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Home Publications Blogs Beat the Press Beat Up Your Favorite News Reporter, What Would It Mean for the U.S. to be Unable to Pay Its Debt?

Beat Up Your Favorite News Reporter, What Would It Mean for the U.S. to be Unable to Pay Its Debt?

Tuesday, 02 August 2011 04:33

Okay boys and girls, this stuff about a credit downgrade has gone far enough. We know that all the important people in Washington and on Wall Street are warning us about the possibility that the credit rating agencies will downgrade the U.S. government if we don't reduce the debt to their standards. But what could this possibly mean?

The U.S. debt is denominated in dollars. The government issues dollars. Do Moody's and Standard and Poor's think that there will be some point in the future where the government will not be able to issue dollars?

Let's say this so that even a reporter with an elite news outlet can understand it. Suppose I issue IOUs that are payable in Dean Baker IOUs. What is the likelihood that I will ever default on my IOUs?

That's right, unless I lose the ability to write, the probability is zero. There is a possibility that at some point that Dean Baker IOUs will lose some of their value (i.e. inflation) because I have issued so many of them. However the credit rating agencies are not in the business of making inflation predictions. They certainly don't have any obvious expertise in this area.

Furthermore, if a debt downgrade for the U.S. is simply a forecast for higher inflation, then the debt downgrade must apply to every debt issue denominated in dollars. In other words, if U.S. debt loses 30 percent of its value because of higher than expected inflation, then so will dollar denominated debt issued by General Electric, AT&T, or the government of Israel.

In other words, if the concern really is higher inflation, then the credit rating agencies must be considering downgrading all debt denominated in dollars. But, they have not threatened every issuer of dollar denominated debt with a credit downgrade, so this must not be what they mean.

So, what does the threat of a credit downgrade mean? The reporters should be asking this question and giving us the answer. This is their job.

Comments (6)Add Comment
written by foosion, August 02, 2011 6:20
That's right, unless I lose the ability to write, the probability is zero.

The Republican House threatened to lose the ability to write. The rating agencies are making a political judgment, not an economic judgment. That is not their business.

Given the constitutional priority of public debt,however, and the factors you mention, the odds of an actual default approximate zero. Which means we should retain AAA.
written by John Puma, August 02, 2011 6:37
Did we mention, yet, that these very same credit rating agencies rated as "investment grade," for bundling into exploding derivatives, untold reams of loans backed only by the borrowers ability to respire?

They purport to be "very serious" when, in fact, they deserve only to be "very incarcerated."
U.S. Debt Won't Be Downgraded
written by Paul, August 02, 2011 9:50
Everyone knows that the rating agencies are paid to issue ratings which is their only source of profits. But nobody is paying them to rate U.S. debt because there is no reason to rate U.S. debt; the worldwide bond market rates it every minute of every day.

Without any profits to be made from downgrading U.S. debt, the rating agencies couldn't care less about U.S. debt.
written by skeptonomist, August 02, 2011 2:25
I agree that the probability that the US will default is negligible. The "crisis" was basically phony - the Tea Party, a small collection of legislators, does not have the power to cause default - they were essentially stooges for the plutocratic establishment. We see now that they are taking a lot of the blame and scorn for the "crisis", making Boehner and other real leaders look moderate.

But governments have defaulted before and probably will again whether or not they have their own currency - in fact as far as I know all governments which defaulted have had their own currency. As such events are anticipated ratings agencies would not be doing their jobs if they did not change ratings. Of course they have a poor track record at evaluating the probability of default, but this does not change the basic economics. The threat is nonsense because the US has a large economy which can stand behind the debt, not because the Fed can issue dollars. It seems to me that this emphasis on whether or not a country has its own currency and its own central bank has gone far enough.
U.S. Debt is ALL in U.S. Dollars
written by Paul, August 02, 2011 4:26
True, having your own currency is not determinative; Argentina had its own currency and it defaulted. But Argentina's debt was in foreign currencies which obviously it could not print. When the value of its currency collapsed relative to foreign currencies, it could not pay its debt.

Not rocket science.
Lets hear it for the rating agencies
written by Nassim Sabba, August 02, 2011 4:53
Last week the interest rate on 10 year US bonds were 2.96%, today they have risen sharply to 2.60%. Wrong word, or maybe that was the freudian wish of the AAA rating agencies and all the macho talk of their power.

I expected the fear of these servants of the masters of the universe downgrading the US something or rather would have made the rates zoom up.

Lets give them megaphones and blast them out into the whole universe. A couple of more weeks and we may see real effect of their pronouncements on the dollar and then we can sell something US made for humanity's sake.

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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.