My God, you are an idiot.

[Greedy,Greedy,Greedy]

Originally Posted by Adder

I said that, but skeptically because I'm not sure which of them are AAA.



That will not result from a downgrade. It will result from a default, or a market belief that a default is imminent or materially more likely. A downgrade may or may not influence that market belief.

Here's the fun thing about a sovereign downgrade. It will be accompanied by downgrades of corporate and municipal debt. Drive up borrowing costs and you drive down equity values. As long as you assume that many borrowers would see an increase in costs from a downgrade, a pretty good assumption, you should also assume equities markets drop after a sovereign downgrade.

Though, who knows, maybe enough money flows to equities away from debt as they become less distinguishable.

[Tyrone Slothrop]

Originally Posted by Adder

Only if you assume that the ratings downgrade is going to have an effect.

Which you were doing, since your premise was that "there is some quantity of investor money that is forced out of government bonds and into other investments."

[Sidd Finch]

Originally Posted by sgtclub

The idea is that they agree to overall numbers now and work out the details later. That would be a step forward, but as I already acknowledged, they will take it to the limit again.

It just hit me why we see things differently. Other than GGG (I think), are all of you guys litigators?

Good point. Litigators are used to kicking things down the road, and from that experience we realize it's a shitty way to deal with problems.

But next time will be different, I'm sure. Next time, Congress will work out a package of entitlement cuts and tax increases that they can all agree to. Next time, with the pressure of an imminent election, Rs everywhere will be willing to forsake Grover Norquist and say, "I, too, can vote for tax increases -- including cutting stupid subsidies and deductions -- for the good of the country, because it is obviously needed, and because it will cause my political counterparts to compromise."

[Tyrone Slothrop]

Originally Posted by Greedy,Greedy,Greedy

Actually, I think he is circling around but not closing on a key point. There will be a flight of capital out of treasuries, and out of US corporate and municipal bonds. That will benefit companies and governments in other parts of the world. Probably not enough to offset the collapse of equities markets and the grinding to a halt of the financial system, but, in the long term, it will be a big step on the road from the American to the Asian century.

I think this is the wrong way to think about what will happen. I would be surprised if you see a huge change in where capital is invested. People are not going to stop buying Treasuries. BUT, rates will change. Many different types of bonds will get more expensive, and none are going to get cheaper. A company or government in another part of the world is not going lend money for less than they do today, just because buyers are going to find other options less attractive. To the contrary -- they may be able to ask more than they do today, since there will be fewer alternatives.

It's like a huge, massive tax.

[Tyrone Slothrop]

Originally Posted by Adder

Macroeconomics is officially obsolete, "Pelosi: "It Is Clear We Must Enter an Era of Austerity."

It's like 1937 all over again.

[Greedy,Greedy,Greedy]

Originally Posted by Tyrone Slothrop

I think this is the wrong way to think about what will happen. I would be surprised if you see a huge change in where capital is invested. People are not going to stop buying Treasuries. BUT, rates will change. Many different types of bonds will get more expensive, and none are going to get cheaper. A company or government in another part of the world is not going lend money for less than they do today, just because buyers are going to find other options less attractive. To the contrary -- they may be able to ask more than they do today, since there will be fewer alternatives.

It's like a huge, massive tax.

I don't think this is right at all. Ask the states that have already been downgraded whether it is harder and more expensive to borrow money.

I can tell you I know investment bankers who believe most of the deals they are currently working on will die if there is a default, and will be deeply troubled if there is a downgrade.

And if those deals die, law firm revenues are going to suck wind.

[Adder]

Originally Posted by Greedy,Greedy,Greedy

It will be accompanied by downgrades of corporate and municipal debt.

I'm not sure that's true. Note that Salmon doesn't assume it to be the case in the article Ty linked.

Related to my earlier speculation, here's Krugman noodling the effect of threatened default, in response to Nick Rowe speculating that downgrade could be stimulative. Krugman concludes no, although I don't know if there is wiggle room between Rowe's "downgrade" and Krugman's "threatened default."

ETA: Btw, Sumner also concludes no, as does DeLong in the comments to Rowe's post. That's a lot of big name economics bloggers discussing imbecility.

[Adder]

Originally Posted by Tyrone Slothrop

Which you were doing, since your premise was that "there is some quantity of investor money that is forced out of government bonds and into other investments."

What were you just saying about reading the whole thing?

Alternatively, I meant "some effect on treasury yields." Which I thought was clear.

[sgtclub]

Originally Posted by Sidd Finch

Good point. Litigators are used to kicking things down the road, and from that experience we realize it's a shitty way to deal with problems.

But next time will be different, I'm sure. Next time, Congress will work out a package of entitlement cuts and tax increases that they can all agree to. Next time, with the pressure of an imminent election, Rs everywhere will be willing to forsake Grover Norquist and say, "I, too, can vote for tax increases -- including cutting stupid subsidies and deductions -- for the good of the country, because it is obviously needed, and because it will cause my political counterparts to compromise."

That's not where I was going. I was more focused on how litigators v. non-litigators view the negotiations. At the end of the day, this is just a deal like any others, and having been through this a few times, I don't see anything unusual here, other than those who don't have leverage crying about those that do.

[Greedy,Greedy,Greedy]

Originally Posted by sgtclub

That's not where I was going. I was more focused on how litigators v. non-litigators view the negotiations. At the end of the day, this is just a deal like any others, and having been through this a few times, I don't see anything unusual here, other than those who don't have leverage crying about those that do.

You see, in deals I do, if I represented the Dems, we would have walked away a long time ago based on the other side's inability to negotiate.

I don't know what Boehner thinks he can keep walking away. Neither side can in this one.

[Adder]

Seems like a way better idea to me than locking in pro-cyclical fiscal policy.

Originally Posted by Tyrone Slothrop

It's like 1937 all over again.

That's what really kills me. We did this already, and having learned exactly what not to do, and after analyzing the results for 70 years, all sides seem to agree on doing all of the wrong things again.

Spending will be cut, programs gutted, taxes raised (if at all) solely for the purpose of paying down debt that we're carrying at an all-time low interest rate, and when unemployment is 10% next year everyone will be scratching their heads and/or blaming Obama for it, and him and Pelosi will have certainly earned their share.

[Adder]

Originally Posted by ironweed

That's what really kills me. We did this already, and having learned exactly what not to do, and after analyzing the results for 70 years, all sides seem to agree on doing all of the wrong things again.

And of course the UK did this already very recently and against demonstrated it to be wrong.

But the myth of Germany is out there!

[sgtclub]

Originally Posted by Greedy,Greedy,Greedy

You see, in deals I do, if I represented the Dems, we would have walked away a long time ago based on the other side's inability to negotiate.

I don't know what Boehner thinks he can keep walking away. Neither side can in this one.

Yes, they can and will. The Rs will win this one. It's already guaranteed. On 8/2, the world does not come to an end. Revenues still come into treasury, and the government will need to decide who it pays. The logical result is that the government will need to cut spending in other places, so it can pay bondholders, SS, etc. This is exactly what they want, which is why they tied budget to debt ceiling.

ETA: This http://www.bloomberg.com/news/2011-0...lvia-says.html

[Hank Chinaski]

Originally Posted by ironweed

That's what really kills me. We did this already, and having learned exactly what not to do, and after analyzing the results for 70 years, all sides seem to agree on doing all of the wrong things again.

Spending will be cut, programs gutted, taxes raised (if at all) solely for the purpose of paying down debt that we're carrying at an all-time low interest rate, and when unemployment is 10% next year everyone will be scratching their heads and/or blaming Obama for it, and him and Pelosi will have certainly earned their share.

W spent tons of money! and it ruined the economy!

Obama can't fix the economy because they Rs won't let him spend tons of money!