Moody’s strips U.S. of triple-A credit rating
Long term reforms to make education and healthcare outcomes focused, punishing administrative overhead and rewarding performance. Similarly defense could be massively downsized IMO to just expendable drones and submarine based nuclear deterrence, we don't need a 'triad' - one ballistic sub can basically end the world. Replace defense contracts with guaranteed purchase orders and let the private markets figure out how to do hypersonics or missile defense.
Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
You don't even have to raise the cap by very much to fix every foreseeable funding issue Social Security has
Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
You say this as it's some sort of injustice. But the guy who makes 10 million will collect the same benefit in retirement as the guy who makes $176,100. Or are you proposing that the guy who make $10 MM should pay more, but get their benefit capped? Because if that's what you are proposing, I don't see how that is just or fair. Except maybe following the argument along the lines "screw the rich, they can afford it".
It is absolutely a "fair" and "just" thing for a society to do to itself.
... you'll notice that taken to absurdity this is the same statement as "everyone should be paid the same". And that's been tried.
Let's also add fines and traffic tickets to the list of things that ought be more expensive as one becomes wealthier please.
It seems to me like government programs is a poor delineation, as government can pass a law to extend its own scope.
Why not groceries or clothes?
Why not groceries or clothes?
Well, programs like TANF and SNAP exist, which I think are great and their greatest problems are they are not easy enough for people to make use of.
So, fair point, when looking at the most impoverished among us I do not think we should stop at governmental services.
Feels like we're splitting hairs a bit here.
I guess im still looking for some limiting principle. Why not just mandate that all goods are sold proportional to income.
This was reality under the Soviet system, and was one of the main reasons it failed.
Now, I understand why I am getting all the cheeky responses and the downvotes. People are hurting. Capitalism in the US is currently failing under a different failure mode. The capitalists are relentless optimizers, even past the point where optimizing their metrics stops making sense. Their metric is "extract as much wealth from the populace as possible", and it's gotten to the point where the people are disillusioned, and very soon there will be nothing left to take.
It is in no way like insurance today, and never has been. It has always paid out independent of circumstance. It was never about equity either - The poor get less, and the very poorest get none. Again, this is the way it has been since conception.
It is a state mandated pension with low returns and a progressive fee. Noting more.
My analogy to insurance was more about whether you pay into "your" account with your name on it or if you pay into a big fund directly pays out to recipients, and nothing is held aside for you.
The money isnt held in a dedicated account with your name on it. However, how much you pay in is rigorously tracked and used to directly to determine how much you get.
The closest thing is a pension. Like a pension, SS pays out X% of your taxable salary. X is progressive with high earners heavily subsidizing low earners.
SS starts by paying out 90% of taxable salary in the lowest bracket. As income goes up, this reduces to paying out 15% in the top bracket. The brackets are referred to SS bend points.
Or are you proposing that the guy who make $10 MM should pay more, but get their benefit capped? Because if that's what you are proposing, I don't see how that is just or fair.
You get to live in a stable society, in relative order, safety, and peace. Your life is (financially) richer than 99.99999% of people in the world. All of this in exchange for a small portion of your wealth, and yet you STILL want to complain about the unfairness of this arrangement?
Push it too far, and the only alternative you're going to get is having to look over your shoulder everywhere you go, living in constant fear that someone will pillage your property and threaten your personal safety.
Push it too far, and the only alternative you're going to get is having to look over your shoulder everywhere you go, living in constant fear that someone will pillage your property and threaten your personal safety.
But that's the thing: is Social Security a safety net or is it welfare? If it's a safety net, means testing (can at least in principle) preserve the safety net aspect.
If it's welfare, you're transferring wealth from people currently working to those retired, many of whom are much more comfortable than those paying the tax. Why are we transferring wealth to those with more from those who must work?
I don't know, I've never heard of this distinction before. As far as I'm concerned we decide which types of programs we want to have in our society, and then we find the funds for these programs. The only moral option then is to take more from those who can contribute more through progressive taxation.
It's an increasingly common distinction today, and is actually cited as a reason for social securities high support (see: https://www.cbpp.org/research/social-security/top-ten-facts-...):
Finally, Social Security’s nearly universal nature ensures its continued popular and political support; 79 percent of Americans oppose cuts to the program.
It is not an exaggeration to say that politicians explicitly argue against means testing because they want universality to keep it a third rail and became an increasingly prevalent sentiment during the COVID crisis when money was cheap. For example (https://www.vox.com/2021/10/15/22722418/means-testing-social...):
“We can choose to strengthen the bond Americans have to one another by proposing universal social insurance benefits that broadly benefit all Americans, or we can pursue complicated methods of means testing that the wealthy and powerful will use to divide us with false narratives about ‘makers’ and ‘takers,’” leaders in the Congressional Progressive Caucus wrote in a letter to House Speaker Nancy Pelosi on Wednesday.
while simultaneously arguing social security is necessary for the economic security of every family (https://www.vox.com/2021/10/15/22722418/means-testing-social...).
And that's the point: there is a very real portion of the party that, rather than cutting Jeff Bezos', Warren Buffets, Bill Gates' and other wealthy individuals who can survive without the cuts social security would rather raise taxes to pay more benefits because it is good politically. It's absolutely absurd, and highlights how the discussion is manipulated to ensure that social security as a political third rail continues rather than addressing seniors actual needs.
And the argument is that if you are rich you can afford it.
But why increase the tax on the rich in an obfuscated way via this Social Security trick? Because you think they won't notice it? Or because you think you can stoke some proletariat fury by claiming that the cap is injust? It's ok to stoke that fury if the injustice is there, but in this case it is not.
I don't see how that is just or fair
It's not and it doesn't need to be. If I make 10 million dollars a year, I don't need social security period. I'm going to be fine no matter what. I personally would not mind, at all, giving up a portion of my income to other people who are not so fortunate.
It's like giving the fat king and the starving orphan both one slice of bread. Sure, it's fair, but does the king need the bread? Who cares about fairness when the playing field is already so skewed in favor one side?
Also: the reality here is that rich people pay WAY less taxes proportionally compared to the poor. If we want to talk fairness, we have to start there. Poor people are spending 100% of their income on consumption, it's going straight into the economy. It's getting income taxed and it's getting sales taxed.
If rich people had to pay anywhere close to the amount of taxes the working class or the poor do, they would turn to dust. I'm sure they're fine in their already extremely favorable position. In short - give me a fucking break.
It's hard for me to look at the idea of "law, policy and regulation should now move the needle in the other direction" and see that as grossly unjust. We can debate whether social security is the right place to do it, but it seems like one of the top options to me, considering the huge wave of people who are going to be jobless, old, poor and alone, and therefore vulnerable, as the Millennials age.
Yeah, people who make more money should pay more to fund the government. Apparently this is a wild concept for some.
"screw the rich, they can afford it".
are you really getting screwed though, if you can't feel it?
"screw the rich, they can afford it".
> are you really getting screwed though, if you can't feel it?
I say this kinda-sorta in jest, but in truth, there's a somewhat huge contingent of the ultra-richest of the ultra-rich who are absolutely guilty of such "Screw the poors." behavior. The ongoing and worsening effects of this specific outta-control inequality speak for themselves. Worst part of it is that the things they're doing these days aren't only going to harm just some of humanity, but rather all of humanity, as well as most all other life on Earth.
They could choose to spend the money they've spent doing outright "evil" (bad things that harm everyone) doing good instead, and cemented their places in the history books among many other great humans who made the world a better place during their time here on Earth, but instead they actively choose to do harm, many of them full-well knowing they're doing harm.
Means testing is one of this things that fools people - it sounds good, but in practice is wildly bad at what it’s trying to do, and can be borderline evil.
Beyond the bureaucracy dimension - means testing puts up a barrier, not at the top, but everywhere.
Adding “one more thing” to people who are already struggling can be disproportionally difficult for them to meet, and therefore cause them to miss out on benefits they are completely entitled to.
Additionally, it can create incentives for behavior you would otherwise be completely pathological, such as divorcing your sick spouse because as a couple you don’t qualify for support, but individually they do.
it sounds good, but in practice is wildly bad at what it’s trying to do, and can be borderline evil.
The UK's DWP is a good example (and I'd suggest they crossed the border a long time ago into evil.)
* https://www.bbc.co.uk/news/uk-england-merseyside-68727007
* https://www.bbc.co.uk/news/articles/c20nrv02vz1o
* https://www.bbc.co.uk/news/uk-england-leicestershire-6770464...
* https://www.bbc.co.uk/news/uk-england-nottinghamshire-525003...
* https://www.bbc.co.uk/news/business-51756783
That's just a simple BBC search - going through Private Eye, for example, would bring up a lot more.
There's "Gary's economics" discussing it, even though the usual economic comment somehow seems to escape him.
(that would be "what about creative destruction" btw)
Means testing is one of this things that fools people - it sounds good, but in practice is wildly bad at what it’s trying to do, and can be borderline evil.
These non-specific appeals to emotion aren’t very convincing when we’re discussing a topic where we’re already collecting tax returns for the same people collecting social security.
incentives for behavior you would otherwise be completely pathological, such as divorcing your sick spouse
We do live in the only country in the developed world where “deathbed divorce” is a thing to try to ensure your surviving spouse doesn’t get crippled by medical debt, so there is that…
Someone who makes 10 million dollars (or 100 million, or...) a year pays the exact same social security tax as someone who makes $176,100.
Very few people earn that kind of money as taxable _income_. More people earn that kind of money as unrealized _capital gains_. Social security is paid for with a payroll tax and what amounts to an income tax. Once you're earning several times the cap you stop caring about it. If you earn 5x or 10x the cap then you will probably not be counting on social security, so there's no us-vs-them dynamic likely there. The problem is that to make this make a big different you'll have to hit hard those who earn only 1.5x or 2x the cap, and that's how you'd get an us-vs-them dynamic.
Instead you can increase the retirement age, increase the cap, increase the tax rates, lower the COLAs, etc., and that's what we've seen so far.
There’s two drivers to the actual problem here… one is that wage growth slowed a lot since wage indexing and the yield on those taxes is lower in real terms. People who are making more make a lot more, and frankly that’s a well that needs to be tapped.
The other is less popular… but we’re in wind down of nearly 25 years of conflict. The events of 9/11 were engineered to and succeeded in created the same type of economic attrition the US ultimately inflicted on the Soviets.
We’re at a tipping point… our social insurance is approaching entirely avoidable cash flow insolvency. 25 years of war means that the military is worn out and needs trillions of investment to maintain parity. Ignoring the problems our strategies created brought us with a reactionary buffoon destroying the government and a fairly dim decade ahead.
Working people
We could magically pay it off right now and the US would still look like a credit risk. It's all about trade policy right now, and the general existential risk that we blow it all up. The treasury rate spike in April (likely but inconclusively due to strategic dumping) continues to have everyone spooked, and fiscal restraint, tax policy, austerity, etc... don't speak to that concern at all.
[1] Corrected: service cost of the debt
In point of fact outstanding debt as a fraction of GDP isn't even all that large, historically; it was much higher in the 80's and literally every one of those bonds is now paid off
I think you are very much mistaken: https://fred.stlouisfed.org/series/gfdegdq188S
https://fred.stlouisfed.org/graph/?g=iEiV
Again, if the debtpocalypse didn't happen then it's clearly not happening now. This is simply not about fiscal policy. Period. It's about institutional trust in the government's ability to manage payments.
(No, that's not correct. Borrowing in the 80's was more expensive. Period.)
If I have a $1M mortgage at 6%, and a $1000 credit card debt at 25%, which is harder for me to pay off, assuming I make $100K per year?
There is some chance inflation will be keep increasing
So what? Inflation is GOOD for the debt, which is dollar-valued and not inflation-indexed! If you inflate the currency by 20% the real value of the outstanding debt drops by 20%. That's always been the joke about federal borrowing, if we ever get in trouble we just print money to pay all the bonds and poof, no debt. Inflation being high makes borrowing cheaper, not more expensive.
The discourse about the subject is cursed. Everyone projects their own (largely political) priors onto it, everyone thinks macroeconomics works like checkbooks. It's just one bad idea after another.
(I think what you're trying to say is that interest rates being high makes borrowing expensive, and that high interest rates are a natural policy response to high inflation. But you have the causality backwards. In fact one reason borrowing doesn't care about inflation is that the fed moves the levers to keep the impact roughly constant.)
Inflation is GOOD for the debt, which is dollar-valued and not inflation-indexed! If you inflate the currency by 20% the real value of the outstanding debt drops by 20%.
Unfortunately GDP is also dollar-valued, so debt:gdp ratio wouldn't change with inflation. Inflation wouldn't only destroy debt (which is good) it will also destroy currency and to some extent the economy. In the very end it's part of FED mandate - to keep inflation in bay.
The discourse about the subject is cursed.
I think macroeconomics is very complicated subject, with a lot of uncertainty of how things will unfold.
Your initial claim was that servicing our debt was much harder in 80s, so it's actually not as bad (or at least not worse) these days. What I'm trying to say we can all of sudden end up in a world where interest rates are back to 80s levels, while debt:gdp ratio (which is the real amount of debt in a way) is way higher. And this would be much more complicated problem to solve. Or we would not, because it's hard to predict a) where inflation goes from now on and b) what will FED do in the same kind of scenario to 80s.
But actually scratch it, it is already bigger problem than it was back then: US needs to refinance/issue $9.2 trillion of debt this year. Current USG 10Y is ~4.5%, current GDP is 27.72 trillions. Which means after this year we will add 0.015 to the interest/gdp ratio (assuming very low current cost of the debt which is being refinanced, from https://fred.stlouisfed.org/graph/?g=iEiV). It will bring us above the level in 80s this year! Just this year of debt will bring the cost of servicing the debt above than it was back then. That's where huge issue is, unfortunately. And unless rates will go down it will be getting worse and worse really fast.
Unfortunately GDP is also dollar-valued
It... what? Good grief. If I buy a candy bar for $1, it counts to the GDP as $1. If it inflates and I have to pay $1.20 for the next one, you're saying that the GDP magically knows to adjust the accounting for how much it used to cost?! No, this is ridiculous. GDP counts currency.
The amount of bad economics being deployed in support of baldly political positions on HN is just astounding.
What about second calculation? I know assuming 0 rates of the refinanced debt is wrong, but it does give a sense of how bad the thing is.
As for your comment about my political position - you’re wrong, and frankly it’s not nicely engaging comment either. In fact I was of your opinion couple of months ago, but since then I changed it. As a meta comment the fact that such giants as Ray Dalio keep ringing the bell about the debt should be enough to, at least, seriously consider there might be an issue.
But in reality federal interest payments as a fraction of revenue are like 18%. That is well under the median consumer debt load, and very manageable.
The better metaphor, if you insist on using one (don't), would be to say that federal debt is like carrying a mortgage, where the title reflects the US economy as a whole, something that grows somewhat faster than housing real estate.
The second calculation is just spin, no numbers
I literally gave you numbers. It's quite hard to estimate growth of interest/gdp ratio because of how many different securities are there but here's my try: https://chatgpt.com/share/682b4741-9bbc-8007-94fc-848198c9c3... I got +0.006 this year, which will bring total ratio to 0.043, it's also 15% growth a year. We had this ratio last time in 97.
But in reality federal interest payments as a fraction of revenue are like 18%.
... and rapidly growing.
That is well under the median consumer debt load, and very manageable.
Consumer debt service payment to income is around 11.3%: https://fred.stlouisfed.org/series/TDSP
From what I gather ratio between household disposable income to household total debt is about 1:1. Government ratio is closer to 1:7. This is very different ratio.
However I'm not insisting on comparing household finances to gov finances, I'm not sure you can compare those two. At least not in a world where government controls money supply.
You keep accusing me in being partisan where in fact I go and do my own research. I think it's you who made up the mind that debt is not an issue and disregard anything which goes against your (partisan if you will) view of the world.
US has big budget problem. It will pay itself one way or another eventually (most likely through inflation/currency devaluation, affecting everyone and a lot), but so far it was mostly accumulating instead. The real solution is, of course, optimize spending (i.e. health care & military) and (what's even more important) tax the rich. Similarly to what we used to have in 50s. But we never gonna get there because, you know, the rich holds all the cards. So instead we'll get through a suffering of blown up currency, and I, personally, think we should be doing everything we can to avoid it. I don't think it's a problem of today, tomorrow or next year. But it's a problem and further we delay it worse the resolution would be.
Consumer debt service payment to income is around 11.3%: https://fred.stlouisfed.org/series/TDSP
That's a chart vs. DISPOSABLE income!
I give up.
In point of fact outstanding debt as a fraction of GDP isn't even all that large, historically; it was much higher in the 80's and literally every one of those bonds is now paid off!
This[1] shows in the 80s the total debt to GDP ratio started at 31% and ended at 51%. We are currently at about 122% according to the same chart. I'm not sure what numbers you're referring to, could you provide a source?
In terms of the bonds being paid off that's true, but they were paid off by selling even more bonds to cover new spending and old, i.e. total debt grew even if individual bonds matured.
Edit: i am flabbergasted at how low literacy is about how our government works.
Intragovernmental debt holdings represent federal debt owed by Treasury to federal government accounts—primarily federal trust funds such as those established for Social Security and Medicare—that typically have an obligation to invest their excess annual receipts (including interest earnings) over disbursements in federal securities.Debt held by the public represents a claim on today’s taxpayers and absorbs resources from today’s economy, meaning that when an investor buys Treasury securities it is not investing that money elsewhere in the economy.
Intragovernmental debt holdings reflect a claim on taxpayers and the economy in the future. Specifically, when federal government accounts redeem Treasury securities to obtain cash to fund expenditures, Treasury usually borrows from the public to finance these redemptions.
From memory I believe we're at ~100% publicly held debt to GDP and ~122% gross debt to GDP.
you can probably pull debt out of any kind of relationship if you squint right.
No, this is pretty explicit. To rephrase what the GAO said when the Social Security Administration takes in more than it sends out it invests the difference in special Treasury securities (that's the trust fund(s)). The money the Treasury gets is spent on general government operations (education, healthcare, etc). The treasure must pay this money back, with interest.
But it certainly is not to blame for our inability to balance the budget
When the Treasury pays the principal and interest it needs to either have enough tax dollars (higher tax rates or spending cuts) or issue debt to the public. So yes, it does factor into a balanced budget. It still must be paid back and the taxpayer will foot the bill one way or another, now or in the future.
which seems easiest to explain with nearly sixty straight years of cutting marginal tax rates while claiming to be fiscally conservative.
This is a gross oversimplification. If you think just one side is the issue you're not going to be able to fix the problem.
This is a gross oversimplification. If you think just one side is the issue you're not going to be able to fix the problem.
And what is the other side, pray tell?
Don't worry, I gave up on this country's ability to fix any problem a long time ago.
If we restrict our view to programs like Social Security or Medicaid we see that demographics are also straining the system. For instance I believe the number of people contributing to Social Security vs the number of people receiving benefits in the 70s was around 3.7 (payer/beneficiary), we're currently around 2.6 and in 10 years that will go down to 2.1. Put simply we're unhealthy, we're getting older, and we're not having enough kids to contribute to these programs that pay for all of these old, sick, childless people to retire and have healthcare.
From a philosophic point of view I would say the fact that about half of the electorate do not want higher taxes while the other half wants more government services should mean that these extra services are non-viable politically. What we've essentially done instead is "compromised" by not having higher taxes but still expanding government services which is contributing to our debt issues. We simply can't have it both ways, but that's exactly what the people voted for through their representatives.
Don't worry, I gave up on this country's ability to fix any problem a long time ago.
While we are likely on opposite ends of the political spectrum, I can agree that I don't see us actually fixing this problem. I made a comment elsewhere in this thread discussing the fact that Congressional Republicans appear to be going for lower taxes and higher deficits right now while the Democrats are in disarray and not particularly focused on this problem. The unfortunate fact is that this problem is going to get worse and the solutions will get more painful over time. Congress as a whole has really dropped the ball here.
While we are likely on opposite ends of the political spectrum, I can agree that I don't see us actually fixing this problem.
Eventually reality comes calling and problems resolve themselves. You just might not like the resolution.
If you fail to proactively address a cancerous growth, health problems compound but eventually disappear entirely.
From a philosophic point of view I would say the fact that about half of the electorate do not want higher taxes while the other half wants more government services
Are these not the same people? One half can convince themselves they don't get any payoff from their taxes; the other sees the payoff. Ultimately both expect services from their government they aren't getting, and are upset with services the government does render that seem inherently injust.
The difference is that those who most adamantly state they contribute the most while getting the least actually contribute the least while getting the most.
have an obligation to invest their excess ... in federal securities.
The Social Security surplus is pretty much required to purchase US bonds and other guaranteed Federal securities.
But saying that "contributes to the Federal debt" is like saying your 401k contributes to corporate debt.
I am still not convinced that Social Security causes Federal debt the way that a trillion-dollar military budget does.
A small group of people considers itself superior to the rest of the population. As a group it is convinced it deserves every break, benefit, privilege, and handout, while the second group is only worthy of intrusive oversight, abuse, exploitation, and punishment.
This isn't hyperbole. This is the political belief system that drives the rhetoric about the government spending and debt.
The proof is simple - government debt always increases when the first group is in power.
Always.
This wouldn't happen if it was really about the deficit.
The motivation to remove social security isn't economic or rational, it's political and psychological.
Yes this is it and this is all it ever was. The second the pen was put to paper and SS was made law it has been under attack. People have been proclaiming it'll go insolvent any day now for almost a century.
It's an ideological attack and we shouldn't even humor these people. The idea of essentially retirement insurance feels unfair to a ton of people and that's that.
So you're right that it's not the same as publicly held debt. Rather intragovernmental debt is deferring the decision of how to pay for some governmental services to a later time, although usually it becomes publicly held debt. One way or another, the tax payer is on the hook for this spending which is part of the gross national debt, just like they're on the hook for publicly held debt.
https://en.wikipedia.org/wiki/Social_Security_(United_States...
[1] We only recently just reached the tail-end of the 1983 reforms' gradual shift in retirement age.
So either there's going to be a cut in benefits and/or the retirement age will be bumped up
Or...raise the contribution limit which fixes the whole thing easily without having to screw over the people that paid in and just want to get back what they were promised.
Raise the retirement age? Really? All this advancement to make our lives better and more efficient, and we're going to conclude that we all need to to work more?
And meanwhile we can piss away cash by the trillion but when it comes to social security suddenly there's no money to be found anywhere.
They've fooled everyone into believing "the fund will be depleted" in x years. Then put some more money in assholes.
Considering that the population has decided it doesn't want any more significant immigration, ensuring the median age (along with median working age) will increase faster than lifespans, it seems foolhardy to think we can have our cake and eat it, too. Any kind of tax increase is a difficult sell.[1] If we can successfully raise the limit on payroll taxes, we better make it count. Note that social security disability benefits exist and presumably would remain an option for those unable to work.
That said, I appreciate you pointing that out. I hadn't realized how much revenue there was still to be had in lifting the payroll cap, at least according to https://crr.bc.edu/to-fix-social-security-increasing-the-wag...
[1] How quickly the left forgets that the president who pushed through devastating tax cuts in 2018 was just recently re-elected.
Without legislative changes, trust fund reserves are projected to be depleted in 2033 for the OASI fund.[16] Should depletion occur, incoming payroll tax and other revenue would be sufficient to pay 77 percent of OASI benefits starting in 2035.
Social security itself does not take in any income whatsoever.
Social security is a debt. Therefore it itself directly affects the US' ability to pay off it's debts.
That by law can only go to fund social security and nothing else.
Eh, that's partly true. The true statement is that social security tax revenue must eventually go to fund social security.
Before it's needed (i.e. while tax revenue exceeds benefits), it has been used to buy US treasuries -- the funds used to do so then appeared for Congress' general use.
You can see the US treasures the social security trust fund is currently holding here: https://www.ssa.gov/OACT/ProgData/investheld.html
The money goes to the trust fund, the trust fund buys treasuries and meets it's outlays using the maturing treasuries.
Or to put it another way, buying special issue treasuries isn't functionally different than Congress directly spending excess money in the trust fund and guaranteeing to pay more back later.
Just with additional steps and a thin veneer of impartiality and financial standards.
It has literally no impact on the deficit or our ability to pay off debt. By statute.
This however is wrong.
As a simple proof: let's just up social security payments by 3000x... social security is still "self-funded" and "separate" but that would be an untenable debt and the US would immediately default on that obligation. The amount and structure of social security debt matters to the US' ability to pay.
Social security is a promise to pay an amount of money in the future and it is backed by the "full faith and credit" of the US government. The bigger it is, the bigger the debt, the hard it is to pay off. It's a big impact.
Just because it's specifically funded and tied to a precise specific tax does not make it immune from debt considerations.
https://www.ssa.gov/cgi-bin/investheld.cgi
Cash money from payroll tax is sitting there collecting interest and being drawn down by Social Security disbursements.
So we pay taxes, that revenue holds a gun to Congress and forces them to buy another aircraft carrier... That's semantics for you.
Sorry. The aircraft carrier thing is bitter sarcasm on my part. But I'm put off by dismissing the funded nature of Social Security as the root cause of the Federal debt.
The root cause is deficit spending.
Social security is self-funded. It has literally no impact on the deficit or our ability to pay off debt. By statute.
There is a very real problem that social security is project to be no longer solvent in 2035. (see here: https://www.congress.gov/crs-product/RL33028) It may require either transfers from the general budget or structural changes to remain solvent.
To be fair, republicans have been saying SS will go insolvent from the moment it was written into law. It's been almost a century. After a certain point, we have to call a spade a spade and just admit there's a lot of people ideologically opposed to SS and that's it.
Actually, SS was going to go insolvent when it was first written. The benefits were far too generous for what was affordable, even with the population pyramid at the time.
Then it actually was going to go bankrupt and the benefits were reduced in real dollars, because it turned out at one point we were dramatically overestimating inflation, and we couldn't afford it.
If social security was an actual insurance or pension plan, it would have been shut down by a state regulator or the PBGC. It's a horrifyingly bad plan for the simple reason that it's structurally insolvent. Even the concept of "uncap the tax" just kicks the can down the road: you now need to pay those people benefits.
The issue is we don't actually know what we want from it, which I alluded to in another comment. If we want some sort of "social insurance" plan where you just get back a portion of what you pay in, we have it and it's functionally in default. If we want a social safety net, we need to have a serious discussion about means testing.
And I say this as someone who unabashedly supports allowing it to revert to its statutory payout rat, even if it is below what was promised.
But seriously, nobody was promised anything not dictated by statute. Who gives a shit about what you, specifically understood the statute to mean? By any reasonable understanding of the law it's not even possible for SSI to go without funding, assuming the government is still operational.
What's more real and relevant is that the government only cares about your insofar as you contribute to the private economy. Like what can we do to make those fucks actually pay out and take care of us?
Social security is self-funded. It has literally no impact on the deficit or our ability to pay off debt
Technically, yes. Practically, it’s a pair of income and expense streams. Slashing social security payouts to pay for some nonsense is tempting.
My guess is we’ll stick it to Gen X.
I'll be telling anyone who will listen that they're being sold up the river to finance the military and the wealthy against all reason.
My cat's incredibly convinced of a global scheme against his caviar budget, that doesn't really cause any consequence.
If you have issues with what it is, that's fine. But it still doesn't impact our deficit or ability to pay off debt.
They'yr not paying for their own, they're paying for the receivers of it. The debt has already accrued. and worse yet, those that did not pay for the social security they're receiving are now living longer and costing more. Its like a "life interest".
In my humble opinion, this kind of broken promise borders on "the government defrauding the people".
It would be more legitimate to say "SS won't be there for you if you make too much" to those in their teens and 20's just entering the workforce -- but that won't have a major effect on cash outflow needed to satisfy SS obligations for 40-ish years (except for the small fraction of rich unfortunates who get SS because they become unable to work at a young age.)
You might also argue that the level of prying into people's finances implied by "means testing" is a form of illegitimate government overreach. If you believe this, in theory you should, for consistency, also believe that individual income tax ought to be eliminated (which many people consider a radical proposition).
Hopefully everyone involved goes to jail, once the government changes and starts charging people who break the law again.
It takes a super special type of incompetence to fail to find any provable fraud, waste or abuse in US government spending.
From that you have a choice: either you allow low level government employees to partake in the corruption and remove a lot of rules, or you leave those rules which makes running the admin cost more. I think the second solution is better even if it were to cost more (i'm not sure it does, corruption is expensive), because once government low level employees start to accept bribes, your country is fucked.
that could lower the debt that would result in little to no austerity.
I like your ideas, but I'm not sure this is possible without austerity or major tax reform. The deficit is massive.
If I was King, I'd choose tax reform and go with a land value tax. It's what economists agree is the least bad tax.
The whole principle of a triad is based on the expectation that an adversary could compromise your retaliatory ability to a high degree so you need to mantain robust options.
Maybe a few hundred billion right there.
Source that such reforms add up to this much? What do the reforms look like in concrete terms?
means-test social security
Why would you means-test insurance? A means-test is for something like welfare, not insurance.
Explicit fuel subsidies are only $3 billion: https://www.eesi.org/papers/view/fact-sheet-proposals-to-red.... (Implicit subsidies are arguably much more, but anything that would make energy more expensive is an economy killer and would tank revenue.) What’s lost to corporate tax havens?
The simple reality is that US will need to go through a period of pain to correct some of those excesses. It will not be fun for anyone, which is why there is so much effort put forth to kick can down the road.
And the part that really gets me is that congress is discussing cutting taxes, fed is being pressured to lower rates.. as if all those things were not at least a factor in the mess we are in now.
The only solution is for the Gov to stop spending money it doesn't have. I don't know how you can insinuate that de-industrialization and taxes are a viable strategy without addressing the root of the problem. It would be like telling someone with a gambling problem that spending more time at the casino and less time at work would improve their finances.
spending is a good thing. roads, schools, healthcare, research funding - we need these things in order for america and its people to thrive.
our representation just has this awful aversion to increasing taxes on those who can actually afford to bear the increases.
Ultimately, no idea what will happen when debt services consumes all tax revenues. This will come in the mid-2030s at the current rate. I figure that the Fed will just suspend the requirement of Treasuries and debt payments, print like crazy, and the USA will look like Zimbabwe.
Any argument you can do one and not the other is insane.
Challenge accepted :).
The argument for lowering spending and lowering taxes is that the size of the economy and the tax base are inherently tied to tax rates and economic growth. Historically, federal tax receipts have hovered around 17 to 18% of GDP since the end of WWII, regardless of the tax rate[1]. Deep spending cuts paired with high taxes might increase the percentage, but it would be of a smaller economy, shrinking the overall tax base and making the debt ratio worse.
I don't know if that's true and I don't think we'll find out because the Republicans in Congress appear to be going for option C, lower taxes and larger deficits. The Democrats are in disarray and reflexively taking a contrary position, but even if they were in power I don't think this would be much of a priority. I think we get to see how far we can go. Maybe we'll beat Japan's debt to GDP ratio or maybe a failed auction or some debasement. The future has a lot of exciting possibilities.
If the government stops spending money on programs, it looks bad.
If the government raises taxes, it looks bad.
Essentially people don't understand this, which is why grifters like Trump got elected who promise the impossible, make the economy seem good for 4 years then once shit starts going down the Dems win and have to deal with the outcome, which then they get shit for not being able to fix.
Social Security: 22% Interest on the Debt: 14% Medicaid: 14% Medicare: 14% National Defense: 13%
That's 77% of the budget in those categories.
Everything else is 23%. The Federal deficit is ~25% of receipts.
You could cut each and every function of the government other than the above and still be left with a deficit. And there isn't a lot of room to cut everything else, as they've already been squeezed for decades.
There's little reason for a good chunk of the US, insulated from the true cost of spending, to favor spending cuts.
The real issue with spending cuts is that the public will not accept any reductions to entitlements, the poor won’t accept cuts to welfare programs, and the donor class won’t accept cuts to military spending. This means there’s zero political will to fix the situation.
The direct link between spending and taxes is far easier for people to understand.
So instead, raise taxes by 20+%. Setup automatic tax adjustments to cover spending changes to ensure the debt shrinks every decade.
As noted, however, these is zero political will to reduce spending, and I therefore believe the USA will suffer a monetary crisis in the mid-2030s. I hope to be incorrect, but I just don't see it happening. Raise taxes? Lose votes. Reduce spending? Lose votes.
Edit: Ah wait, rereading you're 100% correct. It's more difficult to see all of the cases I mentioned as being due to monetary inflation. So, while felt, people don't immediately attribute it as such.
Why is the phrase "reduce spending" never anywhere to be seen with these awful takes?
Because the government was running a surplus under Clinton and then decided to cut taxes and low and behold there's been a deficit since.
Voters might be unsophisticated, but the bond market is not.
Bond vigilantes, who can bring fiscally irresponsible politicians to heel by unloading a country’s debt, may rear their head if Congress doesn’t show any appetite to bring the federal deficit under control.
https://usafacts.org/government-spending/
https://finance.yahoo.com/news/bond-vigilantes-killed-trump-...
https://ghpia.com/wp-content/uploads/2024/07/Investment-Insi...
For reference, the total net worth of all U.S. households is close to $160 trillion. The rich half (top 50%) own about $156 trillion (or about 98% of it). The poorer half only own about $4 trillion. Breaking down that top half even further, the top 1% (1.3 million families) owns about $49 trillion (or about one-third of the total share) by themselves. And going even further, about half of that $49 trillion is owned by the top 0.1%. That’s only around 136,000 households and includes all of America’s wealthiest people.
Tax wealth, not work, roughly speaking. With that said, stagnation is inevitable due to demographic dynamics. Historical economic prosperity was because of a demographic dividend that won’t be repeated in our lifetimes.
https://news.ycombinator.com/item?id=43861997 (citations)
It should be illegal to borrow with stock as collateral. This makes tax avoidance really easy for wealthy people.
Nobody needs as much wealth as the top 1%. Limits and incentives need to be put in place to essentially create a luxury tax.
Stock buybacks should be disincentivized. Companies holding so much money in cash sitting on the sidelines (Apple) don’t stimulate the economy.
The US has an embarrassing amount of money, it’s just all manipulated away from the market and the people.
The US has an embarrassing amount of money, it’s just all manipulated away from the market and the people.
Well if the people consistently elect the wealthy to govern, would that not be the direct result of the wealthy looking after their interests?
For the bottom 60% of U.S. households, a "minimal quality of life" is out of reach, according to the group, a research organization focused on improving lower earners' economic well-being.
https://www.cbsnews.com/news/cost-of-living-income-quality-o...
I don't want to give people ideas, but at the same time this is not exactly new to anyone following that set of news. During last EU fiscal crisis, EU came up with a novel approach to handling bond issues. Haircut[1].
[1]https://www.sciencedirect.com/science/article/abs/pii/S10575...
https://www.cbpp.org/research/federal-budget/doge-access-to-...
Not only are we already in a bad place with government spending/debt given the new world of high interest rates. We’re just going to blow many trillions of dollars worth of new holes in the budget.
Then throw in the endless tariff stupidity and it’s all just bad, bad, bad.
Moody’s said it expected federal deficits to widen to almost 9 per cent of GDP by 2035, up from 6.4 per cent last year, owing to increased interest payments on debt, entitlement spending and “relatively low revenue generation”.
Yes, and this was extremely predictable. Hopefully once the disaster gets a bit more clear more people will see what's happening.
The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government. The only reason to downgrade is if there is a real risk the US government will collapse and cease to exist for political reasons. There is no fiscal risk.
The deficit hawks don't understand how money works. The real concern is private debts, not government debts. But you never hear about that in the media.
The real crisis is high debt loads in the private sector, not the government. Why? Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts.
Right, but it isn't like the government controlling the money supply is some sort of get out of jail free card. If it was, why would the government even have debts? US could just pay off all the debt right now.
If the government starts printing money to pay interest on or pay off our $35+ trillion dollar debt, that will cause inflation, which is like a regressive tax. If the government doesn't start printing money, then a greater and greater share of our tax revenues go towards paying the interest. Neither of those outcomes seem particularly good to me.
Debts in the private sector have other downside like economic instability, but it seems to me that private sector lending is responsible for a lot of great economic developments (of course including our little VC funded corner of the world).
The national debt is simply all the money the government created minus the money it destroyed from taxes. Another way of thinking about it is it's national savings.
The boom and bust cycles happen because of private sector debt cycles not government debt.
I guess I don't see the great societal benefit of the super wealthy a safe asset to park their wealth in, but I do see the societal harms of government borrowing (mentioned above).
How would swapping interest bearing money for non interest bearing money cause inflation?
The way that basically all economists think it works: https://www.investopedia.com/ask/answers/042015/how-does-mon...
Those rich people and organizations invest in stuff like businesses and real estate. The businesses spend money on things (including labor) driving up costs. Rent and land costs get more expensive too
It even says so in the article you linked.
US is basically at full employment. Labor is a very constrained resource and quite inelastic (for example, it takes ~30 years to grow and train a new doctor). Housing supply in the US is increasing, but the timelines here are glacial. I don't see how increasing the money supply won't increases wages and land values. And labor and land pretty much feed into the costs of everything else.
Sure, a few things which are mostly imported or automated (t-shirts, some commodities, etc...) might be relatively stable in price, but the bulk of household budgets isn't t-shirts. It's stuff like housing and services (healthcare, education, etc...); if wages and land prices go up, housing and services get more expensive.
You act like that interest payment is just a technicality or something. It’s not. It’s a market rate that reflects the world’s belief in the soundness of the currency and government.
Throw that away and it all comes crashing down.
The US doesn’t exist in global isolation. We still buy things internationally as inputs to our factories and to make everything work. If we start a hyper inflationary currency death spiral where the government prints money out of thin air as a solution to spending problems, the value of our dollars becomes progressively less, hence the inflation. Then we all, including the government, have to spend more of those dollars, so the printing increases, and it becomes a self-reinforcing cycle.
This entire line of thinking that it doesn’t matter is basically quackery. It has been tried. It does not work.
On the other hand, the government debt interest burden goes down, which means a slowdown in the growth of the base money supply (even while borrowed money increases). Perhaps this slows long-term inflation, but that in turn might mean inflation driven by growing private debt and speculative malinvestment swings well past equilibrium and turns into a bubble that pops into eventual deflation.
The national debt is simply all the money the government created minus the money it destroyed from taxes. Another way of thinking about it is it's national savings.
The national debt is all the money spent minus money collected via taxes
If a government starts printing money like nothing matters, we already know what happens: Hyperinflationary death spiral. The government gets money to spend, but it crushes the value of the currency in the process. In crushing the value of the currency, they then need to print more money for the next round of spending, which further devalues the currency, which accelerates the cycle.
If you haven't realized, but banks only insure accounts up to $250k.
If your bank isn’t politically connected enough. See Silicon Valley bank failure.
If your money is at BoA/JPM/Wells Fargo/Citi/US Bank/etc, I’d bet the $250k limit turns out to be fictitious and all depositors get bailed out.
In addition to that, most FIs purchase some form of excess share insurance to cover deposits beyond the 250k.
You would need a very large amount of deposits at a single institution to run up against the insured limits. If you are ever concerned about that, you can reach out to your financial institution(s) and ask them if you have any uninsured deposits.
There is zero risk the government couldn't pay it's dollar debts if there is still a US government.
The real concern is not that the government cant pay it, it is that the government has to pay it out of revenue alongside obligations, leading to runaway inflation and economic damage.
In theory, governments can run on new printed money. It just makes for a terrible market to conduct business.
High inflation wipes out currency denominated debt holders and creates a terrible environment for investment and contracting.
It increases transaction costs to a level that is often prohibitive.
In theory, governments can run on new printed money.
Anyone who thinks this is an infinite money glitch for governments should see what has happened when other governments have tried it. Hint: Search for “hyperinflation”
If you just start printing money to spend it, the currency crashes in value, which necessitates printing even more money to maintain the same level of purchasing power, which crashes the currency even further. It’s how you end up with people paying for bread with trillion dollar bills. Sure you can keep printing that money, but acting like it’s a cheat code or even a positive thing is to ignore all of economic history.
Initially, my salary as an engineer has decreased quickly in value to the equivalent of $2 per day. Then, for a long time, my salary has been approximately doubled every month, so that by the beginning of the month it was worth the equivalent of about $2 per day, but by the end of the month it was worth only the equivalent of about $1 per day.
Before the hyperinflation started, I had saved all the money for buying a new car. Unfortunately, I had not predicted what would happen, so I have not closed a deal quick enough. In a few weeks you could no longer buy even a TV-set with that money. A short time later, you could barely buy some decent food with it.
Buying some electronics or programming book could require the salary for 2 months. Funny times.
When there is inflation, nobody can save anything, because the value of any savings decreases too quickly.
Everybody who has made prior savings loses them, unless they predict the inflation and buy something valuable, like real estate, with all the money they had.
As long as there is excessive inflation, any money earned must be spent immediately, before losing too much value. For ordinary people and small businesses this makes it very difficult to buy expensive things, because it is hard to save money for that and credits may become too risky.
Because the government owns the currency it's debts are denominated in. There is zero risk the government couldn't pay it's dollar debts if there is still a US government.The deficit hawks don't understand how money works.
I’m afraid it’s you who doesn’t understand how national debt works. The US government doesn’t have infinite leverage to do whatever it wants with its currency with no consequences. We have to sell our debt on the public market. If we start acting like we’re going to pull currency tricks as the way to fight the debt, the interest rate we have to pay on the debt goes up quickly.
As it goes up, we have to pay more every year to service the interest on that debt. If we’re in a situation of high budget deficits the only way to service that additional interest charge is by issuing more debt, which turns into a debt spiral.
Waving it all away as a non-issue is a severe misunderstanding of the threat.
If you were to just erase private sector debt, not much happens on a socio-economic scale. If a company is owed money, but at the same time owes people money, the debt on either side is cancelled out.
With government being the actual source of money, if it owes a lot of money, it has to "print" it, which is exactly how you historically get inflation, which then causes rising prices. This literally happened during Covid.
Lets also not pretend that the current administration actually understands anything about economy either.
In the last half century, every Republican administration (except George Bush Sr.) passed huge tax cut bills, and for some reason, everyone here acts as if they are some edicts from above that cannot be touched.
It's like the federal government quit its tech job to go work fast food and became convinced the only solution to its debt is to start living in a tent under a nearby bridge rather than try getting the tech job back. The current administration's policies are similar to selling off the tent and using a newspaper for cover because it would rather start panhandling than continue working a real job.
It’s almost like destroying state capacity for “woke” causes like foreign aid and science was the actual goal, rather than getting the budget under control.
The fact that one party is always behind this financial profligacy, and the US keeps putting it in charge, probably means that the US' debt rating is still much too high.
From my basic understanding, this is indeed true. At the cost of rampant inflation, the US can simply print more currency, inflate away historical debts, and not have to default.
If the Moody's credit rating is a measure of the stability of the asset, then a downgrade makes sense. If its to measure the likelihood of a default -- it does seem unlikely the US would simply default.
But maybe there's something I'm missing
If you cant trust a currency, you have to revert to much more cumbersome and limiting contracts. e.g. loaning cash today to be repaid in gold tomorrow.
Furthermore, the undesirability of a currency severely limits the ability of governments to maintain economic stability.
Doing it is the end to the dollar backed global financial system.
The problem isn't the debt, the problem is a lack of imagination/ambition in finding good investments for the capital that's being handed to the US. Saying the debt should be cut is saying "We're terrible at business, don't have good ideas, you all need to find smarter and more responsible people to entrust with your capital. We plan to underachieve."
The remainder is an IOU to others with interest. Neither is an investment with returns.
I dont make money running up my credit card or withdrawing from my retirement and promising to pay it back later
Another: the government uses bonds to build core infrastructure for a city. That infrastructure allows businesses to set up shop in the city. The business activity yields tax revenues, which pay back the bonds with interest and continue to pay dividends long term.
Multiply that by hundreds of thousands to millions of investments in infrastructure, people, services, etc.
22% Social Security
14% Debt interest.
13% General Health
13% Medicare
13% National Defense
11% income security
5% Veterans Benefits
3% Education
2% Transportation
Most is a cost center, not revenue center. Keeping grandma alive isnt an investment. In fact, it incurs even more costs outside the budget.
Government spending = investment is a very poor heuristic. Most is simple consumption, the way buying a nice dinner is consumption, not an investment. That isn't to say it cant or shouldn't be done. The point of having money it so be able to enjoy nice things.
It is just important to not get lost in the sauce and forget the difference. Someone is always ready to argue a nice dinner is an investment because you cant work tomorrow without food. That makes it an expense.
The rest of these investments in the citizenry do pay dividends. Not every investment is a simple matter of buying something which spits out money immediately. Spending on health and education is a long-term investment which returns higher tax revenues. Paying for national defense and caring for veterans is simply paying ourselves, that money continues circulating and yielding tax revenues. Even debt interest is paying ourselves! Most of the debt is internal, which just circulates the money around in the economy. Only something like 20% of debt is foreign owned, and that revenue still often comes back to us in to form of rolled-over bond purchases and trade.
In closing, the national debt is only a problem when we stop circulating currency. We can make the debt a huge problem by suddenly slashing productive investments in the deluded belief that we're a poor family which has racked up a big credit card bill.
I see two issues with what you said. First, what matters is the expected return and whether it's prositive. I can sell you an "investment" that pays dividends and raises revenues, but that doesn't mean it is net positive economically. I can spend $100 to raise revenue by $0.01 for 10 years. Is that an investment simply because some nonzero level of return?
Second, waving away debt as internal ignores the fact that interest recipients and payers are different. A family with a big credit card bill is also domestic debt and circulation. That is little consolation for the family spending an increasing portion of their budget servicing the debt, nor is it consolation that the money is being circulated by their banker paying their housekeeper. The internal "who" matters, especially when some people can run up the credit and check out before the bill comes do.
However, if this becomes apparent, it will become increasingly difficult to find buyers for new bond issues.
Heh. You have a point on a technicality, but I can assure you that people, who lend other people money would likely be a lot less technical about it. In other words, the default may be a shorthand for 'immediately unable to borrow more at the previous rate', but I suppose it is not as catchy.
“This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns,” the agency wrote.
It's that moody is grading on a curve.
idea that the people who can print more money and pay the interest just wouldn't do it, out of what
Self preservation. Have we already forgotten what inflation does to incumbents?
monetizing the debt is an effective default in the eyes of the market, nevermind economically disastrous. MMT idiocy caused major problems for the Biden admin and likely contributed significantly to Trumps reelection.
I would have just assumed that if you're another big financial institution you're doing your own research.
Is it that orgs below a certain size need these people to help tell them what's going on?
I would have also assumed anyone who holds an important amount of US treasuries does their own research and doesn't need to listen to any of these agencies?
What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?)
https://www.theguardian.com/business/2017/jan/14/moodys-864m...
these were the same people that were reporting A+ on junk bonds back then, weren't they?
Fun fact: those AAA securities paid out. We have obvious endogeneity issues with the bailouts. But the evidence is strong that even absent the bailouts, those senior tranches would pay out.
The problem was that most AAA securities are both highly solvent and high liquid. But these proved solvent but illiquid. That caused issues when their owners tried to dump them. But Moody’s rated solvency, not liquidity.
It was honestly a shocking finding at the time. But loss ratios (2.3%) were just within historic norms for what someone buying something rated AAA would expect[1], and to my knowledge, the losses presented as restructurings not outright defaults as is commonly imagined in popular retelling of the financial crisis.
[1] https://www.federalreserve.gov/publications/april-2021-dodd-...
Moody's has been in this game a long time, I'm sure they're not perfect, but also being wrong once doesn't mean you're always wrong.
Doesn't anyone here think the US recent economic instability merits a reduction in credit rating? We have a massive amount of debt (we borrowed to pay something like $800 billion in interest on our debt last year) and are essentially betting on our rocketship economy to offset our enormous debt in the future. The latest economic turmoil does cast a bit of doubt on that ability to pay off this huge debt later on no? I mean, isn't that a reasonable conclusion, regardless of whether you hate Moody's or think they are stupid?
Of course, they were kind of right because a federal government bailout was waiting in the wings.
It’s no secret the USA fiscal path is unsustainable, the Fed has said the same.
What actual value do they provide? (esp. in light of the housing crisis proving they weren't providing any value at all?)
A significant amount of retail and institutional investment still use these ratings as a guiding indicator.
Not everyone does due diligence. If you have ever worked for a corporation, you know that they love cutting corners. And one corner they'd happily cut is time on due diligence - even if it causes a crash later on. It is not a problem for this quarter.
Not everyone does due diligence.
I don't think it makes sense for every single person or company considering investing in Company XYZ to do their own, separate due diligence on XYZ. The information they each would uncover is the same.
It's a lot more efficient to pay a ratings agency to rate XYZ once. The tricky part is getting the incentives right so that the ratings the ratings agency produces are accurate. (There already is a reputational risk incentive pushing towards doing this the right way, but as we saw in 2008, there are other incentives pushing the other way, and they might often be stronger.)
The interesting aspect to me is that they are not a government department- they make these ratings as part of a profitable business model. It's not like they keep chugging along no matter what.
It just seemed like that during the housing crisis the businesses seen to be putting their "ok" stamp on everything would have been the first to go down.
Additionally, if you are on the other end (the one getting the rating), you pay the credit agencies for a rating so that buyers of debt will buy it. It's basically required that you have a rating if you want to issue debt.
It's a racket in some ways with a ton of bad incentives and inefficiency.
Kind of like a lot of things.
do they have any real insight on credit worthiness?
Yes. You can look at default rates by initial and proximate rating and see clear information.
in light of the housing crisis proving they weren't providing any value at all?
Name me one AAA-rated security that defaulted. They were downgraded. They lost paper value. But to my knowledge, they didn’t default. (Those who held them did well[1].)
[1] https://www.nber.org/digest/aug18/evaluating-role-credit-rat...
Under Trump the US has voluntarily relinquished that role
I would argue the process was started under Obama, and continued under Trump and Biden. What caused that shift is an interesting question in itself. My theory is that once Obama won on the platform of limiting US foreign involvement, the writing was on the wall and the politicians after him all became isolationist as that seemed to win elections.
The difference is that Trump, an incompetent populist he is, doubled down on the process so much that it became a very conspicuous mess.
I suspect we'd be living in a completely different world if John McCain was elected in 2008.
* Dollar "Milkshake" Theory: the dollar (and treasuries) are so in demand that it kind of doesn't matter how far into debt we go, because the point is that treasuries are mostly used for financial collateral, not for earning interest payments. So whenever there is a crisis, there will be a rush to the dollar, not away from it.
* Traditional Fixed Income valuation: that fixed income buyers care about real returns, and will penalize nations that get themselves into situations where they must either default in actuality, by refusing to pay their debts, or by effectively defaulting (in real terms) by inflating their currencies to the point of writing off their debts.
I understand the argument from both perspectives, and I understand that politics can easily lead to defaults that don't technically need to happen. I still have no idea which of these two theories will prove more accurate going forward. I generally consider myself pretty fiscally conservative, so I tend to lean toward traditional theories of fixed income.
If this happens (50/50 I think over the next twenty years) then it will be slow, and then sudden. I suspect a lot of high income US citizens will start caring a lot more about Social Security at that point.
Insofar as "where the money goes," the sovereign bond market is huge, and if the milkshake theory is to be believed, finding and alternative is just a coordination problem that could be effectively solved by a few large actors.
If the traditional theory is to be believed, downgrades from ratings agencies should simply facilitate the movement of folks leaving treasuries as a risk-free rate. This does introduce currency risk (though it existed already), but we may simply move to baskets of securities of we don't end up on a single currency to carry bonds in general. There is also the "store of value" vs "transactional" aspects to currencies, and the dollar may become more and more transactional and less useful as a store of value and/or collateral. If that's the case, I wouldn't be surprised if there were not more "asset inflation" if that's even a useful term.
I agree with you that it should be slowly and then all at once, because if the US is going to default or debase, nobody wants to be the greater fool.
Insofar as "where the money goes," the sovereign bond market is huge, and if the milkshake theory is to be believed, finding and alternative is just a coordination problem that could be effectively solved by a few large actors.
If I have trillions of Treasuries then it's gonna be hard for me to move them to basically any other sovereign bond market. The only one that even conceptually works is the euro, but that's split across multiple sovereigns.
whenever there is a crisis, there will be a rush to the dollar, not away from it.
And yet during the current crisis there was a rush away from the dollar.
Meanwhile Fox News posted that akshually Trump had a cunning plan to lower interest rates by tanking the stock market temporarily so that the bond refinance this year would be more affordable.
This is “hold my beer” economics in action.
Fitch Downgrade August 1 2023SPY around 455 fell to 433 from August 1 to August 18
By October 27th SPY bottomed around 410 (-10%)
From August 1 to October 23, US 10y yield went from 3.9% to 5%
Stocks went down and bond yields went up last time. The Federal Reserve raised the federal funds rate from 5-5.25% to 5.25-5.50% during the same time period.
(Doesn't always happen like this, and may not have happened like this last time, but it's not uncommon)
Last time around this led to reduced borrowing costs
Last time Treasuries were unambiguously a haven asset. That correlation was broken on Trump’s liberation day.
Altogether, I’d be surprised if this downgrade has a material impact on financial markets. It’s much more interesting for the House.
The Microsoft corporate credit rating is AAA and Aaa by Standard & Poor's Rating Services and Moody's Investors Service Inc., respectively.
It's an interesting aside that the Windows tax in great part was driven by revenue loss resulting from coin clipping.
I guess they’ve that rule.
https://www.spglobal.com/ratings/en/research/articles/240704...
1: Earn more and spend less
So this number goes up:
https://fred.stlouisfed.org/series/FYFSGDA188S
2: Print more money
So this number goes up:
White House communications director Steven Cheung reacted to the downgrade via a social media post, singling out Moody's economist, Mark Zandi, for criticism. He called Zandi a political opponent of Trump.
It's always someone else's fault.
So Trump wants to TRIPLE social security and medicaid expenses ... with just 2/3 going to him and the rich.
It also creates instability generally - in the economy, business, socially, politically - because unreliable US government finances can destroy all those things.
In other words, Trump made sure that the US debt situation is unsustainable. I don't know if it was sustainable before Trump (seemed pretty stable to me), but whatever the situation was, Trump made it infinitely worse.
To me this is just another example of Republicans saying the government is broken, when what they really mean is "because we will make it so."
PS: See how Clinton/Bush Jr's deregulatory policies were a major contributor to the great financial crisis. See how Trump took over a pandemic playbook and office from Obama, only to disband it upon arrival. If the federal government won't even try to protect us from systemic risk, who will?