NPR Flunks Causal Relations 101 on S&P Downgrade and the U.S. Stock Market

NPR told listeners that Standard & Poors downgrading of U.S. government debt caused the stock market plunge last summer:

"A year has passed since the debt ceiling debacle in Washington, D.C. The showdown cost the U.S. its AAA credit rating and sent the stock market and President Obama's approval ratings plunging."

Is that so? Let's try a little logic 101 here. S&P downgraded U.S. government debt, meaning in principle that there was a greater risk that there would be a default on this debt. Let's assume that the markets took S&P's judgment seriously. What would we probably expect?

That's right! We would expect the price of U.S. bonds to fall, this would cause the interest rate on U.S. debt to rise.

But, what actually happened was that U.S. bond prices soared and interest rates plummeted. This is 180 degrees at odds with the idea that the markets agreed with S&P's assessment about the risk of holding U.S. bonds.

There is another factor that could explain both the jump in bond prices and the plunge in the stock market. This is the euro zone crisis, which became far more serious in early August as interest rates on Italian debt soared. That would cause investors to flee to U.S. bonds and make shareholders weary about the future of the economy.

That explanation logically fits the set of events that we saw in financial markets. Unfortunately it doesn't fit the morality tale that NPR seems to want to give its listeners, so we apparently won't get to hear it on the air.

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written by Last Mover, August 03, 2012 6:07

Next on NPR, What's the difference between debt and equity?

Here to tell us more on this complicated subject is David Wessel who just wrote a book on addition and subtraction, Red Ink.

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written by JSeydl, August 03, 2012 7:13

I'd also add that the day of the S&P downgrade was the same day that the GDP report (with revisions) came out, showing that the economy grew at a stall speed in Q2. This was when the whole double-dip nonsense started to flare up. It would make sense that if there was a real fear of a double dip, then the stock market would plunge.

Causal relationship
written by Shawn, August 03, 2012 8:08

I'll admit I haven't read the article but from the quote you posted it looks like they are saying the debt ceiling showdown caused the S&P downgrade AND the debt showdown caused the stock market's plunging. That's English 101...

Seems like a case of
written by Floccina, August 03, 2012 2:01

Seems like a case of they have to say something to get you to listen. NPR does not need to sell ads but they do need listeners.

S&P is irrelevant
written by Vara, August 03, 2012 2:43

Actually, the markets did pay attention to the significance of the S&P announcement. The market reaction is completely consistent. Markets assumed (quite accurately) that this announcement would lead to more austerity on the part of the government (to win back our stellar rating). Obviously that would lead to lower economic growth - consequence lower stock prices and higher bond prices. In this case, the markets did get it right.

Hacker, NPR, & Bond Math: Why Students Are Confused
written by TVeblen, August 03, 2012 9:58

Anybody see that stupid piece by Andrew Hacker in the NYTs "Week in Review?" I usually like Hacker's NYRB pieces (and have used them in my econometrics class to teach how to use stats-based arguments), but this was just plain stupidity masking as NYTs hipster "cleverness." Hacker's retired from CUNY-QC, and, as a test of his article's hypothesis, I'd like him to solve for the embedded yield he needs on his savings to live for the next 30 years on say, oh, $100/K per year WITHOUT algebra. OK, so I digress. Maybe if the folks at NPR knew some basic bond math - and even a little calculus - they'd have made the more insightful point that bond price risks are a lot higher when yields are 3% vs. 13% (not that they'll be heading to 13% any time soon). I'm going to play that NPR clip to my class so they can learn - once again - not to believe everything on the radio. No wonder our students are so confused.

NPR Flunks Causal Relations 101 on S&P Downgrade and the U.S. Stock Market

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