–More on (moron) the S&P downgrade of American national credit

Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

Quote from Fox News, 8/6/11:

For the first time in history, Standard & Poor’s downgraded the U.S.’s vaunted Triple-A rating to double A+ after the market’s close on Friday night, a rating it has held at S&P since 1941.

The rating was dropped to double-A+, S&P says, because of its deepening concern that Washington, D.C. cannot get a grip on the nation’s finances in the mid – to long-term, as well as fears that the economy could weaken, and that interest rates could spike higher, causing interest costs on the debt to rise. S&P also cited a weakening federal revenue picture as part of its reasons behind its downgrade.

Let’s examine this one line at a time:

“For the first time in history, Standard & Poor’s downgraded the U.S.’s vaunted Triple-A rating to double A+ after the market’s close on Friday night, a rating it has held at S&P since 1941.”

Think of it. S&P rated the U.S. AAA all through World War II, during which the federal debt was much higher relative to the size of the economy, and when we were being attacked by two powerful enemies, who very well could have defeated us. Today, with a relatively lower debt, and much greater national security, the U.S. is downgraded to AA+.

“S&P says, because of its deepening concern that Washington, D.C. cannot get a grip on the nation’s finances in the mid – to long-term . . . “

What does “get a grip on” mean? No one really knows. Does it mean the federal government will not be able to service its debts? No. As a Monetarily Sovereign government, it can service any size debt denominated in it sovereign currency, the dollar (100% of the federal debt is denominated in the dollar). In fact, the federal government has the power to eliminate all federal debt tomorrow, merely by crediting the bank accounts of all T-security holders. No T-securities = no federal debt = no debt worries.

Or perhaps S&P is not worried about the debt, but rather worried about the deficit??? If so, S&P may not understand the lack of functional connection between debt and deficit (we could have either without the other), but for certain they do not understand this basic equation in economics: Federal Deficit – Net Imports = Net Private Saving. If they did understand that equation, they would know that reducing the deficit reduces saving, which slows the economy.

“. . . as well as fears that the economy could weaken, and that interest rates could spike higher, causing interest costs on the debt to rise.”

Yet another thing S&P doesn’t understand: As a Monetarily Sovereign nation, the U.S. has the unlimited ability to service any debt including any amount of interest. In fact, there actually is a slight, but positive, relationship between federal deficits and GDP growth. The probable reason: Federal interest payments add stimulus dollars to the economy. Further, there is no historical relationship between federal deficits and interest rates.

“S&P also cited a weakening federal revenue picture as part of its reasons behind its downgrade.”

Finally, S&P does not understand that unlike spending by the states, counties and cities, spending by a Monetarily Sovereign nation is not constrained by revenue. If federal taxes fell to $0 or rose to $100 trillion, neither event would affect by even one dollar, the federal government’s ability to spend.

Someday, someone will ask the officers of S&P how their evaluation of France (a monetarily non-sovereign nation that hangs at the edge of bankruptcy, yet incredibly has been gifted with an AAA rating) compares with their evaluation of Monetarily Sovereign United States, a nation that unlike France can pay any bill, and time. Can you visualize the officers of S&P looking at each other and mumbling “Duuuhhhhh. . .”?

And that might be the smartest thing they will have said all year.

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings


14 thoughts on “–More on (moron) the S&P downgrade of American national credit

  1. From Bloomberg
    By Robert Burgess – Aug 6, 2011

    Borrower Moody’s S&P Fitch
    Austria. . . Aaa. . . AAA. . . AAA
    Canada. . . Aaa. . . AAA. . . AAA
    Denmark. . . Aaa. . . AAA. . . AAA
    Finland. . . Aaa. . . AAA. . . AAA
    France. . . Aaa. . . AAA. . . AAA
    Germany. . . Aaa. . . AAA. . . AAA
    Luxembourg. . . Aaa. . . AAA. . . AAA
    Norway. . . Aaa. . . AAA. . . AAA
    Singapore. . . Aaa. . . AAA. . . AAA
    Sweden. . . Aaa. . . AAA. . . AAA
    Switzerland. . . Aaa. . . AAA. . . AAA
    United Kingdom. . . Aaa. . . AAA. . . AAA

    Split ratings:
    Borrower Moody’s S&P Fitch
    Australia. . . Aaa. . . AAA. . . AA+
    Hong Kong. . . Aa1. . . AAA. . . AA+
    Isle of Man. . . Aaa. . . AAA. . . NR
    Jersey. . . Aaa. . . NR. . . NR
    Liechtenstein. . . Aaa. . . AAA. . . NR
    Netherlands. . . Aaa. . . AAA. . . NR
    U.S.. . . . . . Aaa. . . AA+. . . AAA

    Wow, got to love those Isle of Man bonds, compared with risky U.S. bonds. And hey, what about Jersey, those tiny dots off the coast of Normandy? That’s where to put your money. Just ask S&P.

    Rodger Malcolm Mitchell


  2. Great post. I came across this great description of these fraudsters “….easily deluded companies who are to sane analysis what a croupier at a roulette table is to an insurance policy.”

    I know a political agenda when I smell one.


  3. The downgrade may actually be justified based on the fact that there’s a significant portion of our current Congress and population that believes that an intentional default would have been a good thing and tried their best to make it happen.


  4. The US is a Monetarily Sovereign nation as your blog so states/ You even provide strong proof to support your point. Nice work. Here’s the problem, the US does not have a system to implement Monetarily Sovereignty. The US uses the same double ledger system everyone else uses. If the US would build a true Monetarily Sovereign system it would take a least 10-15 years to be put into production. The cost would surly be in the trillions. You may want to read this on how well the government manages it’s IT infrastructure -> http://www.nytimes.com/2011/08/04/technology/white-house-picks-new-information-chief.html Quote” Mr. Kundra, analysts say, came in with an ambitious agenda and made some progress. When he arrived at the White House, Mr. Kundra recalled, he was handed a thick pile of papers, documenting $27 billion in technology projects that were running well over budget and well behind schedule.” A I stated in the past, the US Government has no magic computer key.


    1. John Galt,

      Sounds like a good opportunity for out of work IT professionals. It’s certainly not an excuse to do nothing.


  5. John, I agree the U.S. often doesn’t act like a Monetarily Sovereign nation, especially when Congress tries to impose a debt ceiling.

    However, the double ledger system is easily modified. Simply stop creating and selling T-securities, and call the debit line “Money created” or something similar

    Anyway, even if it cost trillions, wouldn’t that be good thing? Pumps money into the economy.

    If the U.S. doesn’t have a magic computer key, how did the so-called debt get so big, and no default?

    Rodger Malcolm Mitchell


  6. The Federal Reserve (Fed) provides them the funds. The Fed, like the FDIC, works on a profit and loss model. The Fed pays their employees bonuses based on profit sharing. The Fed has systems that can be quickly changed, not the federal government. Did you know that all TARP accounting was done on spreadsheets and stored on SharePoint? It’s true.


    1. John, the US certainly is monetarily sovereign right now. There is no problem. It does not need to be “implemented”. It would take 10-15 seconds, not years, at no cost at all. What it needs is Congress to do its job of spending enough, and a President who uses his powers and his bully pulpit. Even without Congressional spending, he is authorized to set up a Humphrey-Hawkins jobs program. Public demand for jobs would soon force Congress’s hands if he were not a less-than-spineless and addled invertebrate. Monetary sovereignty, MMT, Functional Finance is about using what you have right now.

      That we issue bonds instead of printing money is just a shell game whose main purpose is to hide what is going on. The deepest level of the shell game is to think that the game has any importance at all – whether we keep it or not, keep issuing bonds or not. This last level still succeeds in fooling many who think they are not fooled. The government most certainly does have a magic computer key, by which it creates money. That is the important thing, not playing games with bonds and central banks and interest rates and ledgers.

      BTW, I hope Mr. VanRoekel fails and makes the US computer systems more inefficient. Not to mention the nefarious ends government computer systems can and have often been used for, when there is no full employment, and we are very far from that, efficiency is inefficient. Government “waste” is productive spending. Government efficiency is the impoverishment of the governed.


  7. “…and that interest rates could spike higher, causing interest costs on the debt to rise.”

    Isn’t the S&P doing a self-fulfilling prophecy? Meaning, down grade debt, interest rates go up because of the ‘risk’ of lower grade bonds?


  8. Courtesy of Nathan Goss, who sent this to me:


    David Gregory, moderator of “Meet The Press” on NBC: “Are U.S. treasury bonds still safe to invest in?”

    Alan Greenspan, Former Chairman of the Federal Reserve: “Very much so. This is not an issue of credit rating, the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default.”

    Rodger Malcolm Mitchell


    1. Warren Mosler told me he also said this years ago when he testified about Social Security. It’s amazing how long one can go without being able to connect the dots.


  9. Rodger,

    How would you recommend that the government fund the growing cost of Medicare, Medicaid and Social Security when the cost of keeping these programs alive and well will approach 80 trillion when the boomers all begin to age?

    According to your articles (which I read and yes I understand monetary sovereignty) the government could essentially print 80 trillion in dollars and pay for it. Surely printing an amount of money that large would have disastrous effects for the inflation rate…wouldn’t you agree?

    Seeing as how it is the future unfunded liabilities that are the threat to our nation’s fiscal future, what would you propose the government do?


    1. Medicare & Medicaid aren’t the problems themselves. It’s soaring healthcare costs (and our entire approach to health) in the private sector. This could be easily remedied by removing the sick for profit industry from the equation. Just look how much money is wasted funneling upwards to Insurance Industry moguls- never to be circulated in the economy again as it’s tucked away on some remote island. And that’s only the beginning of the savings.


  10. Brad,

    I agree with the MMT people that the only restriction on federal money creation is inflation. That said, the question becomes, how much money creation will cause inflation. I’m not sure. But there are some hints at item 12, in Summary

    Clearly we are a long, long way from deficit spending causing inflation, and a very short way from recession and depression. So which is the more immediate problem?

    Rodger Malcolm Mitchell


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