Risky Business

By DeusExMacintosh

China has scolded the US over its “addiction to debt” after rating agency Standard & Poor’s downgraded the US’ top-notch AAA rating to AA+.

State news agency Xinhua said unless the US cut its “gigantic military expenditure and bloated welfare costs,” another downgrade would be inevitable. But other countries, such as Australia, France and Japan, said they retained their faith in US bonds.

The downgrade ended a week of growing uncertainty for the world economy. Fears that the US might be headed for a double-dip recession and the eurozone’s debt problems were set to spread to Italy and Spain saw stock market sell-offs around the world.

The downgrade is a major embarrassment for the administration of President Barack Obama and could raise the cost of US government borrowing. This in turn could trickle down to higher interest rates for local governments and individuals. One initial estimate says that could add an extra $75bn (£46bn) to the US annual interest rate bill at a time when its debt levels are already high.

The other two major credit rating agencies, Moody’s and Fitch, said they had no immediate plans to follow S&P in taking the US off their lists of risk-free borrowers. Xinhua called for the printing of US dollars to be supervised internationally and repeated China’s contention that a new global reserve currency might be needed.

Analysts say neither suggestion is likely to happen. But China – the world’s largest holder of US debt – is clearly worried about its holding and also worried about criticism at home for having so much of the country’s savings in US investments. “The spluttering world economic recovery would be very likely to be undermined and fresh rounds of financial turmoil could come back to haunt us all,” it said.

It also said the US should stop “letting its domestic electoral politics take the global economy hostage”.

BBC News

45 Comments

  1. Posted August 9, 2011 at 10:37 am | Permalink

    [email protected] When I talked of “managing” the international system I meant it: having a democratic polity with no territorial ambitions the overwhelmingly dominant military power discourages folk from even going there. The strategic environment can change very quickly, however. Consider what the strategic environment looked like in 1931 and whether you could have predicted 1941 from there? That the US could retain its dominance with a lower level of spending is true, and I continue to suggest that US defense spending as a % of GDP will resume its long-term decline. But it is so not the big issue in terms of fiscal and economic policy.

  2. Posted August 9, 2011 at 10:40 am | Permalink

    [email protected] Actually, Australia is a remarkably well-run country whose politicians have done much better than most of their equivalents in other developed countries.

    Let’s not fall into the trap of imaging some pristine land of never-achieved virtue and then classing all cases of not reaching it as somehow basically the same.

  3. Patrick
    Posted August 9, 2011 at 10:54 am | Permalink

    Well, Lorenzo, I would normally have agreed with you. But carbon tax, NBN, workplace relations, ffs the list is growing too long too fast and I think those three initiatives (three of this government’s four biggest – the other is MRRT which I actually agree with) are square within my framework: implemented by people obsessed by their personal convictions borne of ideology with little or no attention to the actual reality unfolding around them.

  4. Mel
    Posted August 9, 2011 at 11:12 am | Permalink

    Paddy:

    ” … are square within my framework: implemented by people obsessed by their personal convictions borne of ideology with little or no attention to the actual reality unfolding around them.”

    Ah yes, what we need is Tony Abbott so he can release yet more Chaplains on hapless school children.

  5. Posted August 9, 2011 at 11:27 am | Permalink

    [email protected] Wrong level of government: regulation and provision of schooling is a State/Territory matter. All the Commonwealth can do is offer money.

    [email protected] Most of which are being seriously politically contested: we will see what actually ends up getting implemented for any length of time.

  6. Posted August 9, 2011 at 11:37 am | Permalink

    Patrick:

    “carbon tax” – how is a carbon based tax any less ‘growth’ favourable than a labour based tax?

    “NBN” – The last mile in telecommunications is a natural monopoly, therefore won’t be efficiently handled by a market. Investing in basic infrastructure is important for growth is it not?

  7. Mel
    Posted August 9, 2011 at 11:38 am | Permalink

    [email protected] Wrong level of government: regulation and provision of schooling is a State/Territory matter. All the Commonwealth can do is offer money.”

    Poppycock. The Commonwealth has muscled into schooling in various ways notwithstanding the constitution and that includes John Howard’s National School Chaplaincy Program, which has been beefed up by a boof-headed Gillard. No doubt fecking Abbott will work even harder to ram his rosary beads and cross down the throats of school kids.

  8. kvd
    Posted August 9, 2011 at 1:18 pm | Permalink

    Apocalypse not. Today, anyway. Fits with my general theory of relativity: whatever the Americans do (booms, busts) we only ever seem to do half as ‘well’.

  9. kvd
    Posted August 9, 2011 at 1:50 pm | Permalink

    One significant factor seems to be that short sellers needed to ‘cover their positions’ (read arses), so I may as well get it all off my chest: Please give me one sound economic reason for or benefit from the practice of short selling. And why management bonuses should in any way be tied to anything shorter than two or three year on year’s performance.

    Strong, sound companies take years to build, yet performance is sometimes measured monthly, weekly, and can be subject to market disruption via shorting at any time. It is absolute crap and quite destructive.

    Naked short selling is supposedly banned, so what happens? Your super fund ‘lends’ title to ‘your’ shares (for a fee) to somebody willing to double down on the very company you are invested in. How does that create ‘value’ for you, and how does it contribute to the good of any of us?

  10. Posted August 9, 2011 at 2:36 pm | Permalink

    [email protected] The Commonwealth has done so by offering money, its only lever. Which is my point: it can bribe, it can put conditions on funding, but it cannot direct.

  11. Posted August 9, 2011 at 2:39 pm | Permalink

    [email protected] The markets concluded that the Reserve Bank will continue to be more competent in its monetary policy management than the Fed, ECB or BoJ. A reasonable expectation.

  12. Mel
    Posted August 9, 2011 at 3:14 pm | Permalink

    Lorenzo:

    “Which is my point: it can bribe, it can put conditions on funding, but it cannot direct.”

    Frogshit.

    “During the Howard era there were determined attempts by the government to reshape Australian community ”values”. They were, naturally, the values that were thought to appeal to people who might be supporters of the government.
    Consequently, in 2004 the government tied school funding to flying the Australian flag. To get their slice of $31 billion worth of Commonwealth funds, schools had to have a functioning flagpole topped with the flag.”

    That’s a direction, old bean.

  13. Patrick
    Posted August 9, 2011 at 3:53 pm | Permalink

    [email protected], well, infrastructure sure, but NBN is like a high-speed railway (top-notch equipment from the last century going nowhere fast). I’ve never seen something more likely to be a white elephant before it is even finished. Have you heard of wireless?

    So a complete waste of my money.

    As for carbon tax, it isn’t actually a shift from any tax (oh yea, there’s a two percent cut), and it won’t actually reduce carbon emissions, it will just export them (and the jobs that produce them – carbon is even more labour than profits, if you hadn’t noticed – are you really in favour of lowering the tax burden on banks and increasing that on manufacturing?!). The only part that reduces carbon emissions is the ‘direct action’ copied from straight from Abbott of shutting down Hazelwood and Playford.

    So not sure what the benefit there is.

  14. Posted August 9, 2011 at 7:30 pm | Permalink

    Have you heard of wireless?

    Yes, but it is not a substitute for a high bandwidth physical connection. There’s only so much bandwidth available to share in the wireless spectrum, and the technological trends strongly suggest we need more. You only have to look at the US where they’re bringing in strict bandwidth limits on mobile internet connections because the system can’t handle the current bandwidth demands (or in Australia where the wireless bandwidth pricing is crazy).

    it will just export them

    Can you demonstrate that purchasing permits from overseas countries will simply result in a direct increase in their ‘nominated emissions’ (i.e. no actual decrease in physical emissions)?

    are you really in favour of lowering the tax burden on banks and increasing that on manufacturing?

    Not particularly. However it’s not like banks are the only industry that would be minimally effected by carbon tax, and I can’t see a substitution effect that would shift spending from manufacturing to banking as a result of a small price shift (I can’t drive an additional bank account around, can I?).

    ‘direct action’ copied from straight from Abbott of shutting down Hazelwood and Playford

    It’s amusing that you’re so politically biased that you think those ideas originated from Abbott.

  15. Patrick
    Posted August 9, 2011 at 8:26 pm | Permalink

    There’s only so much bandwidth available to share in the wireless spectrum,

    Have you heard of the golden rule? If you can imagine it it will come to pass in far less time than you think. Lo and behold, Steve Perlman thinks he can (well thinks he HAS) exponentially increase the data capacity of wireless.

    Can you demonstrate that purchasing permits from overseas countries will simply result in a direct increase in their ‘nominated emissions

    It isn’t purchasing the permits that increases their emissions. Rather, what becomes more expensive to make here stays the same price there, so the product is imported. That is basically what happened in the EU thus far.

    I can’t drive an additional bank account around, can I?

    No, but you can drive an imported car, see above.

    It’s amusing that you’re so politically biased that you think those ideas originated from Abbott.

    Yea I don’t really, sorry. I just find it amusing that the goodthinkers mock ‘direct action’ so scornfully when it is the only part of their program with any certain material impact this decade.

  16. Posted August 9, 2011 at 8:46 pm | Permalink

    I think equally concerning, but lost in this, is the situation in London, and what the government’s response is.

    They’re recalling Parliament, naturally… because what a London mob REALLY needs is a sternly wagged finger and a target-rich environment!

    [See new funnie]

    Re: investing. If I actually had any money I’d certainly be buying Alcoa given the drastic price drop (aluminium is infinitely recycleable so I think it would be a good long-term bet)

  17. Posted August 9, 2011 at 8:49 pm | Permalink

    [email protected]:

    Naked short selling is supposedly banned, so what happens? Your super fund ‘lends’ title to ‘your’ shares (for a fee) to somebody willing to double down on the very company you are invested in. How does that create ‘value’ for you, and how does it contribute to the good of any of us?

    Well the relevant indexes go up, which is good if you’re in a tracker…

  18. Mel
    Posted August 9, 2011 at 9:07 pm | Permalink

    I think what Paddy is trying to say amounts to something like this – “we mustn’t build any more highways lest the not too distant future be one of Jetson’s style jump-jets”.

    Meanwhile back in the real world, even Paddy’s linebacker, Steve Perlman, admits his DILDO is at least 10 years away from commercialisation. In real terms, that means at least 20 years, if ever.

    If we listened to every nay saying Paddy-come-lately, no large scale infrastructure, like major roads, rail, ports, the electrical and telecommunications networks would ever be built.

    ps. At the moment, thanks to a Howard era boondoggle, folk like me who live out in the sticks are entitled to a free satellite dish every 3 years. Yipeeee!

  19. Mel
    Posted August 9, 2011 at 9:29 pm | Permalink

    But back to the main topic.

    Notwithstanding my above caution about bloggers with absolutely no training in economics but who’re convinced their nimble pinkies and a little google power and amazonian magic makes them Adam Smith, I’m punting on Krugman being right on this:

    “1. US debt is downgraded, sparking demands for more ill-advised fiscal austerity

    2. Fears that this austerity will depress the economy send stocks down

    3. Politicians and pundits declare that worries about US solvency are the culprit, even though interest rates have actually plunged

    4. This leads to calls for even more ill-advised austerity, which sends us back to

    Behold the power of a stupid narrative, which seems impervious to evidence.”

    I think the teabag/libertarian mantra of government slash and burn will turn out to be disastrous if put into action.

    As I said over at Club Troppo approximately 3 years ago, Mr Obama won himself a shit sandwich. It would have been much better if a Republican President was forced to clean up this God awful mess.

    The sadist in me is rooting for a MIchelle Bachmann presidency in 2012.

  20. Posted August 9, 2011 at 10:07 pm | Permalink

    Okay Mel, that’s just nasty

  21. Posted August 10, 2011 at 2:15 pm | Permalink

    [email protected] Folk can decide to not take the money. Hence various Commonwealth-State argy-bargy’s where the Commonwealth tries to assess at what point the conditions overreach State (or whoever’s) break point. Without the offered money, the Commonwealth cannot “direct” anything, since regulating education in the States is ultra vires.

    [email protected] Your analysis completely ignores monetary policy. A difficulty, since it is the real culprit. While I agree both sides of politics are to blame for the fiscal mess, Obama’s failure to nominate people to vacancies on the Fed Board for months was criminally stupid. But so is conservative/Republican tub-thumping on inflation, so both sides are to blame there also. As one would figure, for such a spectacular level of mess.

  22. Posted August 10, 2011 at 2:32 pm | Permalink

    monetary policy… is the real culprit.

    The real culprit was the collapse of trust in banks and the financial market in general. It would have caused chaos regardless of monetary or fiscal policy. That’s not to say relying on monetary policy to cover up structural issues in the economy was a bright idea, or that it didn’t exacerbated the financial crisis.

  23. Mel
    Posted August 10, 2011 at 3:59 pm | Permalink

    Lorenzo:

    [email protected] Your analysis completely ignores monetary policy. A difficulty, since it is the real culprit.”

    Sorry, Lorenzo, but you ain’t Adam Smith any more than I am. You have no grounds for certainty other than the false prophet that is ideology, that being the very same thing that leads an otherwise intelligent person to value the judgement of a nutty JFK conspiracy theorist over that of an appropriately convened panel of one’s peers.

    “Without the offered money, the Commonwealth cannot “direct” anything, since regulating education in the States is ultra vires.”

    The purse strings offer de facto control, if we must go all Latin. In reality (de facto), no state government is in a position to decline billions of dollars from the Commonwealth (other than maybe WA).

    Sheesh. Next you’ll be arguing that State can’t direct individuals since all it can do is jail or fine law breakers.

  24. Posted August 10, 2011 at 7:38 pm | Permalink

    [email protected] If you have problems in the financial sector and the central bank tightens monetary policy, it can turn difficulties into a catastrophe. That is what happened in 1929-30 and it is what happened in 2008 (for different values of ‘catastrophe’).

    [email protected] I will take my considered judgement that monetary policy mattered over your apparent certainty that it did not any day. I have been following the debate on this for some years and disastrous monetary policy was central to the debacle, and continues to be since it means key economies are performing well below capacity, driving down revenues and driving up spending, making fiscal problems worse even without further decisions by legislators.

    And if you cannot tell the difference between having the legal power to regulate and having to offer money in order to have any say then a lot of differences in social phenomena are going to be beyond you.

  25. Posted August 10, 2011 at 8:03 pm | Permalink

    [email protected], sure once the bubble has burst tightening monetary policy would be a bad idea. However, when you’ve got rampant asset inflation, loose monetary policy is only going to make the bubble bigger.

  26. Posted August 10, 2011 at 8:10 pm | Permalink

    [email protected] Rampant asset inflation is not exactly how I would describe the current situation in the US, Japan or EU.

    Housing down here in Oz yes, but we are in a very different place.

  27. Mel
    Posted August 10, 2011 at 8:16 pm | Permalink

    Lrrenzo,

    Sorry buddy but I think the considered opinion of Paul Krugman, Brad Delong, John Quiggin etc. is more valuable than yours on economic matters by so many orders of magnitude that no number is big enough to express it. You are, after all, a man who sources his opinions on science from people who believe 9/11, the moon landing and the JFK murder were all subject to mysterious conspiracies confected by mysterious forces who still remain at large. In other words, your judgement is visibly and demonstrably worse than useless 🙂

    ps. Do you really believe the moon landing was a hoax?

  28. Posted August 10, 2011 at 8:47 pm | Permalink

    [email protected] Ah yes, but I rate opinions and analysis by their plausibility, not by their holders. I really don’t care what a scientist commenting on science thinks about who shot JFK.

    See your Krugman, Delong and Quiggin and raise them a Scott Sumner, David Glasner, etc. Except that you will find that the view I expressed above overlaps with some of Krugman and Delong’s views (not sure about Quiggin, haven’t read him on the issue).

    As an aside, anyone who hasn’t seen Krugman’s Nobel Prize lecture, I recommend watching it. A splendid presentation on how to do social science.

  29. Posted August 10, 2011 at 9:02 pm | Permalink

    A nice statement of how fiscal mess can have monetary policy causes is here.

  30. Mel
    Posted August 10, 2011 at 9:22 pm | Permalink

    Lorenzo:

    [email protected] Ah yes, but I rate opinions and analysis by their plausibility, not by their holders.”

    That is false, on every level. Unless you have expertise in a particular area you cannot make anything other than a superficial assessment. No keyboard warrior, no matter how inflated their ego, has the basic building blocks of knowledge and mental capacity to conduct a meaningful analysis of matters outside a couple areas at most.

    Moreover, a technically strong (plausible) argument may well win the annual debating medallion at Pymble Primary School but this doesn’t tell us anything at all about facts. “X” may argue plausibly that the earth is flat while “Y’ may argue implausibly that it is round, but the facts exist outside any such arguments.

    Show some humility, man.

  31. Posted August 10, 2011 at 9:29 pm | Permalink

    [email protected], I was referring to pre GFC policy, which is something i think explains why stimulus was more effective in some countries than others.

  32. Posted August 10, 2011 at 9:31 pm | Permalink

    I really don’t care what a scientist commenting on science thinks about who shot JFK.

    But you contradict yourself Lorenzo because prior to that you stated:

    but I rate opinions and analysis by their plausibility, not by their holders.

    Make up your mind, if I take the last statement then I should never trust anything an economist or whatever says about AGW. Which I don’t but because of your first statement but because I’m sick to death of the whole debate. Waste of time.

  33. Posted August 10, 2011 at 9:31 pm | Permalink

    [email protected]

    your judgement is visibly and demonstrably worse than useless

    Since you have not actually provided any analysis of what is wrong with the actual statements I quoted, it is a case of “that word ‘demonstrably’ it does not mean what you think it means”.

    Great scientists have believed weird and wonderful things. Isaac Newton’s religious and numerological obsessions, for example. Which affect his scientific achievements not at all, and no one of any sense thinks they do.

  34. Posted August 10, 2011 at 9:38 pm | Permalink

    [email protected] If you like I will rephrase: I assess propositions in their own terms, not in terms of completely unrelated propositions that may also be held by an individual.

  35. Posted August 10, 2011 at 9:40 pm | Permalink

    Great scientists have believed weird and wonderful things.

    Damn right. Here’s a example from a discussion I had today: many physicists have argued that because of the “improbability of life” occurring there must be something seriously wrong with our understanding of the universe, in fact a book was published last week asserting just that. Apart from the obvious fact that such an assertion places far too much faith in probability as an intellectual discipline, it also is predicated on the notion that we can determine probabilities in the absence of sufficient information to know what is probable. So just this week some scientists have stated that have detected “DNA building blocks” in meteorites. Hmmm. .

  36. Posted August 10, 2011 at 9:42 pm | Permalink

    I assess propositions in their own terms

    Sorry Lorenzo I don’t like that, don’t make sense. I assess propositions on the basis of the internal consistency and supporting evidence. Need to consider levels of analysis.

  37. Mel
    Posted August 10, 2011 at 9:44 pm | Permalink

    Lorenzo:

    “Isaac Newton’s religious and numerological obsessions, for example. ”

    You haven’t been paying attention, Lorenzo. Newton got into that shit AFTER he made his important discoveries. This is a pattern that has repeated itself throughout the history of science, as per Max Planck’s famous quote that I mentioned earlier.

    Your problem is that you believe in some species of naive empiricism. You believe that the heroic keyboard warrior may lift the veil on any matter he turns his mind to, provided he engages in “careful analysis” and weighs up the “plausibility” of the arguments. On the other hand, I recognise that the best we can do is rely on heuristics and, for want of a better word, intuitions, on all matters outside those very few on which we may reasonably call ourselves experts.

    You really do need to be more reflective and philosophical in your approach to knowledge, methinks.

  38. Posted August 10, 2011 at 9:50 pm | Permalink

    [email protected] Well, that’s cuts you out of a lot of things you cheerfully comment on.

    How do you choose which particular economists to follow and which to ignore, for example? Regarding the subject of this post, I have made some effort to get my head around monetary economics, have a degree in economics, have worked in economy policy areas and am moderately knowledgeable in economic history.

    Krugman and Delong are serious economists (Quiggin is more patchy: his argument against privatisation that the government had cheaper access to capital due to its taxing powers was just silly). But that does not mean lesser mortals must simply defer to what they say since equally serious economists disagree to one degree or another.

    One of the fundamental problems is macroeconomics still lacks a common analytical language: putting it in a much worse situation that microeconomics.

  39. Posted August 10, 2011 at 10:00 pm | Permalink

    [email protected] Happy to accept your expansion.

    [email protected] The order in which Newton “got into” matters religious and occult makes absolutely no difference to the quality of his science. If you think it does, there is something very wrong with your thinking.

    Yes, I believe in reasoning and evidence. I absolutely accept that we use short cuts, habits, routines, etc. Wrote about that years ago. But if we get no better than “intuitions” then it all becomes a pointless, tub-thumping game.

    You seem, for example, completely unable to see that your current line of argument cuts the ground out from under yourself.

  40. Posted August 10, 2011 at 10:00 pm | Permalink

    Wow, this thread really won’t lie down. Lorenzo & Mel, you may have to pretend to be gentlemen and agree to disagree on economics. Play nicely, please.

  41. Posted August 10, 2011 at 10:05 pm | Permalink

    One of the fundamental problems is macroeconomics still lacks a common analytical language: putting it in a much worse situation that microeconomics.

    That’s encouraging Lorenzo, good to see economists are getting down to the nitty gritty of their profession. I don’t follow economics that closely but I often feel that what passes as economic commentary in the MSM is more like story telling than analysis.

    BTW, the same problem you highlight bedevils psychology.

  42. Mel
    Posted August 11, 2011 at 6:59 am | Permalink

    [email protected] “You seem, for example, completely unable to see that your current line of argument cuts the ground out from under yourself.”

    I readily accept that my opinions on most things are no more weighty than an angel dancing on pin head. There are few, if any, geniuses among us keyboard warriors 😉

  43. Posted August 11, 2011 at 9:15 am | Permalink

    One of the fundamental problems is macroeconomics still lacks a common analytical language: putting it in a much worse situation that microeconomics.

    The more I learn about macroeconomic theory, the more it seems to be of a quality and relevance somewhere between homeopathy and acupuncture. It can seem to work well in cases of mild ailments or discomforts (thanks to the placebo effect). The problem is the US economy has a deep penetrating stab wound, and economists are discussing how to dilute a solution or place a needle. Meanwhile the reserve bank is stuck like a nurse who is only allow to determine how much water the patient can drink. They’re looking at the patient bleeding out, deciding that they look dehydrated and prescribing that they drink more water, as if it’s going to magically cure the problem. Meanwhile, no one wants to actually do anything that might help, because the orthodoxy holds that the human body is the product of billions of years of evolution and therefore quite capable of healing itself; and because of its complexity anything we try to do externally will just cause more damage than good.

  44. Mel
    Posted August 11, 2011 at 9:55 am | Permalink

    Dunno, desipis. I thought the macro orthodoxy was still that some pump priming is in order.

  45. Posted August 11, 2011 at 10:50 am | Permalink

    Mel, pump priming is analogous to looking at the bleeding patient and deciding they need fluids. I’m not saying that it’s wong or pointless, just that it kind misses the bigger picture of the structural issues in the economy causing the liquidity/financial problems in the first place.

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