Subject: Re: S&P: US Needs to Get Its Act Together on the Debt - Atlantic - McArdle
From: "Michael Andrews" <[email-masked]>
To: "Eric Schwerin" <[email-masked]>
Cc: "Hunter Biden" <[email-masked]>
Date: Tue, 19 Apr 2011 11:38:03 -0400

Eric,

I said the same thing yesterday when I heard the news. McArdler is  
correct that we cannot predict when the market may move against US but  
it will be a move against political process more than the debt which  
is enormous.

Michael
On Apr 19, 2011, at 11:11 AM, Eric Schwerin wrote:

> Of course, no one is mentioning that S&P (and Moody's and others)  
> got it all wrong when they rated CDOs as AAA.   Can't imagine they  
> are the most reliable judge.
>
>
>
>
> Eric D. Schwerin
> Rosemont Seneca Partners, LLC
> 1010 Wisconsin Ave., NW
> Suite 705
> Washington, DC 20007
> (202) 333-1880
> [email-masked]
> P Consider the environment before printing this email.
>
>
>
>
>
> On Apr 19, 2011, at 11:07 AM, Michael Andrews wrote:
>
>> S&P: US Needs to Get Its Act Together on the Debt
>> APR 18 2011, 3:54 PM ET218
>>
>> So S&P has changed the outlook for US credit from "stable" to  
>> "negative".  Some commentators seem to have confused this with a  
>> ratings downgrade, which it isn't--the US AAA rating is still very  
>> much intact.  Rather, Standard & Poor's are saying that the  
>> probability of a downgrade in the future has gone up. I think the  
>> WSJsums it up pretty well:
>>
>> The S&P analysis didn't offer any new insight into the nation's  
>> fiscal plight or partisan differences about how to solve it, but  
>> served as a reminder that investors may not always be as patient as  
>> they have been about U.S. deficits.
>>
>> The U.S. debt now stands at $14.2 trillion and is expected to  
>> balloon in part because of rising costs for health care, retirement  
>> and other so-called entitlement programs, and the interest costs on  
>> existing debt. S&P said that even if a short-term deal is reached  
>> to contain deficits, any agreement could later be undone by  
>> politicians.
>>
>> Administration officials, who were first alerted to the report on  
>> Friday, questioned its conclusions but said it validated their  
>> efforts to broker a bipartisan deal to address the debt.
>>
>> Fundamentally, what both sides seem to have trouble grasping is  
>> that the important thing is not to solve all our problems right  
>> now, but to convince markets that we have the will and the  
>> fortitude to solve them at some point in the future.  Right now  
>> markets are willing to cut us a lot of slack because they figure  
>> that we'll get it together eventually--just as we've always done  
>> before.  The problems start not when our debts become totally  
>> unsustainable and congressmen start getting into fistfights on the  
>> House floor--but when markets stop believing that we'll find some  
>> way to solve our budget problems short of inflation or default.   
>> And "trouble" consists not of some massive capital flight, but of  
>> rising interest rates.
>>
>> This is why I am so steadfastly unconvinced by people who point to  
>> our low interest rates as evidence that the market thinks it's safe  
>> to borrow.  When higher real interest rates come, they will not be  
>> a timely signal of problems ahead unless we change course--they  
>> will be the problem.  The term structure of US debt is pretty  
>> short, with an average maturity of under five years, and  
>> Republicans are complaining that we've been issuing too much short- 
>> term debt lately.  If interest rates climb significantly, our  
>> interest expense will start putting a lot of pressure on an already  
>> weak fiscal position. Arguing that we're fine because interest  
>> rates are low is like arguing that the Titanic must be safe because  
>> it hasn't run into an iceberg yet.
>>
>> Of course, this warning applies equally to the people who think  
>> that demagoguing the debt ceiling is a fine way to force Congress  
>> to fix things (on their terms).  Shutting down the government, or  
>> mucking around with the debt ceiling, doesn't help avert a crisis:  
>> it is the crisis.  Or rather, it risks triggering precisely the  
>> crisis of confidence that we want to avoid.  If interest rates go  
>> up too sharply, our interest rate expense will widen the gap  
>> between revenue and spending.  To my mind, this makes both large  
>> tax hikes, and sizable spending cuts, more likely, not less so.   
>> Unless you're the sort of ideologue who would happily spend more  
>> money on interest as long as it means higher taxes or less  
>> spending, this is madness.
>>
>> The US debt problems are large, and they will be painful to solve.   
>> But they are not intractably large or painful.  It is our bitter,  
>> partisan politics--and our own willingness to compromise, or even  
>> face reality--that is putting us at the most risk.
>