Late Friday afternoon, as books were being closed all over the financial world for the upcoming weekend, one of the last great ones of summer, Standard and Poors dropped the Federal Government’s bond rating from AAA+ to AA+…….
Moody’s and Fitch’s, the other two bond rating institutions, did not…
Here is their explanation as to why…..
S&P has said their decision to downgrade the U.S. was based in part on the fact that the Budget Control Act, which will reduce projected deficits by more than $2 trillion over the next 10 years, fell short of their $4 trillion expectation for deficit reduction.
They let the Treasury know before announcing (even though word was leaked during the day’s stock trading…)
The Treasury responded with an…..” Uh, it looks here like you made a $2 Trillion math error…” Once corrected there is a $4 Trillion savings in this bill…. ”
Standard and Poor’s, sheepishly caught in their miscalculation, responded, “Oh, did you say only two trillion? That’s nothing; we’re keeping the bond rating as it is….”
So Standard and Poors thinks the amount of $2 Trillion is significant enough to destroy faith in the US Government.. and drop our rating from AAA+ to AA+ ….. but when they make a $2 trillion math error, a very basic one at that, it is not significant enough to change it back….
Obviously they have another reason for dropping the rating that has nothing to do with the reality of economics or politics… Usually when something like this happens, it means someone is on the take…..
How could they make such an error…
Specifically, CBO calculated that the Budget Control Act, including its discretionary caps, would save $2.1 trillion relative to a “baseline” in which current discretionary funding levels grow with inflation. S&P incorrectly added that same $2.1 trillion in deficit reduction to an entirely different “baseline” where discretionary funding levels grow with nominal GDP over the next 10 years. Relative to this alternative “baseline,” the Budget Control Act will save more than $4 trillion over ten years – or over $2 trillion more than S&P calculated. (The baseline in which discretionary spending grows with nominal GDP is substantially higher because CBO assumes that nominal GDP grows by just under 5 percent a year on average, while inflation is around 2.5 percent a year on average.
The impact of this mistake was to dramatically overstate projected deficits—by $2 trillion over 10 years…..
S&P did not believe a mistake of this magnitude was significant enough to warrant reconsidering their judgment, or even significant enough to warrant another day to carefully re-evaluate their analysis.
They said, “That’s our story and were sticking with it…”
Even though they know it is completely a lie and a bunch of crap.”
The magnitude of this mistake – and the haste with which S&P changed its principal rationale for action when presented with this error – raise fundamental questions about the credibility and integrity of S&P’s ratings action.
Obviously, obviously, obviously, obviously, obviously, obviously, obviously, obviously, obviously, Standard and Poor’s is more concerned with their impact on the market, than they are with whether what they say, is true, or not….
They, are the Rupert Murdoch of the bond rating services…..