USA fact of the day

Of the world’s share of AAA sovereign debt, we issue 59 percent of it.  (Next is Germany with ten percent and then France with nine percent of the total.)  You can read this a few ways:

1. Wow, we really abuse that AAA privilege.

2. Losing the AAA rating would spell disaster for repo markets and the like.

3. The world trusts us enormously, isn’t that wonderful?

4. All of the above.


I think that our debt load is smaller than that of France and Germany relative to the size of our respective GDPs. What's the expected growth rate of these three countries? What sort of demographic speedbumps a la the baby boom are France and Germany facing in the next few decades? From my very ill-informed point of view, the only difference between the perceived creditworthiness of the United States and that of France and Germany is that the United States has a malfunctioning legislature.

The countries' share of AAA debt is not all that far off from their share of GDP among the same group:

Whoops, in-comment pictures aren't allowed. Here's the link instead:

I'm just going by Wiki's debt(GDP) numbers as of 2010 -- the accuracy of these may not be so great. Germany: 78.8%, France: 83.5%, USA: 58.9%, UK: 76.5%. Data from earlier years would presumably have the States at a relatively larger number since at least France and Germany have larger automatic stabilizers, right?

'I’m just going by Wiki’s debt(GDP) numbers as of 2010 — the accuracy of these may not be so great. Germany: 78.8%, France: 83.5%, USA: 58.9%'

I can't speak to France, but just like the U.S. measure of unemployment is quite lax compared to the German one (somebody looking for a full time job who isn't working more than 15 hours a week - that's right, the Germans count people as being unemployed when they are working 15 hours a week), so is the measure of debt.

German debt, at least in German language sources, includes all debt from all government levels in Germany. Obviously, the American definition is different. And much harder to determine accurately.

2 remarks regarding the debt/gdp ratios that seem to go unnoticed with us readers.
1) europe`s maastricht accounting rules for public indebtedness demand an inclusion of all public debt into the debt/gdp ratio. so, ie in germany, it's not just feral debt but also debts of states, as well as communities (including what the us would consider as munies, school board debts, etc) and also the debts of privat companies (ie all public services services providers) that are majority-owned by an public entitiy. greece's problems derives out of the fact, that they government back in the early 2000 tried to hide public debt by "outsourcing" it into private entities or swaps but was forced to put them back on the balance sheet after the chance of government.
2) the growth figures for the us have been higher over the last 2 decades, but if one considers the growth per capita to exclude the population growth of the us, the picture is turned upside down:
average gdp growth between 2001 and 2010
in absolut terms:
USA 1.7
Japan 0.7
EU25 1.3
vs. gdp growth per capita:
USA 0.7
Japan 0.7
EU25 0.9
with best performance in sweden: 1.5 and finnland: 1.4

ps: germany and france have strong automatic stabilizers (unemployment, public healthcare, etc)

I find it a little amusing that S&P is being so vigilant with the U.S.debit when they got the MBS / CDO ratings sooooo wrong. Politics not withstanding, their threat to lower the U.S. rating is a little ridiculous. There is literally zero chance that the U.S. won't service the interest on the bonds, even if that means printing more money.

Amusing sure, but it's also transparent. They are trying to be tough guys now that they screwed the pooch so badly before. Pendulum overswing the other way.

But to be charitable, their warnings are adding to the urgency of the debate and that's actually a good thing.

Also, the bond markets are reacting like you are: they won't care much if and when we go from AAA to AA+

At this stage I'm curious what the basis of the downgrade would be? So far as I know the US has never defaulted on a credit obligation, nor is there really any credible reason to believe that it will in the near future (worse case they'd hold back the Social Security checks before defaulting). So until the day the US defaults I think S&P's position is bordering on playing politics. And my problem with that is it compromises the impartiality they are supposed to have as a credit rating agency (not that they really have much credibility at this point). I'm not suggesting that it's a coordinated with either political party, but it's amazing how often the threat of their downgrade gets referenced by the pols.

Some thoughts:

- We issue too much debt relative to GDP.
- If the US has a true sovereign debt crisis, the whole world will be plunged into a deep , deep recession.
- A technical default by the US should be no big deal, because investors have nowhere else to go. They can't dump US securities, unless they go to cash, in effect.

Euros, yen, Swiss franks, gold, silver, oil, other commodities...and that's just off the top of my head.

Wasn't the original purpose of credit ratings to give the entity lending money information about the credit worthiness of the borrower that the lending entity could not easily get on its own? Beyond its affects on contracts where credit ratings are specifically mentioned, aren't credit rating agencies pronouncements given too much attention when they concern the credit worthiness of entities, such as the United States government, of which a great amount is already known by the relevant public?

Unless the credit ratings agencies know much more about the emotional/ideological tendencies of members of congress than others, it seems as if they are only stating the obvious in the form of easy to understand letters.

Information and analysis. Even given that all of the information is, at least in principle, available to the public, the effort involved in compiling it all and figuring out what it practically means is beyond what most investors can justify when it comes to deciding whether to seek profit in e.g. Italian government bonds. But it is worth Standard & Poor's time to do that work, once, for everyone.

It is also useful to have neutral outsiders doing the analysis. If, e.g., a pension fund has a fiduciary duty to make only low-risk investments, you probably don't want to just trust the fund manager to say, "trust me, I've looked into Italian bonds, they're low risk". Write it into the charter that, say, 70% of the fund has to go into AA+ or better bonds and be done with it.

In the specific case of US government sovereign debt, most investors have enough other reasons to pay close attention to what the government is doing that there is probably little value added from the credit agencies. But if they're looking into everyone else's sovereign debt, they might as well keep an eye on Washington as well.

Seems to me bond holders have nowhere else to go. They may want higher interest rates to go with the higher risk if the US defaults, but they may not get it if demand here remains strong. Who else has a market large enough to handle what should flow away from the Treasury? Commentators seem to think that if US Treasury rates [u] should [/u] rise, that they [u] will [/u] rise.

If I understood the Cowen post "Default in a liquidity trap" I could probably answer my own question. It sounds like there is one market big enough - cash.

Two words: commodities.

Sorry for spoiling the party Folks, but no country, not even the US, can push this "nowhere else to go" argument too far:
(a) there is no place else to go because American governance is the only one that is (yet) trustworthy;
(b) investors are looking for other places to go because American governance is not trustworthy (anymore).
As you can see, (a) and (b) don't work well together.

Yes, no where else to go... until they do. Then it's too late.

I wonder how big the market for non-sovereign AAA rated bonds is.

Careful, some in the audience may think you are referring to a non-sovereign American Automobile Association rated bond.

GDP of Germany is $3.33T, according to Google, and $14.12T for the US. That means our GDP is about 4.25 times larger, for which we have a outstanding debt that is 6 times larger. A big difference, sure, but not massive.

Re: US and Germany. Don't forget liquidity (depth of market), and the fact that German banks are on the hook for foreign sovereign debt of Spain, Ireland, Portugal and Greece, not to mention peripheral EU countries; if there is a banking crisis, Germany will have to backstop its banks.

Is all German and French debt AAA rated? This may be a really stupid question.

What would losing a AAA rating mean for the repo market? Do they have repo financing in Japan? Do they do defeasances in Japan? Etc.

It would seem strange that an entity which has never had a default in 200 years and issues ten-year paper at a 3% coupon is labeled less than AAA.

Never had a default in 200 years? I'll give you a pass on the Carter hiccup default, but the Nixon and FDR defaults are undeniably defaults.

"the Nixon and FDR defaults are undeniably defaults"

Not as the rating agencies (or the average investor) defines the term.

If you sign up to pay your debt back in Dollars and pay it back in pesos, that's a default.

If you promise to pay back in gold and pay back in dollars, that's a default.

What would you call it?

But the promise wasn't to pay literally in gold, it was to pay in dollars that at the time were tied to gold.

If you sign up to pay your debt back in pesos, which happen to be pegged to the dollar, and then you devalue the pesos, and then you pay your debt back in pesos, that's not a default.

Oh I see the confusion. Some don't realize that from reconstruction to modern times Federal debt had a gold clause--- it was payable in gold on request.

The federal government unilaterally voided those clauses. That is called welching.

So if the only thing that changes on US Debt is that Moody's downgrades, does that really mean the liklihood of interest being paid has been lessened due to the downgrade? Or is it more likely that US debt default is more liklely due to excessive spending? So in the economic world, the downgrade should be irrelevant, the budget issue should be center stage?

Of course there is the secondary issue of... If the US isn't AAA, then really who is? Where do you put AAA money?

If default doesn't matter, then Obama should just redirect angry social security recipients to their local legislator when Geithner doesn't cut the checks.

1. Because it is the global reserve currency, and because the post Bretton Woods IMF demands austerity of our trading partners when our poor underwriting couples with local credit cycles to put their currencies under pressure, naturally they hoard a certain amount of Treasuries. This is an abuse of our AAA rating, but in the form of extorting payments from our trading partners when we flub our underwriting.
2. Our politicians and most of our electorate do not understand that the monopoly issuer of a floating fiat currency can not be FORCED into default in that currency: any default risk the US faces is the result of political ignorance or avarice.
3. I doubt the world trusts us, but our success in the post war era in using the currency as a sort of imperial trojan horse much as John Hobson described a century ago amongst the colonial powers of that era to run surpluses with our trading partners drew them into a system denominated in dollars. The shift under Nixon to pure fiat money created a reciprocal opportunity for them that has held them in our orbit since despite the repressions in crisis perpetrated by the IMF: because we use the issue of Treasuries to control our interest rate rather than a supporting rate as Australia and Canada do, our trading partners have learned to use the hoarded Treasuries we coerced them to purchase in 2. above to their benefit by reversing the mercantilist tables. Of course it is not sustainable for them because we get the goods and they just get IOUs, something to which the Chinese have recently awakened.
4. If labor utilization rates were where they were twelve years ago, we would not be running a deficit and all those who want to work would be doing so. We could become as rich as we think we are.

Fiscal crises are about the future, not about the past. Whatever privilege U.S. presidents may have enjoyed in the past becomes irrelevant when the incumbent is finally seen as someone willing to sacrifice everyone else for his own self-interest (not from Matthew 3:13-17; just from Public Choice 101).

!. Yes politicians do indeed abuse it.

2. Not even close. There are vast amounts of sub-AAA debt already used in the repo markets, and the ways for dealing with their risk are well known. Furthermore, a number of important foreign credit rating agencies have already downgraded U.S. federal debt without causing a discernible ripple in the repo markets.

3. Despite the downgrades and threatened downgrades, the world continues to have high confidence in Treasuries -- the 10-year note closed today at 2.95%, still trading in the right-around-3% range it's been trading at for the last several weeks as the Beltway hysteria about the debt ceiling has ramped up. But after 2008 they don't trust our credit rating agencies farther they can shake a stick. Even less do they trust agencies like Moody's and S&P that have a revolving door with the U.S. Treasury for their opinions on the U.S. Treasury debt. As other posters have observed above, in the Treasuries market there are many far better sources of information than the credit rating agencies.

I'm with Former Beltway Wonk. You've never heard of haircuts on collateral?

Who needs Jerry Seinfeld when useful idiots attempt to help their fraudulent clowns?
Read Ezra Klein's post:

It's actually an insightful post on who has the leverage in this struggle. Except of course the bit of D.C. default hysteria he threw in to maintain his Beltway bona fides. The "economic crisis" the Democrats in the know actually fear, but dare not utter, is a Minnesota-style partial shutdown of government which quite disproportionately hurts Democrat contributors, while avoiding tax and debt hikes helps more Republican contributors. The Tea Party is being "intransigent" for very good reasons.

P.S. Donald Trump among many other Republicans agrees with Klein on who has the leverage. The real estate mogul and author of "The Art of the Deal" has strongly recommended that "the Republicans demand 100% of what they want" in exchange for a debt ceiling raise. I couldn't agree more. McConnell and Boehner are wimps with their compromise plans. With one party (the Democrats) so heavily dependent on laundering tax money into their own coffers, the debt ceiling is a crucial constitutional counter-balance that Republicans must take full advantage of if we are to restore balance to our republic's finances and optimally grow our economy.

My main worry is institutions which are required, either by law or just their own charters, to hold AAA securities. If US Treasuries are downgraded they will put in a major bind.

*they will be put

This is actually a good explanation for negative real interest rates. Sticky charters.

The root cause of all our recent debt crises is an insatiable global demand for AAA-rated securities. "Safety" addicts end up creating the biggest systemic risk of all.

Supply inevitably explodes to meet demand, and most of that supply -- whether AAA-rated tranches of CDOs in 2007-2008, or US treasuries in 2011 -- ends up being nowhere near AAA by any objective standard. Supply grows without limit, either by churning it out on a printing press, or if that isn't inherently possible, by introducing vast amounts of toxic and fraudulent product into the food chain (as we saw with mortgages).

The monstrous oversupply makes debt ratios go up, and the whole thing becomes a devalued mountain of slag that is much "too big to solve".

The natural home for this AAA-seeking tidal wave, at any one point in time, is usually some single option: the "no one ever got fired for buying IBM" choice -- at this point in time, it's the USA. If "everyone else is doing it", no buy-side fund manager can be singled out for blame in the aftermath, whereas going prematurely contrarian is an enormous career risk. This "bond anti-vigilante" effect makes fools of all who preach caution, crying wolf about deficits that don't matter until suddenly they do, much later, by which time it's too late. Then the world will settle on some new best-choice AAA drug dealer and the US goes the way of Greece.

There is no way to avoid this endless cycle of crises, unless you throttle or outlaw the demand for AAA somehow, because no one ever learns. Witness the enormous real estate bubble in Vancouver, even with the US crash of the past few years right under their noses.

5. Most of the rest of the world debt really does suck.

6. Ratings agencies tend to under-estimate long term systemic risk.

7. Since there is no Bell curve forced on ratings, they tend to cluster on the top and bottom.

Hi, I compared your blog regarding debts from 2004 and your present comment. There is still a lot of study to be done before the difference between US and european financial politics can be understood.
You proposed an extrapolation of the debts up to 2050, this was actually an excellent idea, I had the same one right now. Well, why does nobody extrapolate US debt under a purely republican versus a purely democratic government for the next 10 years ? Just for the fun of it.
Regards from over there, Subramanian

No. 3 in Tyler's list is the only one that really matters. And the reason for it is:
5. The US has never defaulted on any debt.
6. 14th amendment Sec. 4 of the Constitution prohibits defaulting on any US Govt debt, and unlike a lot of other countries we tend to try not to abuse or too overtly break our constitutional duties. (Obviously, the 14th does not apply to State and local govts, which is why it would make no sense to aggregate all public debt and divide by GNP, as can be done for other nations.)
7. The future of the US economy is still OK, in spite of repeated and vigorous attempts in the last 12 years by two Administrations and six Congresses to break its back.
That is, compared to the US, the rest of the world economies still suck. But only *comparatively* speaking, of course.

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