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Home Publications Blogs Beat the Press NYT Does PR Push for the Bond Rating Agencies

NYT Does PR Push for the Bond Rating Agencies

Wednesday, 27 July 2011 05:08

Let's see, if the bond rating agencies lower the credit rating for the U.S. then, if we look at the NYT chart, the interest rate on U.S. Treasury bonds may fall from today's 3.0 percent to 1.1 percent paid by AA- paid by Japan. There is little evidence that the markets pay a great deal of attention to the credit rating agencies. Note that many countries with lower ratings pay considerably less in interest than those with higher ratings.

The piece also includes a bizarre paragraph stating:

"But in the broader economy, if money that might have gone to new purchases or increased investment were instead diverted to higher interest payments, the result could be slower economic growth and a higher jobless rate for the remainder of the year, analysts warn.

Macroeconomic Advisers said the country’s gross domestic product could slow in the second half of this year to 2.6 percent from a forecasted 3.2 percent, and that the jobless rate could end the year at 9.6 percent, above the 9.2 percent expected."

This sounds bad, but then we hear:

"Joel Prakken, chairman of Macroeconomic Advisers, said any change in interest rates would probably be small and not felt for several years."

Okay, so the impact on interest rates and will be small and not felt for several years, but yet we have the same outfit projecting sharply lower growth in the second half of 2011. These are not consistent.

The piece continues with the quote from Prakken:

"'The real story is whether the uncertainty will cause consumers and companies to stop spending,' he said.

On that front, some analysts noted that corporations stopped spending long before the debt-limit debate hit the news.

'Companies clearly have had record cash on the books for a year and a half now,' said Alec Young, an equity strategist at Standard & Poor’s Equity Research. 'Yes, they’re not spending the money, they’re not hiring, but is it because of this issue?'”

No, this ain't what the data show. New orders for non-defense capital goods rose 5.8 percent in May from April. For the year to date they are running 14.0 percent above last year's levels.

The deference in this article to the judgement of the credit rating agencies shows a remarkable ignorance of recent events. At this point, these outfits are one step ahead of the law. They should hardly be dictating fundamental political decisions to the nations.



Comments (4)Add Comment
written by foosion, July 27, 2011 6:53
The only rating agency issue is that many institutions can only hold bonds rated AAA. In the US, institution can generally hold treasuries or AAA, but non-US holdings policies are often written in terms of AAA.

Losing AAA would mean these institutions could not hold US treasuries (unless they revised their charters or any relevant laws), causing them to sell, depressing price and raising rates to some degree. I haven't seen any quantitative analysis of this issue (perhaps someone reading this knows of one).
New Economic Order: One Stop Shopping Requires Only Sellers
written by izzatzo, July 27, 2011 7:41
Okay, so the impact on interest rates and will be small and not felt for several years, but yet we have the same outfit projecting sharply lower growth in the second half of 2011. These are not consistent.

Adam Smith's invisible hand of specialization has collapsed into a generalized visible hand of know-all be-all corporations working both ends of the supply and demand chain.

They know what's good for you and bad for you and everything in between. They sell cures for causes they sold before that which were cures for prior causes.

It's consistent. Remove consumers as buyers and replace them with sellers who create their own demand via force feeding which completes the circular flow.

You need this omnipotent prediction in order to avoid repeating history and you will abide by it regardless of whether you pay for it directly as a buyer or indirectly as a victim.
Can you have an AA reserve currency?
written by Jay Weiser, July 27, 2011 2:38
At the least, a downgrade would threaten the dollar's position as the world's reserve currency, since it would introduce credit risk. The Japan comparison may not be apt: my recollection is that most long-term Japanese government debt is held domestically, and it wouldn't surprise me that domestic Japanese investors, on average, have fewer investment alternatives than worldwide investors in Treasuries and T-Bills.

If there's a US downgrade, there would be huge domestic pressure within China to more aggressively limit dollar exposure, particularly if long-term rates jump and the state investment portfolio takes a hit. In addition, failure to address the longer-term issues in a debt package could cause a shift in investor preferences toward T-Bills and shorter-term T-Notes, raising US liquidity risk and potentially increasing long-term rates. It's possible that this could result in a more significant jump in US funding costs than predicted and be destabilizing.
written by Matt R, July 27, 2011 3:35
Here is my question... Why did a congressional hearing about the efficacy and legitimacy of credit rating agencies turn into a discussion about the federal debt rating? If a journalist were on trial for plagiarism and during his hearing he began making statements about the possibility of the judges personal life making the front page, I would generally think this would constitute some sort of moral hazard...

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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.