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Government The Almighty Buck United States News Politics

S&P's $2 Trillion Math Mistake 1040

Posted by CmdrTaco
from the show-your-work dept.
Last friday Moody's S&P announced that they had downgraded the U.S.'s credit rating (leading to a pretty huge discussion on Slashdot I might add). Since then more interesting news has come out, suraj.sun writes "In a document provided to Treasury on Friday afternoon, Standard and Poor's (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error — a basic math error of significant consequence — S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one. 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. S&P acknowledged this error — in private conversations with Treasury on Friday afternoon and then publicly early Saturday morning. In the interim, they chose to issue a downgrade of the U.S. credit rating."
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S&P's $2 Trillion Math Mistake

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  • by lambent (234167) on Monday August 08, 2011 @09:00AM (#37020920)

    regardless of the math, S&P's reasoning is sound. let's not try to find scapegoats, please. the U.S. is hurtling at full speed towards a deficit meltdown, and quibbling over S&P's math doesn't change the fact that the country needs to come to terms with it ASAP.

  • by Tteddo (543485) on Monday August 08, 2011 @09:03AM (#37020958) Homepage
    Yeah, these are the same people that gave mortgage backed securities a AAA rating right up until it was blindingly obvious that they were wrong.
  • Political (Score:5, Interesting)

    by jbolden (176878) on Monday August 08, 2011 @09:04AM (#37020968) Homepage

    S&P in their report had essentially 2 issues:

    a) They had questions about the budget strategy over the medium term.
    b) They believed that political risk in the United States had increased substantially.

    Given that we had 50+ US congressmen arguing that a sovereign default was either no big deal or desirable I can't see how one can disagree with (b). Political risk has substantially increased.

    (a) is more questionable. The US economy is very large and the US ultimately does own a printing press. But the United States because of political divisions is simply unwilling to engage in the actions required to end high unemployment nor willing to reduce the government to the size needed if we intend to maintain a much lower labor participation rate than we had been.

    So I can see both sides for (a), but (b) is the big factor. I think the Obama administration in trying to attack S&P based on secret conversations is simply failing to address the depth of the real problem. Whether their story is true or not, S&P is not wrong to notify investors that treasuries have risks they did not have 5 years ago.

  • by Anonymous Coward on Monday August 08, 2011 @09:19AM (#37021142)

    Not to be silly or anything but it deserves to be downgraded.

    AAA is supposed to be rock freaking solid. You do not worry about it.

    This up to the wire biting your fingernails crap is *NOT* AAA material. If you saw the last 3 budget rounds being this sort of fiasco (which it was) would you want to invest in it?

    If you have to worry about it then it is not AAA material. It is still 'good' credit. But something you need to keep an eye on so AA+.

    The rating system was subjective in the first place. As seen by the AAA ratings they were giving out to 'too big to fail' institutions right before they failed. In many ways s&p helped create the very mess they are downgrading the US gov for. As the US gov covered their bets...

  • by smelch (1988698) on Monday August 08, 2011 @09:21AM (#37021168)
    I wonder which agency carries the most weight though. I suspect it is S&P, though I'm not sure.

    We have a huge cultural problem. Most people don't care about any of the important things. Of the people who care, fewer still are educated. Of the people that are educated, many are polarized in to incompatible philosophies. This is leading to paralysis. I hate to say it, but more and more the idea of dividing the union just makes more sense. The belief that the Federal government should be doing all that it does makes the US too big and too diverse to govern in a reasonable way.

    I don't mean any of this in a doom and gloom kind of way, just saying I think it makes a lot more sense. Everybody knows the US is majorly divided on how we should do just about everything, largely based on geography.
  • Re:Retaliation (Score:4, Interesting)

    by iceaxe (18903) on Monday August 08, 2011 @09:26AM (#37021238) Journal

    You seem to be implying that S&P is secretly acting on behalf of the Democratic Party in support of President Obama's re-election campaign, which I find to be an interesting point of view.

    The rest is even more confusing.

  • by AtariDatacenter (31657) on Monday August 08, 2011 @09:27AM (#37021244)

    Please see their original report and press release. Here are some quotes from the August 5th press release:

    "The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy."

    "Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. "

    Their explanation didn't suddenly switch to political. It was there all along, yet so few pundits chose to focus on it.

  • Re:Pack of LIES (Score:4, Interesting)

    by AngryDeuce (2205124) on Monday August 08, 2011 @09:37AM (#37021372)

    Nah, I think we need tax reform more than anything. Every other time in history we've raised taxes in war time to pay for it; that is, until Bush II comes along, he does the opposite, goes to war and lowers taxes. Add to that idiocy the enormous amount of speculation going on, the obscenely low tax rates on income from hedge funds, and the fact that multi-billion dollar corporations not only pay no effective tax at all but collect checks from the government in the form of refunds...

    Sorry, but let's cut the bullshit. All this talk about raising taxes on the wealthy "killing small business" is crap. Something like 80% of businesses in this country bring in less than $75,000 a year, the statistics are all on the various government agencies that do the reporting. All this crap about taxes "hurting business" is just more emotional game playing. Then we hear about how it's all a liberal agenda to foster "class warfare", c'mon, we're already at war. It's the problem of the corporate mentality...no system can grow indefinitely. But the corporate cycle demands growth every single quarter, as do the investors in our economy. But that's unsustainable...and current events show this to be true. Business is hitting the point where there is very little wealth left for them to suck up and now they are simply looking for more creative ways to suck.

    Atlas is shrugging, all right, but it's not the wealthy that are shrugging, it's the poor, who as they get more desperate are going to start reacting with force. It's a historical inevitability. Crime is going through the roof all over the U.S. and it's because there is no opportunity. For all the "stimulation" of Big Business the tax payer has been paying for none of the fucking wealth is trickling down. The businesses are sitting on it, the largest companies are all sitting on record amounts of cash both here and abroad. Meanwhile, they're laying people off and then crying how the little in taxes they do pay is hurting them and they need more of a break. Yeah, right.

    Ayn Rand was just another person trying to justify to the masses why it's okay for one person to have more wealth than they could spend in 100 lifetimes while others starved outside of the gates of their compound. It was disingenuous then and it's disingenuous now. We've got 30 years of "Trickle Down" and nothing to show for it but more debt and social problems. Time to give "Trickle Up" a shot now...that is, if they're not afraid of actually having to compete again...

  • by Remus Shepherd (32833) <remus@panix.com> on Monday August 08, 2011 @10:04AM (#37021578) Homepage

    Let me break it down to the most basic of concepts:

    Democrats want the government to spend more. The TEA Party wants the government to spend less.

    Who do you think is right here?

    In a global recession on the verge of depression? The Democrats, hands down.

    Although 'the Democrats' misrepresents that side of the argument. Sane economists and a few lawmakers want to increase government stimulus. Some Democrats are stupid, however, and want to spend less, just not as much less as the Tea Party. The president, unfortunately, is among the latter.

  • by elrous0 (869638) * on Monday August 08, 2011 @10:20AM (#37021774)

    You can run the numbers all you want, cook them every way but over-easy, and produce a powerpoint presentation of them that would make even the most die-hard quant choke. But at the end of the day, it's all about confidence. All those dollar bills in your wallet are only as valuable as we collectively agree they are. This can range from "Not worth the paper they're printed on" to "Holy shit, this is the best currency in the world!" But it all depends on confidence. U.S. currency (and bonds too, for that matter) has no real objective value.

    The U.S. government takes in so much in revenue each year, and outlays so much in spending. Right now spending way outpaces revenue. Could that economy be balanced? Probably. But who knows what that balanced economy would even look like, or whether it would even work. Maybe even trying to balance the U.S. economy would turn the U.S. into a second-world country, hopelessly spiraling towards collapse. Maybe the U.S. economy is doomed to collapse no matter WHAT we do. In that kind of situation, what are those dollars worth? Who the fuck knows. It's all a question of how much confidence you have that the U.S. economy WON'T collapse, that the government WON'T default on its debts.

    Right now, the world has a lot of confidence in the U.S. But recent political events put this seriously into question. Republicans have a vested interest in keeping the U.S. economy in the shitter through 2012 (to help their party's political ambitions). And, more importantly, they have shown their ability (and willingness) to best the Democrats politically at almost every turn. They have a great deal of party discipline and the determination to keep the U.S. economy down. This puts the chances of an ongoing, and possibly much more serious, recession as very high. S&P was just recognizing that fact, along with the fact that it's highly unlikely that either party at this point will ever be able to get the U.S. debt under control without some kind of default.

  • by Anonymous Coward on Monday August 08, 2011 @10:21AM (#37021792)
    Actually doing it before would have been political, as an attempt to influence how the deal went down. Doing it after just means they waited to see what the outlook was like, since there was at least some attempt to fix the government spending problem. You seem to be under the mistaken impression that the debt limit fight is what is triggering the downgrade, rather than our overall financial outlook.
  • by CrimsonAvenger (580665) on Monday August 08, 2011 @10:39AM (#37022028)

    If the amount that's coming in increases and the amount you're sending out decreases, that's a cut in your deficit.

    Which isn't the way Congress did this. What they did was "We spend X trillion on this now. In ten years we expect to spend 5X trillion on this. If we instead decide to spend only 4X trillion in ten years, we've saved X trillion."

    Roughly comparable to me saying "I can't afford my house note (this is theoretical, since I paid my house off ten years ago). I was planning on buying a vacation home in the Hamptons. Instead, I will buy a vacation home in Canada's cottage country. I have therefore saved money."

  • by drooling-dog (189103) on Monday August 08, 2011 @10:44AM (#37022128)

    ...the same people who entirely failed to foresee the biggest economic collapse most of us have ever lived through. They were handing out AAA ratings, to mortgage backed securities

    This suggests that it was merely incompetence on the part of the rating companies, when outright fraud would be the more apt term. They gave out those AAA ratings not because they're boobs, but because their customers - the big investment banks - were paying them them huge fees to do just that. The fact that no one's even been investigated, let alone prosecuted, for this continues to amaze and practically guarantees a repeat performance in the future.

  • Re:Pack of LIES (Score:5, Interesting)

    by AngryDeuce (2205124) on Monday August 08, 2011 @12:40PM (#37023842)

    You mean those crime-ridden hell-holes that your wise and benevolent government built for you as part of the myriad of social programs that you're vehemently arguing against cutting?

    Yeah, those ones, because (and I'm sure this is going to blow your mind) it is still better than being homeless and living in a car, or on the fucking street. Where do you think these people are going to go? Oh, right:

    the alternative isn't poor people starving and dying in the streets, it's poor people getting married to support their children in low-cost private housing, instead of being raised by government-subsidized single mothers only to become bastards who commit rape, robbery, murder, and other mayhem.

    Really? It's that simple?! Oh my God!! Hey guys, looks like Mike here solved the problem with poverty in the US, we just need to pair them up and make them get married, then they will magically have all the means to raise those kids just fine without any assistance! We'll just put them in all that low-cost private housing! You know, all those decent neighborhoods filled with benevolent landlords that are waiting to receive all the people from the projects with open arms? How could we forget about them?!

    You have no concept of what you speak of. The vast majority of the people in those situations didn't choose to be there, they ended up there due to circumstances outside of their control. With all the stories of people losing their homes and shit, with all the people getting laid off, are you seriously still holding to that ridiculous notion that only the dregs of society and the undeserving are desperate or on government assistance? Have you ever actually met a poor person, or do you just see them on TV and read about them in the paper?

    The biggest tragedy is all the people calling for the end to social security. In civilized cultures the elderly are revered and taken care of because they raised us and everything we have today was built upon their hard work and sacrifices when they were our age. They take care of them because they fucking deserve it and because it's the morally right thing to do. Anyone that's calling for those cuts, go down to Walmart and look at that 80 year old people greeter that is handing out shopping carts and struggling with stickers due to their arthritis. Really look. If you can do that and not be completely ashamed, then you are a far colder man than I, and frankly, if that's the type of society you want to live in where we can't even take care of our forebears, then I want no part of it.

    I mean, what the hell did we spend all these billions defending our country if we can't even take care of our own? We have fucking veterans sleeping under bridges. We can't even take care of the people that risked their lives to defend the country that made these assholes rich and they're supposed to "tighten their belts"?!

    Man, what I would give just to lock a group of millionaires in a room with those "bastards" and have them justify why they can't pay a few more percentage points a year in taxes...I bet they could suggest a few ways they could trim their budgets without fucking over the disadvantaged...

  • by Anonymous Coward on Monday August 08, 2011 @12:58PM (#37024086)

    And when you give the keys to your crazy uncle Bob (Tea Party) your insurance company BELIEVES it might be a good idea to raise your premiums...

    Um...No.

    The debt has been steadily increasing over the last number of decades, and nearly exponentially over this last decade starting with GWB's TARP and prescription-drug Medicare entitlement expansion, but particularly since the Progressives in BOTH Parties, but mainly in the Democratic Party, took control of both Houses and the Presidency.

    The TEA Party formed only as a reaction to the insane spending increases starting about ~3 years ago. The TEA Party only recently made modest inroads into the House of Representatives in 2010.

    It's simply unpossible for the TEA Party to be responsible for the US downgrade. This is history-revision to rival anything from the Ministry of Truth or the Politburo.

    The TEA Party, rather than being a cause, was prescient in warning that such negative consequences were on the way, and did their best with their limited power to stave the downgrade off. Remember that Obama and the Progressives in Congress started out demanding a "clean" debt-ceiling extension with NO spending or debt reductions.

    There was also no chance the US would default on the national debt. There are enough revenues coming in constantly to pay the interest payments on the debt as well as SS, Medicare/caid, military/veteran pay, and more.

    Failure to reach an agreement would simply have meant that there would be a 40% reduction in Federal spending. Of course, to politicians who depend on spending mass quantities of taxpayers' money to assure re-election, that would be a disaster!

    Blaming the TEA Party is "shoot the messenger" politics-as-usual from the usual Washington-insider, career-politician suspects that are responsible for the insane spending & debt (and the decades-long steady degradation of US economic & world power) in the first place.

If you had better tools, you could more effectively demonstrate your total incompetence.

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