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Wednesday, April 20, 2011
Interesting piece on the S&P downgrade
Is the US in financial crisis? Will we default? The questions have the flavor of meledrama. Yves Smith posted a short piece today (see here) that picks through the emotion to the first question. Are we in a more fragile economic position than we were in 2008? Did S&P make a mistake?
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Very interesting article but the content still seems a little fuzzy perhaps someone could elaborate on it?
ReplyDeleteAs for being in a more fragile economic position I think that is up for debate. Conditions today are obviously quite fragile. The Fed seems to have used every trick in its bag to provide economic support yet we are still "walking on thin ice". However, is this really that different than 2008? Yes, unemployment is worse etc. but conditions in 2008 demonstrated "faux stability". Things were so highly leveraged that any little issue had the potential to cause catastrophic failure.
I think both conditions are equally as fragile. 2008 conditions just appeared better at the time.
Check out the article by the Financial Times titled "China credit agency: cut US debt rating six months ago" (Can't post hyperlinks in a comment)
ReplyDeleteThe Jist:
* The serious defects in the United States economic development and management model will lead to the long-term recession of its national economy, fundamentally lowering the national solvency.
* The new round of quantitative easing monetary policy adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar, and the continuation and deepening of credit crisis in the U.S. Such a move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government’s intention of debt repayment.
* Analysis shows that the crisis confronting the U.S. cannot be ultimately resolved through currency depreciation. On the contrary, it is likely that an overall crisis might be triggered by the U.S. government’s policy to continuously depreciate the U.S. dollar against the will of creditors.
(Continuing from above...I realize I just called for a reduction in "China articles" but this one doesn't so much have to do with China except them lowering the rating of our Debt - which they own a lot of)
ReplyDeleteThose comments by the Chinese rating agency are pretty STRONG. The mentioned quantitative easing (QE) which we talked about in class. Take these words with a grain of salt though, China is still accumulating more of our Treasurys.
"The second misconstruction is acting as if GDP were static and impervious to budgetary changes, and therefore the way to deal with large debt levels is to cut spending. Unfortunately, empirical evidence solidly refutes this idea. The UK tried that 10 times in the last 100 years, and every time the debt to GDP ratio got worse. We are seeing the same results in Ireland and Latvia. In Japan, when the government got nervous about spending in 1997 and reduced expenditures, the debt ratio worsened."
ReplyDeleteThis paragraph was really eye opening to me. I have long supported budget reallocation and cuts, however she well supports how that doesn't always improve the government debt ratio. In theory, her support for more domestic spending convinced me of what will help our economy debt the most.
Finally I think that the further advancing of our debt should be taken seriously and that S&P did not make a mistake regarding our debt crisis. Although it is likely that we will pull out of this, making it appear as a pertinent problem affecting the welfare of our country is a great idea. This needs to be addressed now, not later.