U.S. loses triple-A credit rating from S&P

[smurff]

I always thought the easiest way to prevent absurd military escapades is to simply add a war tax above and beyond our regular taxes for every year that we are engaged in some absurd conflict overseas. I think we would have ended these wars a long time ago if every taxpayer had to pay for this rather than put it on the credit card for our children to pay. Of course that Idea would make sense and therefore must be eliminated if for only that reason.

Yes, I really like the idea of a war tax too.  For a legitimate war of self defense, reasonable citizens would be happy to pay. 

Such a war tax (which I am in favor of) would work best--if the intent is to stop illegitimate wars--when assets as well as income were taxed.

[Storm]

A couple of years ago they had some Al Quiada foot soldiers interviewed on TV. They were saying that they had defeated World communism by dragging USSR into the 1980s Afghan war. They said that their mission was to do the same for World capitalism too in the same way. Basically as far as I can see, you can not overcome a nihlist movement by fighting. You can only beat them by walking away. Very very hard to do I agree BUT Ghandi claimed that Hitler could have been defeated by non-violent means and fewer people would have died that way??

Stone, that is an amazing concept which I've never thought of before.  This reminds me of the great movie Wargames:

Joshua: A strange game. The only winning move is not to play. How about a nice game of chess?

[MediumTex]

A couple of years ago they had some Al Quiada foot soldiers interviewed on TV. They were saying that they had defeated World communism by dragging USSR into the 1980s Afghan war. They said that their mission was to do the same for World capitalism too in the same way. Basically as far as I can see, you can not overcome a nihlist movement by fighting. You can only beat them by walking away. Very very hard to do I agree BUT Ghandi claimed that Hitler could have been defeated by non-violent means and fewer people would have died that way??

Stone, that is an amazing concept which I've never thought of before.  This reminds me of the great movie Wargames:

Joshua: A strange game. The only winning move is not to play. How about a nice game of chess?

Here's another crazy idea: make it so that a President can't go to war unless there is a formal declaration of war by Congress.

Maybe we could amend the Constitution to put in a requirement like that. 

[smurff]

Here's another crazy idea: make it so that a President can't go to war unless there is a formal declaration of war by Congress.

Maybe we could amend the Constitution to put in a requirement like that. 

We would have to define "war" very broadly to include anything that involves our military in any way, in any kind of hostility abroad (including training other militaries to fight their own "drug wars"), as well as giving foreign aid to one or more sides in an ongoing dispute. 

There should also be some sort of time and numerical limit for cases where the President feels the need to strike back at an attacking country before Congress has a chance to meet for a formal declaration.  Otherwise, a future president can drone-zap a country like Iran every weekend, even without an attack against the USA or a declaration of war by Congress, simply because the warmongering factions in the country force the issue.

And don't forget the misuse and abuse of the power of the United Nations, to start and meddle in wars. 

Past (and current) Presidents have used murky definitions of war and UN-related meddling to justify getting us into other nations' disputes.  Past (and current) Congresses have used these murky definitions to justify keeping us in such wars without their having to do their job and make a formal declaration.

[LNGTERMER]

Here's another crazy idea: make it so that a President can't go to war unless there is a formal declaration of war by Congress.

Maybe we could amend the Constitution to put in a requirement like that.

I think all we need to do are the following:
1- Introduce tax payer sponsored campains. I.e Remove private money form elections.
   This will let politicians work for the people rather than be prostiutes to whoever who can fund their next campain.
2- Break the duopoly parties on the system and make it easier for more political parties to enter the system.
   This will diversify ideas, opinions and make it difficult to negatively influence all the parties.
3- Limit the concentration of media ownership and introduce one or more tax payer funded networks like CBC of Canada.
   We should not pretend we have free media when it's simply mouth pieces to its private owners.

I think this will form the bases for more healthier changes but without them we are going nowhere.
IMHO

[hrux]

It is my suspicion that several of you are missing the macro issue here. The downgrade of US sovereign is NOT irrelevant due to the following:
1) It will force S&P to downgrade JP Morgan (as the sovereign stands behind the banking system, you cannot have a bank rated higher than the sovereign),
2) Force S&P to downgrade several European sovereigns, most notably France. Once France gets downgraded, several French banks will get downgraded.

It will then spread to other countries, and we have the potential for another crisis, so don’t underestimate the significance of this. Manage your portfolio risk accordingly.

[MediumTex]

It is my suspicion that several of you are missing the macro issue here. The downgrade of US sovereign is NOT irrelevant due to the following:
1) It will force S&P to downgrade JP Morgan (as the sovereign stands behind the banking system, you cannot have a bank rated higher than the sovereign),
2) Force S&P to downgrade several European sovereigns, most notably France. Once France gets downgraded, several French banks will get downgraded.

It will then spread to other countries, and we have the potential for another crisis, so don’t underestimate the significance of this. Manage your portfolio risk accordingly.

Where are you seeing that JP Morgan has a AAA rating?  It looks to me like the only S&P AAA rated U.S. companies right now are ExxonMobil, Microsoft, ADP and Johnson & Johnson.

Honestly, I doubt that any of what you are suggesting will happen.

This ratings agency business is not nearly as logical or systematic as you may be imagining.

After S&P gets done defending all the lawsuits that this downgrade is going to trigger, I wonder if it will regret downgrading what seems to obviously be the safest debt in the world (not to mention the matter of using incorrect data in its downgrade analysis).

As far as managing risk, the PP provides continuous self-adjusting risk management.  That's why I like it.

[hrux]

It is my suspicion that several of you are missing the macro issue here. The downgrade of US sovereign is NOT irrelevant due to the following:
1) It will force S&P to downgrade JP Morgan (as the sovereign stands behind the banking system, you cannot have a bank rated higher than the sovereign),
2) Force S&P to downgrade several European sovereigns, most notably France. Once France gets downgraded, several French banks will get downgraded.

It will then spread to other countries, and we have the potential for another crisis, so don’t underestimate the significance of this. Manage your portfolio risk accordingly.

The defense is in play already...
http://globaleconomicanalysis.blogspot. ... risis.html



Where are you seeing that JP Morgan has a AAA rating?  It looks to me like the only S&P AAA rated U.S. companies right now are ExxonMobil, Microsoft, ADP and Johnson & Johnson.

Honestly, I doubt that any of what you are suggesting will happen.

This ratings agency business is not nearly as logical or systematic as you may be imagining.

After S&P gets done defending all the lawsuits that this downgrade is going to trigger, I wonder if it will regret downgrading what seems to obviously be the safest debt in the world (not to mention the matter of using incorrect data in its downgrade analysis).

As far as managing risk, the PP provides continuous self-adjusting risk management.  That's why I like it.

[MediumTex]

I think the reverse of what everyone expects to happen will actually happen.

When people see that S&P can downgrade the U.S. and the sun continues to rise every morning, it will just be one more bungled call by the ratings agencies.  How on earth can there be default risk in a nation that controls its own currency, where that currency is the international reserve currency?  Time will tell, I suppose.

However, the idea that you would downgrade the U.S. before downgrading every other country in the world just seems silly.  The U.S. is in much better shape than the entire EU.  The EU is starting to look to me like some kind of surreal suicide pact among a group of nations that have everything to live for, but just don't happen to have identical economic and monetary interests.

I'm sure there will be many earnest speeches and breathless commentaries this coming week.  Ho-hum.

[doodle]

So how important is it that China states through their official news agency that the "good old days of borrowing are over"?

http://www.cnbc.com/id/44044859

It looks like they are going to have to make some adjustments to purchases unless they want to look like they don't mean what they say. Somehow I don't think the Chinese want to give America the impression that they are wishy-washy.

[Storm]

China can be rightly ignored in this debate.  They will use it as ammunition in their goal to have the RMB become the world reserve currency.  There are enough problems in China including economic and political instability, disrespect of IP laws and patents, and outright fraud and misreporting of official government statistics that the thought of the RMB becoming the world reserve currency is laughable.

In the end, the Treasury and the world can safely ignore China's posturing.  The US citizenry itself is the largest holder of US debt.  If grandma stops buying T-bonds, then maybe we should worry, but China is just the rude uncle who you invite to dinner that complains about the food.

[AdamA]

So how important is it that China states through their official news agency that the "good old days of borrowing are over"?

Probably not important at all. 

[AdamA]

Doodle--

Sometimes what you read in the news isn't what drives the markets.  

I think 10 years from now we'll be looking at the S&P downgrade in the same way we look at the 1979 "Death of Equities" sentiment.

If it's on the cover of Time it's probably wrong...at least when it comes to investing.

[doodle]

I don't understand why grandma would buy t-bonds to begin with at these rates. I can get FDIC insured CD rates at about a percentage over treasury rates. Many credit unions are offering 5 year cd's at 2.5% which is double the yield of 5 year treasury.

[AdamA]

I don't understand why grandma would buy t-bonds to begin with at these rates. I can get FDIC insured CD rates at about a percentage over treasury rates. Many credit unions are offering 5 year cd's at 2.5% which is double the yield of 5 year treasury.

Because Grandma knows that reaching for yield is dangerous.

Below is from Craig's blog.

Treasury Money Market Fund rates are about 0% today. Many may think this is a reason to chase after some higher yield. My advice: Don’t.

In 2008 when the credit crisis hit it was the higher yielding assets in many money market funds that faced problems. Some of these funds broke the buck. Others dealt out large losses to customers. The slight extra yield being received over the years was met with a quick evaporation of principal in some cases, freezing of redemptions in others, or just a nail biting experience watching it all happen. Was the extra percent or so a year worth it?

[doodle]

Isn't an FDIC insured CD just as good as a treasury bond? I mean, it is insured by the government after all. If that insurance breaks down, why wouldn't the govt insurance on treasury bonds break down?

[AdamA]

Isn't an FDIC insured CD just as good as a treasury bond? I mean, it is insured by the government after all. If that insurance breaks down, why wouldn't the govt insurance on treasury bonds break down?

An FDIC insured CD is more risky than a Treasury Bond.  There is no way the interest rate on the CD would be higher than that of the Treasury Bond otherwise.

At the very least, the FDIC may make you wait to get your money during a crisis.  The US government will not. 

[Storm]

Isn't an FDIC insured CD just as good as a treasury bond? I mean, it is insured by the government after all. If that insurance breaks down, why wouldn't the govt insurance on treasury bonds break down?

Grandma might have more than the $250K FDIC limit, and doesn't want to drive to 10 different banks all over town shopping for CDs...

[WildAboutHarry]

It is interesting that some "pundits" are warning of a falling stock market and a rising bond market on Monday.

So there is going to be a flight to quality to the bonds that were just downgraded?

[AdamA]

It is interesting that some "pundits" are warning of a falling stock market and a rising bond market on Monday.

So there is going to be a flight to quality to the bonds that were just downgraded?

Pull a Medium Tex and buy some calls.  Sell them on Tuesday.

[doodle]

Storm,

That 1% difference would amount to $125,000 dollars over five years on a principle of 2.5 million. If you know of any rich lazy grandma's who want to split this with me, I will be happy to spend the day driving around to 10 different banks to set up their CD's. 

[Jan Van]

So how important is it that China states through their official news agency that the "good old days of borrowing are over"?

Probably not important at all. 

Pretty funny. They are building huge shopping malls that are mostly empty, airports that don't operate, ghost cities. And they want to lecture the USA? I'm sure they would be thrilled if we stopped purchasing all the stuff they make for us! 

[Jan Van]

Right now I have two competing "hopes" for tomorrow:

1) The market totally overreacts and creates a great buying opportunity for us
2) The market totally ignores the downgrade and gives S&P the collective finger

[Gumby]

Isn't an FDIC insured CD just as good as a treasury bond? I mean, it is insured by the government after all. If that insurance breaks down, why wouldn't the govt insurance on treasury bonds break down?

Doodle, you should really take the time to listen to Harry Browne's Radio Shows. Just about every question you've ever asked about the PP, and its underlying strategy, has been answered on those shows — even your concern with Treasuries.

CDs and other non-Treasury funds are not advised for the cash allocation of the PP. Browne discusses this question in this show:

https://web.archive.org/web/20160324133 ... -04-17.mp3

Answer starts at 13:05 of the show.

Here is a transcript of that answer...

HARRY BROWNE: In my suggested portfolio, 25% is in cash. And I have suggested that the cash portion should be either in Treasury Bills or in a money market fund that invests only in Treasury Bills. And the reason for that you don't want to be concerned about credit risk. Same thing with the bond portion, it should be in Long Term Treasury Bonds, because despite the terrible way the Treasury handles its money. And its not really the Treasury so much as [the way] Congress, and the President handle money and create all of these fiscal crises and the deficits and so forth. Despite all that, the fact is that the Treasury can always tax us or even print the money as necessary to repay the principal and interest. Now doing that, of course, creates bad problems. But it creates bad problems not just for Treasury securities, but for all types of debts. CDs, the Bonds of other companies, and Commercial Paper and all of these things are affected by it. And what you know is that there is no credit risk with any kind of Treasury securities, even though there may be an investment risk. But there is credit risk with the others. If we had sudden Deflation in this country, it may well be that banks would not have the money to repay all of the CDs that they have issued. Now, we like to think that the Federal Deposit Insurance Corporation would back up the banks. But, the Federal Deposit Insurance Corporation keeps only about 1% to 2% in a reserve fund. 1% to 2% of all the liabilities it has. So, it's in a position, the Federal Deposit Insurance Corporation to bail out a single bank when it fails, or another bank when it fails, or another bank over here when it fails. But, if we had a run on the banks in this country, and all banks were under siege from depositors who are afraid and wanting to get their money out of [them], there's no way in the world the Federal Deposit Insurance Corporation would back them up. Now Congress could appropriate money out of the General Fund for the FDIC, but I suspect that the Budget itself would be in horrendous shape at a time like that, and it wouldn't be likely that Congress would just vote to pay off all those liabilities of the banks 100¢ on the Dollar. Rather they would come up with some kind of plan that you got 50¢ on the Dollar, or only people who could show they were in need got it. Or in some other way it would renege on the promises, but attempt to pay off part of it. But, the Treasury Bills would be in a different position. They would be continually refinanced and taken care of. Now I'm talking about an extreme case here, and the situation that would exist. But, I believe that the Permanent Portfolio and the safety part of it should be set up not just for the risks that we can see in front of us, but for the unthinkable. For the things we just don't expect to happen. Like civil unrest in this country. Or other things of... A run on the banks or whatever it may be. Or hyperinflation of 20% or 30%. Whatever it might be that we don't see today as an imminent threat, the Permanent Portfolio should be able to cover all of those things so that you don't have to stay on top of it. So you don't have to keep reading the news and say, 'My gosh, are we going run into an unprecedented situation here now, and am I covered?' I want you to be covered no matter what happens...Now, the downside of the Treasury Bills is that they will not pay as much in interest as the CDs or any other short term kind of debt. And that's because Treasury Bills do have virtually zero credit risk, while the others have some measure of credit risk and that's what causes them to have a larger interest rate.

[WildAboutHarry]

Pull a Medium Tex and buy some calls.

Good idea, but I think I'd rather short McGraw-Hill (MGP).