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Monday, August 8, 2011

S&P's Obama Short

      The question we have to ask about S&P's Friday evening downgrade of US Treasury debt from triple AAA to AA+ is what is their agenda? One thing is clear: "it aint about default risk or economics."

       http://firedoglake.com/2011/08/05/the-pms-of-sp/#Respond

      Yes I am quoting Hamsher with approval. While my criticisms of her site are pretty clear-heavy levels of Obama Derangement Syndrome (ODS) often displayed by her and commentators, her odd alliances for dubious ends in the last 2 years- she did this past week seem to suggest that the endless razzing of Obamabots is counterproductive. She also has planned some big FDL Town Meeting tomorrow where she is gonna help firedoglakers gain some perspective and figure out their next plan of action. She even admitted that the drawback in the "Dump Obama" movement is that if successful it would leave us with someone worse.

       We'll see about that but there's no denying that she has produced some very good work on the S&P downgrade this weekend(I'm not so blinkered that I'm gonna be blind to good work even if it is of someone I've frequently disagreed; no I am not going firebagger! LOL) and asks the central question: what is S&P's agenda? If it isn't about default risk or economics what is it about?

       Because if it's not and I agree with Hamsher here that it isn't then there's something rotten in the State of Denmark as that's the only legitimate reason for S&P to downgrade anyone. Only default/economic reasons are innocuous and as they are not what drove S&P here what did?

        I do really want to urge all progs/libs to not simply say, "S&P-whatevs! We shouldn't give them all this power anyway. Look what they did in 2008 with the subprime mortgages."

        I am the last to want to shield S&P in any way. Much criticism of them is wholly valid starting with it's great that they never downgraded subprime mortgages till the cow had long left the barn and now in a much more questionable move they are out in front-neither Moody's or Fitch have done this-downgrading US debt.

        The importance of this though must be understood. Some say the S&P rating has little meaning anyway that all they have is a water gun. But there are two dimensions to this: one is the market reaction to this which will be interesting to see Monday. Will this spook the market, reduce appetite for our debt and depress our economy?

         The second is political. And that is the dimension that we have to be concerned about here. First let me say that it is very unlikely this downgrade could hurt the economy in and of itself-except indirectly due to the political effects which we will look at below. The reason why it is-very-unlikely to hurt the economy is that we have some historical precedent. In the late 90s they downgraded Japan who continued-and continues-to enjoy lots of demand for it's debt and have been able to continue paying low interest rates.

          Indeed I'm really looking for Monday morning's market opening with interest. I mean if you're a market player what position do you take long or short? Intuitively you would think short as the market has been down basically 11 straight days-yesterday the Dow was finally up by a scant 60 but the S&P index again finished in the red-and even the ceiling raise didn't give the market a bottom as it had another brutal week including a 528 point drop on Thursday.

       Yet often the right market move is counter intuitive. Maybe ironically enough while the "good news" of the debt ceiling hike didn't get us a bottom maybe the "bad news" of this S&P downgrade will. That in a way would really be a slap in the eye for S&P and suggest that they indeed pack no heat-truly just a water gun.

       In summation the downgrade is very unlikely to hurt the market or US debt long term and unlikely to be the direct economic cause of a weakened economy.  According to neweconomicperspectives the S&P downgrade is "much ado about nothing as a sovereign government cannot go bankrupt."

       http://neweconomicperspectives.blogspot.com/2011/04/s-downgrade-much-ado-about-nothing.html

      Politically however the downgrade is not quite a water gun. First let's be clear: this downgrade has to be music to the ears of the GOP indeed of Paul Ryan as well as Boehner/Canter. For it fits like a glove their narrative that because of Obama they were unable to produce an agreement that "got serious about our debt problem."  As Hamsher says, this gives them exactly what they needed in their narrative of "the Obama downgrade."

        Romney himself-the most likely Republican challenger for Obama in 2012 has already been using pithy lines like "the Obama presidency was downgraded today."   You see what I mean about the political potential of this?

       In an update, the market is about to open ((9:29 Mon. Morn), Interesting to see if the Market stays down like the futures suggest. Treasuries have not been hit though which suggests this will not be a game changer in truth and many foreign governments have said so, though China has tried to pile on.

      See http://www.cbsnews.com/stories/2011/08/06/eveningnews/main20089121.shtml

      To remove any doubt of what Dave Beers and S&P are up to. See this exchange

 Mason: In terms of timing, if the U.S. succeeds in reducing its debt, how quickly could it get its triple a rating back?

Beers: That's not what we're looking at right now. We're looking at the deal that was agreed this week and we're (judging) by the test of 'Does it turn the rising of the debt burden around?' Our answer is, in our view, no, it does not.

Mason: What you're saying is it could be years before we get our Triple-A rating restored?

Beers: It depends on the fiscal policy choices that the government makes


     Here Beers is just strutting enjoying the sense that he holds all the cards.

     Latest Update: Market is down over 200 points but that is just stocks of course. The bond market is showing no effects.

       For more on this please hear me at 1-3 http://planamerica.org/index.jsp?contentPage=NewstandMedia.jsp

      Hope to see you there!
        
       

     

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