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Hsieh PJM OpEd: Don't Shoot the Downgrade Messenger

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The 8/10/2011 PajamasMedia has just published my latest OpEd, "Don't Shoot the Downgrade Messenger".

My theme is that attacking S&P for the U.S. credit downgrade is like criticizing your doctor for diagnosing your cancer. Here is the opening:

Suppose you saw your doctor for a persistent headache. After performing a full battery of tests, he told you that your MRI scan showed a malignant brain tumor. Would you (1) work with him on a plan to treat your cancer, or (2) threaten the MRI manufacturer with a government investigation? Although most normal people would choose option 1, our government is responding to the news of the S&P credit downgrade with option 2.

The Senate Banking Committee has responded to S&P's downgrading of the U.S. government's credit rating by "
gathering information
" in preparation for possible formal hearings on S&P's action. Committee Chairman Tim Johnson (D-S.D.) called S&P’s move "
irresponsible
" because it would make it more difficult for cash-strapped state and local governments to borrow more money. In other words, the problem wasn't the fact that the federal, state, and local governments were borrowing money that might not ever get paid back. Rather, the problem was that S&P was pointing out that fact to the rest of the world.

Unfortunately, our government's tactic of blaming the messenger has been all too common these past few years...

(Read the full text of "Don't Shoot the Downgrade Messenger".)

The unrest in Great Britain and Greece are a wakeup call to America as to what to expect if we continue on our current unsustainable welfare-state spending spree. Let's hope Americans take heed before it's too late.

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  • 2 weeks later...

Supporting S&P is like supporting a doctor who diagnoses his patients with heart disease, without evidence, and justifies this fraud because he thinks patients who think they have heart disease will live healthier lives and live longer.

I think the "activist" movement here does itself a great disservice by spreading lies, even if those lies apparently to scare people into agreeing with policies that are advantageous. This is not war: we don't need to create an agreement with Stalin in order to defeat Hitler. Healthy people should not engage in radiation therapy, and so on. The context matters.

In the case of S&P, their assessment that the US might have a possibility of defaulting on its debt is so laughably false that it makes any serious observer see what was really going on there: S&P wanted to unelect Obama and curry favor with the other party. Simple politics.

And yes, it's laughably false. For starters, the US debt is in its own currency, so default simply won't happen since debts can be inflated away. As for inflation (as we've discussed in the Econ forum here), significant inflation in the next ten years is utterly improbable--and S&P knows this. If anything, S&P should certainly be an entity that knows a little bit about what's happening on Wall Street, where 10-year US bonds have dropped to historically low levels even AFTER the announcement. S&P knows that serious investors don't listen to them anymore (makes sense considering their history of fraud in the subprime mess), but they knew that their downgrade would make a big splash among the unwashed masses who know nothing about economics.

So please, as an advocate for truth and reason, don't cede the moral high-ground for expediency.

OP

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And yes, it's laughably false. For starters, the US debt is in its own currency, so default simply won't happen since debts can be inflated away.

Why is inflating debts away not a default?

If I could merely write out checks with nothing in my account to redeem, am I not defaulting? If I steal from others (by taxing or inflating the currency, a fiat currency, a legally enforced tender) in order to have something to redeem for my checks, am I not defaulting?

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Why is inflating debts away not a default?

If I could merely write out checks with nothing in my account to redeem, am I not defaulting? If I steal from others (by taxing or inflating the currency, a fiat currency, a legally enforced tender) in order to have something to redeem for my checks, am I not defaulting?

Well, for a little help, here's how a prominent online dictionary defines the word, "default":

http://dictionary.reference.com/browse/default

default -- "to fail in fulfilling or satisfying an engagement, claim, or obligation."

Anybody buying t-bills are buying debt denominated in US dollars. Yes, you can inflate those dollars, but no, that is not "default" in any sense of the term. Investors know what "dollars" are, and they act accordingly. The treasury also sells TIPS, for example, which is the product for customers who would like to bet FOR inflation.

But all that said, in today's environment, significant inflation in the US is utterly laughable. The ONLY thing going up in price these days is gold, which is obviously a speculator-induced bubble, not a sign of the 500% inflation it portends.

To say it again (as I have in other threads), I'm quite afraid of what are otherwise very rational people being made to look like crackpots in resting a lot of conclusions on something is utterly without evidence. The next decade will be about DEflation not inflation (see: Japan), t-bills are as safe as mother's milk, and S&P was just manipulating public opinion not making any kind of judgment that people expect from them (which amounts to fraud).

Getting on S&P's side and defending them is a BIG mistake. And yes, S&P (and many of the other ratings agencies) absolutely SHOULD be investigated and potentially prosecuted for the fraud they committed during the subprime fiasco. I have no idea why these cases haven't been brought forward--and I wondered that two years ago, long before this downgrade business.

OP

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OptimizedPrime, don't you think there is a problem with every other post claiming that people who disagree with your financial forecasts as in some manner or another intentionally spreading lies and falsehoods to advance a political agenda? Couldn't it just be that they disagree with your economic assessments? Why the personal attacks?

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Well, for a little help, here's how a prominent online dictionary defines the word, "default":

http://dictionary.reference.com/browse/default

default -- "to fail in fulfilling or satisfying an engagement, claim, or obligation."

Anybody buying t-bills are buying debt denominated in US dollars. Yes, you can inflate those dollars, but no, that is not "default" in any sense of the term. Investors know what "dollars" are, and they act accordingly. The treasury also sells TIPS, for example, which is the product for customers who would like to bet FOR inflation.

I understand what you're saying re default. In a delimited, superficial sense, I agree, the government via creating more money will not default. It will "pay" its debts with newly created money (or taxes).

But such a view assumes that all wealth belongs to the government. By inflating the currency, the government is defaulting in the sense that it is stealing in order to pay its debts. It's defaulting on its proper purpose — protecting property rights, etc, and it's defaulting on its debts by way of stealing the wealth of the citizens in order to pay its debts. If it doesn't have the means to pay its debts, it's in default. Creating new money (not wealth, but a medium of exchange) is stealing wealth. Using stolen wealth to pay one's debts does not mean that one is not in default. It is default.

Money is not wealth; it's a medium of exchange. Untied to a substance, like gold, fiat currency robs everyone of their wealth...so that the government can use that wealth as it decides. In my view, it's a confession of default, of bankruptcy, in fact and in principle. The motive behind having a fiat currency is the same as the motive for an individual to counterfeit the currency. A counterfeiter is in default when he "pays" his debts with his newly created "money." So too is the government.

Edited by Trebor
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Could you please identify what the component units of inflation are?
As you know, the term inflation is popularly used to label two very different concepts: 1. expansion in the quantity of money; and 2. a broad rise in prices. I wish each of these had separate commonly-agreed labels, but it is not to be so. Sometimes the term 'expansion" is used to denote the inflation of the money supply, but expansion is also used to label general economic growth. As for price-rise, I can't think of a single term used to the concept of general-price-rise, other than inflation. The consequence of this is that a single paragraph can sometimes contain the term "inflation" used first to mean one concept and then the other. I'm pretty sure I'm guilty of this myself. Matters are made worse by the commonly-held view of the Quantity Theory of Money, where people think there is some almost linear relationship between the quantity of money-supply and the level of prices. This makes it even easier to slip into thinking that even though they aren't the same, they're still part of the same cause-effect chain, and the presence of one implies the presence of the other.

To make matters even worse, an index like the CPI (of even Shadow Stat's parallel version) is taken as a measure of a general price-rise, with inflation of asset prices being downplayed. Indexes like the CPI were geared to being wage-index. Some countries use indexes that were originally meant to measure the cost of living to the lowest quartile of the population. On the other side (i.e. money expansion), the commonly held notion of the "money multiplier" led people to think that there is some almost linear relationship between "high-powered money" created by today's central banks and usable money-like claims that are lent out across the economy. Until somebody comes along to clean up the terminology, I think it is best to use language that clearly indicates which specific concept or measure one is talking about.

I know OP used the term to refer to price-rise, but he might also be using it for both concepts. Perhaps he'll clarify.

What we have seen in the last few years is a huge increase in the quantity of high-power money issued by our central bank (so we have a lot of inflation in that sense). However, in times of fear the demand for money rises, which means that people want to hold more of it, want to borrow less, and want to lend less. Therefore the increase in the high-powered money can happen in parallel with a decrease in money-like claims. We have seen these levels halt their rise completely and plateau (so we have deflationary pressures in this sense). On the prices side, consumer prices have hardly risen any more by historical levels, while home prices and refinance rates have dropped. So, we have low inflation in this sense. Meanwhile, with the fed cutting off all "safe" avenues of getting dollar-denominated returns on cash-like holdings [e.g. CDs], people have incentives to take slightly more risk, and this has led to a rise in the prices of financial assets like stocks and bonds (so, we have inflation in this sense).

As for the S&P, I don't see any evidence that they acted politically. More likely, they're simply applying their scoring methodology for sovereign debt and come up with enough non-top ranking sub-scores that they cannot justify a total score in the top bracket. Add a little need to appear tough as a rating agency and you have a motivation not to make an exception. I wonder who would use a rating when deciding to buy sovereign debt of a large, stable western country denominated in the fiat currency issued by that country. At most, I suppose some organizations may have bureaucratic rules that make them pay attention to S&P's rating of the US, ubt I cannot imagine anyone who thinks for himself caring about what they have to say on the topic.

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As you know, the term inflation is popularly used to label two very different concepts: 1. expansion in the quantity of money; and 2. a broad rise in prices. I wish each of these had separate commonly-agreed labels, but it is not to be so. Sometimes the term 'expansion" is used to denote the inflation of the money supply, but expansion is also used to label general economic growth. As for price-rise, I can't think of a single term used to the concept of general-price-rise, other than inflation. The consequence of this is that a single paragraph can sometimes contain the term "inflation" used first to mean one concept and then the other. I'm pretty sure I'm guilty of this myself. Matters are made worse by the commonly-held view of the Quantity Theory of Money, where people think there is some almost linear relationship between the quantity of money-supply and the level of prices. This makes it even easier to slip into thinking that even though they aren't the same, they're still part of the same cause-effect chain, and the presence of one implies the presence of the other.

I agree that it's confusing to use the word "inflation" for both things. Is not using the word "inflation" for both an expansion of the quantity of money and a broad, or general, across-the-board, rise in prices, a matter of using the same word for both cause and effect?

The only way to get that broad, or general, across-the-board, rise in prices is by an expansion of the quantity of money, else, price increases in one area of the economy occur with price decreases in other areas of the economy. The expansion causes, unless there's some other factor at play, such as what you suggest, a general rise in prices, the effect. There still is a rise in prices, but it's offset by the decrease in prices from those other factors, balancing out to give the appearance of level, or relatively level, prices. Correct?

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OptimizedPrime, don't you think there is a problem with every other post claiming that people who disagree with your financial forecasts as in some manner or another intentionally spreading lies and falsehoods to advance a political agenda? Couldn't it just be that they disagree with your economic assessments? Why the personal attacks?

I wasn't claiming that at all. I don't know how you read that into my posts. Please explain.

OP

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I understand what you're saying re default. In a delimited, superficial sense, I agree, the government via creating more money will not default. It will "pay" its debts with newly created money (or taxes).

But such a view assumes that all wealth belongs to the government. [...]

No it doesn't. I have no idea (and I read the rest several times) how you came to that. You understand how t-bills are sold, right? You understand what the agency is rating here, right?

***

And to the other thread (I don't have this multi-response thing figured out yet), I use the term "inflation" in the sense of, "a general rise in prices". I'm familiar with the other sense of the word, and they are not the same thing and one doesn't necessarily lead to another (as we've witnessed in the last couple of years). Certainly the other sense might be an important thing to follow along with many other risk factors, but it's just a factor, not an actual thing.

***

And yes, my case against S&P's recent action is circumstantial. So take that for what it's worth. It's possible that they are merely idiots.

Paul Hsieh goes on to suggest that other agencies did NOT down-rate t-bills because they are afraid they will be investigated by the government like S&P was (which apparently they all are anyhow). This too is circumstantial (speculative?). So we're all just piecing together circumstantial evidence--and I think mine's a lot better. But nobody can know exactly what is going on in their minds for sure of course.

Now my case against their earlier behavior is not circumstantial (at least at the macro scale). They rated giant multi-billion dollar lumps of dog doo as "AAA zero risk". It was fraud and a proper government should go after them.

So to defend these guys makes you look stupid, and that's a bummer for me since I don't like advocates of freedom and reason looking stupid.

OP

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And to the other thread (I don't have this multi-response thing figured out yet), I use the term "inflation" in the sense of, "a general rise in prices". I'm familiar with the other sense of the word, and they are not the same thing and one doesn't necessarily lead to another (as we've witnessed in the last couple of years). Certainly the other sense might be an important thing to follow along with many other risk factors, but it's just a factor, not an actual thing.

OP

That helps to place these particular posts, and your other economic threads into perspective. Thanks.

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And to the other thread (I don't have this multi-response thing figured out yet), I use the term "inflation" in the sense of, "a general rise in prices". I'm familiar with the other sense of the word, and they are not the same thing and one doesn't necessarily lead to another (as we've witnessed in the last couple of years). Certainly the other sense might be an important thing to follow along with many other risk factors, but it's just a factor, not an actual thing.

No they are not the same thing. One is the cause, the other is the result or effect. Not the other way around. The confusion comes from using the same word for both. You apparently think that if you do not observe an effect, then the cause can not be in play.

So to defend these guys makes you look stupid, and that's a bummer for me since I don't like advocates of freedom and reason looking stupid

You do understand that this is insulting and reflects poorly on you?

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No they are not the same thing. One is the cause, the other is the result or effect. Not the other way around. The confusion comes from using the same word for both. You apparently think that if you do not observe an effect, then the cause can not be in play.

Why do I apparently think that? I'm pretty sure I implied the exact opposite--that monetary expansion is something one should keep an eye on, as it is one factor in price inflation (but without other factors in play its just so much dry powder).

You do understand that this is insulting and reflects poorly on you?

It's an internet forum, not a fancy dinner party. I'm being provocative and direct.

So yeah, defending S&P is retarded.

OP

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Now my case against their earlier behavior is not circumstantial (at least at the macro scale). They rated giant multi-billion dollar lumps of dog doo as "AAA zero risk". It was fraud and a proper government should go after them.

So to defend these guys makes you look stupid, and that's a bummer for me since I don't like advocates of freedom and reason looking stupid.

I doubt you would see many O'ists, or informed people in general, defending the activities of the rating agencies during the housing bubble. For an example, see one of John Allison's lectures on the roots of the financial crisis, in which he goes after the rating agencies for their ridiculous rating practices as well as the structure of the rating industry itself, which is limited to three agencies by government rubber-stamping. I think the support for S&P that we see now coming from the fiscally conservative side of the spectrum stems from extreme dissatisfaction with the policies pursued by the government in the past few years, both fiscally and monetarily, and the idea that these terrible policies will have equally bad consequences for the U.S. economy. Now, it may very well be the case that these consequences will have nothing to do with the riskiness of government bonds, and so S&P made a grave error in downgrading them. However, I think the disgust with America's monetary and fiscal policies being expressed through support for S&P is spot on.

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I doubt you would see many O'ists, or informed people in general, defending the activities of the rating agencies during the housing bubble. For an example, see one of John Allison's lectures on the roots of the financial crisis, in which he goes after the rating agencies for their ridiculous rating practices as well as the structure of the rating industry itself, which is limited to three agencies by government rubber-stamping. I think the support for S&P that we see now coming from the fiscally conservative side of the spectrum stems from extreme dissatisfaction with the policies pursued by the government in the past few years, both fiscally and monetarily, and the idea that these terrible policies will have equally bad consequences for the U.S. economy. Now, it may very well be the case that these consequences will have nothing to do with the riskiness of government bonds, and so S&P made a grave error in downgrading them. However, I think the disgust with America's monetary and fiscal policies being expressed through support for S&P is spot on.

This won't work. By supporting S&P, you are not supporting some arcane reaction you yourself might have to them. The headline for this one is simple: "The US Can't Pay it's Debts, say S&P". This is stupid on the face of it, and S&P are wrong and anybody with a brain can figure that out. They are going to be charged and possibly convicted as criminals--for all of the right reasons.

You want to go on the record as supporting THEM? All this will do is crush your credibility, and help the other side make their case.

OP

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The S&P never said that the US cannot pay its debts. They actually say there is an extremely high likelihood that the U.S. will pay its debts, in both the short-term and the long-term. Of course, idiots can write any headline they want. The notion that the S&P is currying favor with the GOP, in expectation that the GOP will win the next election is classic tin-hat stuff.

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The S&P never said that the US cannot pay its debts. They actually say there is an extremely high likelihood that the U.S. will pay its debts, in both the short-term and the long-term. Of course, idiots can write any headline they want. The notion that the S&P is currying favor with the GOP, in expectation that the GOP will win the next election is classic tin-hat stuff.

Oh come on. There is not ONE person on Earth that interpreted their announcement that way (Paul didn't for starters), and I also have a very hard time believing they "didn't know what was going to happen" when the announcement was interpreted by non-investors as a major ding on the credibility of the US, etc. etc.

As you mentioned, there's virtually nobody that actually pays attention to this rating for serious investment (and the market has underscored that). I think they know that too.

So yeah, the motive of currying favor with the Repubs is a reach maybe, but it's one possible explanation that isn't refuted by the available facts and supported by circumstantial evidence. Now, you don't think that imagining the other agencies didn't change their ratings because they were afraid of being prosecuted wasn't a reach either? I'm not trying to justify bad behavior--we're both working with less-than-complete facts--but it's a judgement call and I think Paul's guess was far less plausible (and then was proven wrong by the facts).

OP

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So yeah, the motive of currying favor with the Repubs is a reach maybe, but it's one possible explanation that isn't refuted by the available facts and supported by circumstantial evidence.

OP

Why is the objective to have to refute assertions by the available facts? If it is to be a plausible explanation, the onus of demonstrating that it is possible, probable or certain belongs to the asserter to connect it to the incontrovertible facts.

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Why is the objective to have to refute assertions by the available facts? If it is to be a plausible explanation, the onus of demonstrating that it is possible, probable or certain belongs to the asserter to connect it to the incontrovertible facts.

I'm not sure what you are asking here, but I think I showed that my assertion that S&P were acting from purely political motives was at least plausible, and supported by several facts. I also showed that Hsieh's assertion was actually refuted by (admittedly after-the-fact) facts.

But somehow we're way down a rhetorical rat-hole here... I think I made my original case, which was that supporting and defending S&P was a really dumb thing to do, and is counter-productive to the cause of liberty.

OP

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Unnecessary perhaps to say so, but the second Reisman talk I mentioned is "

not "Money and Bank."

Some other Reisman YouTube presentations:

He also has a multi-part presentation: " Why Nazism Was Socialism and Why Socialism Is Totalitarian" [Part 1; the other parts available as well.]

Edited by Trebor
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In the case of S&P, their assessment that the US might have a possibility of defaulting on its debt is so laughably false that it makes any serious observer see what was really going on there: S&P wanted to unelect Obama and curry favor with the other party. Simple politics.

If this is the allegation,

And yes, it's laughably false. For starters, the US debt is in its own currency, so default simply won't happen since debts can be inflated away.

Your equating that the US debt is its own currency, comes across to me as confused as those that would pass off freedom is slavery, or one man's terrorist is another man's freedom fighter. Debt and currency are not one in the same. Is this the part of your basis of fact?

But somehow we're way down a rhetorical rat-hole here... I think I made my original case, which was that supporting and defending S&P was a really dumb thing to do, and is counter-productive to the cause of liberty.

That may have been your original case, and I may not have been clear as to the allegation that I thought required supporting.

Personally, I would find supporting and defending what I consider to be dishonest money more counter-productive to the cause of liberty.

As I stated earlier in my response to your clarification on inflation, this just helps me to place your economic assessments into their proper perspective.

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Personally, I would find supporting and defending what I consider to be dishonest money more counter-productive to the cause of liberty.

So we need to pick the lesser of two evils? It's either "dishonest money" (?) or S&P?

And how again am I "supporting" "dishonest money"? Wtf?

As I stated earlier in my response to your clarification on inflation, this just helps me to place your economic assessments into their proper perspective.

Okay. I'm glad to be of help. Your post puts your assessments into their proper perspective as well. This morning, my dog barked, which put HIS assessments into their proper perspective as well. I'm chock full of perspective today.

OP

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