"The rise of temporary labor has contributed to a plunge in German joblessness. The unemployment rate has fallen to just above 7 percent, or 3.2 million people, from nearly 12 percent in 2005, or almost 5 million people."

However the piece also reports that there are fewer than 1 million temporary workers today. Since the number of temporary workers was not zero in 2005, the impact of increased temporary employment on total employment would have to be somewhat limited. If temporary employment doubled between 2005 and the present (an increase of 500,000 jobs), then this would account for about 15 percent of the growth in total employment.

It is also worth noting that Germany's unemployment is actually just 6.3 percent using the OECD's methodology. This methodology is similar to the one used to measure unemployment in the United States. The official German rate counts many part-time workers as being unemployed. This unemployment rate should not be used in an article written for a U.S. audience.

 

 
Will an S&P Downgrade Help Geithner Accomplish His Goal of Lowering the Dollar Against the Yuan Print
Tuesday, 19 April 2011 14:47
The WSJ hinted that a negative assessment of United States debt by S&P may lead China to stop buying U.S. government bonds and possibly to even start selling them. If China went this route, it would help to raise the value of the yuan against the dollar, which is exactly the policy that Treasury Secretary Timothy Geithner claims he is urging on China [thanks Allan]. In this sense, the negative report from S&P may be great news for the Obama administration and its efforts to increase U.S. exports.
 
The Washington Post Has Different Definitions of "Too Much" for Public Workers and Wealthy People Print
Tuesday, 19 April 2011 08:25

The Washington Post told readers that the battle over pay for public sector employees, "comes down to a matter of perception over what qualifies as modest and what is too much."

This is not true. Many of the people who are advocating cuts in compensation for public employees support much larger pay packages in other contexts. For example, the overwhelming majority of public employees earn less than $100,000 and can only start collecting full pensions after 30 years of work.

By contrast, many Wall Street executives earn well over a million a year and can often walk away with multi-million dollar packages while still in their 50s or even 40s. Few of the people who have been at the forefront in protesting generous pay packages for public sector workers have been complaining about Wall Street pay. They have not even been bothered by high pay at banks that get government subsidies in the form of "too big to fail" insurance.

For another example, the economists at the IMF can often retire with 6-figure pensions in their early 50s. The IMF has been at the forefront in demanding that governments raise their retirement ages and reduce the generosity of benefits.

The question is absolutely not "what qualifies as modest and what is too much." This is entirely a question of how much mid-level and lower level public sector employees should earn relative to other actors in the economy. Many of those who earn far more than these public sector employees want to see their pay cut.

 
S&P's Warning on U.S. Debt Prompts Another Front Page Washington Post Editorial Print
Tuesday, 19 April 2011 06:58

The Washington Post, which routinely uses its news section to promote its editorial positions, ran a front page editorial on the implications of S&P's announcement that it has a negative outlook on U.S. debt. The piece asserted that:

"a downgrade [of U.S. debt] would drive up the cost of borrowing and throw into question the global role of the Treasury bond."

Actually, it is not at all clear that a downgrade would have this effect. The interest rate on 10-year Treasury bonds fell by 3 basis points yesterday. This indicates that investors were not too troubled by the risk of a downgrade.

S&P did downgrade Japan's debt back in 2002. This had no notable impact on the market at the time. Currently Japan pays less than 1.5 percent interest on its 10-year government bonds, the lowest of any country in the world. Since S&P's downgrade did not seem to force Japan to pay higher interest rates, it is not clear why the Post would expect that a downgrade would force the U.S. to pay higher interest rates.

It also would have been helpful to provide readers with some background on S&P. It rated hundreds of billions of dollars of subprime mortgage backed securities as investment grade at the peak of the housing bubble. It also gave top ratings to Lehman, AIG, Bear Stearns, and Enron until just before their collapse. In other words, it has a dismal track record which may be one reason why investors seem to ignore its assessment of sovereign debt.

Finally, S&P is also involved in a major political battle at the moment. An amendment proposed Al Franken would end the current system under which a company issuing a bond selects the rating agency. Instead the Securities and Exchange Commission would pick the agency. This amendment would remove the obvious conflict of interest from having the issuer select the rater.

This change was delayed for 2 years by a conference provision inserted by Representative Barney Frank, who was head of the Financial Services Committee at the time. S&P would undoubtedly like this delay to be made permanent. 

It would have been appropriate to discuss S&P's track record as well as its political interests in a major story like this in order to provide readers with a better basis to assess its debt warnings. However S&P's warnings coincide with the Post's editorial stance calling for major cuts to Social Security, Medicare and other areas of social spending. This could explain the failure to provide readers with the necessary background information. 

 
If a Negative S&P Outlook for the U.S. Explains a Drop in Stock Prices, Why Did the Dollar Rise and Interest Rates Fall Print
Monday, 18 April 2011 09:23

Reporters should be given 40 lashes when they tell us that some specific event explains a movement in stock prices. The reality is that the reporter does not know what caused a movement in stock prices, all they can do is speculate.

This means that the beginning of a NYT piece on the drop in stock prices Monday morning that began:

"shares on Wall Street opened sharply lower and Treasury prices fell on Monday after the Standard & Poor’s rating firm lowered the outlook for the United States to negative, saying that there was a risk that lawmakers might not reach agreement on how to address the country’s fiscal issues,"

is pure speculation. The NYT does not know why stock prices fall.

Its explanation seems inconsistent with two other market movements this morning. The dollar rose sharply against the euro and other major currencies. Also, the yield on 10-year Treasury bonds fell by almost 4 basis points.

It is a bit hard to believe that investors sold off U.S. stocks because they became fearful in the wake of the S&P report, but then suddenly wanted to buy dollars and also were willing to hold Treasury bonds at a lower yield. Unless we think that investors in stock are a totally distinct group from the people who trade currencies and invest in bonds, the NYT's explanation of the plunge in stock prices makes no sense. 

A more plausible explanation is that bad earnings reports, most importantly from Bank of America on Friday and from Citigroup on Monday, made investors more pessimistic about the near-term prospect for profits.

It is also worth noting that S&P has a horrible track record for judging credit worthiness. It rated hundreds of billions of dollars of subprime backed securities as investment grade. It also gave Lehman, Bear Stearns, and Enron top ratings right up until their collapse. Furthermore, no one was publicly fired for these extraordinary failures. Investors are aware that S&P's judgement does not mean very much.

 
Douthat Makes It Up On Median Family Income (see note at bottom) Print
Monday, 18 April 2011 03:57

Ross Douthat struck another blow against fact-based arguments when he told readers that the median family of four has an income of $94,900. Douthat warned that if the Bush tax cuts are allowed to expire in 24 years the median family would be paying a marginal tax rate of 39 percent on their labor income.

If Douthat wanted to base this argument in reality then he would have had to start with a median income for a family of four of $75,700. This is what the Census Bureau reports. Douthat overstated the median income for a family of four by more than 25 percent. But hey, it's for a good cause, he wants to keep taxes low.

Douthat also includes some bizarre racial politics in his analysis. He argues that we will face racial tensions in future years because most of the working population will be non-white whereas most seniors getting Social Security and Medicare will be white. His story is that the non-white working age population will resent paying benefits to white retirees.

This is possible if rich people can direct racial resentments towards retired workers. However the more obvious racial tension would be between the working population and the very wealthy, who are also overwhelmingly white. The  top 1 percent's share of national income has increased by close to 10 percentage points in the last 30 years. This is enough to double the income of the bottom 50 percent.

Given the wealthy's control over the media and its ability to promulgate untrue information, they may be able to direct racial hostility against retirees getting Social Security checks of $1,100 a month and who have access to decent health care. However, the more obvious direction of resentment would be against the wealthy who have rigged the deck to ensure that such a large share of the country's output comes to them.

 

Addendum: As several comments note, Douthat actually was citing a real number for his $94,900 median. This came from the Congressional Budget Office's long-term budget projections. The main reason that CBO shows a higher figure than Census is that the CBO data include employer provided health insurance and employer side payroll taxes as part of workers' income. Together these are likely to add 20 percent or more to wages, especially for married couples with children, since the employer may contribute to benefits for spouses and children. So Douthat presumably came by this number honestly, even if he did not represent it accurately in his column.

Douthat has confirmed this point in a note to his column.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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