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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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  • Pack of LIES (Score:3, Insightful)

    by Anonymous Coward on Monday August 08, 2011 @08:58AM (#37020898)

    More lies...the debt will INCREASE by almost 8 trillion over the next 10 years. And probably more than that I can guarantee you! The S&P should have downgraded us a loooonnnggggg time ago.

    And sorry it is no ones fault but ours.

    • Re: (Score:3, Insightful)

      by shentino (1139071)

      It's not my fault that every damn candidate is a corporate cock sucker.

      It's also not my fault that the corporate owned media system is never going to let fly someone waltzing in and pushing their little cozy community out into the cold where it belongs.

      All it takes is a little scandal and even the most angelic of candidates will find themselves stained with some outlandish smear that enough John Q. Publics will run away from, leaving

      That same corporate media engine will also make sure that John Q. Public is

  • 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.

    • Re: (Score:3, Insightful)

      by Anonymous Coward

      No, you see... the point here isn't to make a well-reasoned argument, rather they are trying to link the 'error in calculation' to somehow mean the S&P downgrade is faulty.

      IIRC, the 'math mistake' they did was assuming that the Bush tax cuts wouldn't expire... Which seems like a rather obvious thing to happen considering there's certain elected people who'd rather let the US default than lose the next election.

    • Re: (Score:3, Insightful)

      by Colonel Korn (1258968)

      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.

      I do not think that words means what you think it means.

      Even if their conclusion is correct, their reasoning isn't anything close to sound. "Oh, the justification for our action was off by about 20%? That's okay, we'll just support the same conclusion and justify it with our gut feeling about politics," isn't reasoning at all. It seems to me that sound reasoning would be quantitatively comparing default likelihoods between the US government and other AAA-rated securities and then adjusting accordingly.

      Wh

  • by goldspider (445116) <ardrake79@@@gmail...com> on Monday August 08, 2011 @09:01AM (#37020926) Homepage

    Somebody correct me if I'm wrong, but at current spending levels, cutting $4T over 10 years still has us running a deficit. Considering that this deal was politically the best we could do, it's easy to agree with S&P's pessimistic view of our political budget woes.

    • by Archangel Michael (180766) on Monday August 08, 2011 @10:09AM (#37021644) Journal

      They didn't cut 4 Trillion over 10 Years. They said they did, but it us up to future legislatures to make it happen. They did nothing except put on a dog and pony show for the kids at home. Nothing meaningful happened.

      • Congress loves to claim savings but Congress uses Base Line Budgeting which allows the appearance of savings when in fact no cuts are made. Essentially they state this is what it will cost in the future so if we say we will spend less than that we have made a cut yet spending can still and usually does increase.

        So when you see a Congressmen bemoaning about harsh/absurd/severe cuts to their favorite program (defense/social/etc) you need to understand the numbers they are using. The closest to real cuts that

  • by Cornwallis (1188489) on Monday August 08, 2011 @09:02AM (#37020946)

    There was a time when people worried about who had the largest nuclear arsenal.

    This kinda reminds me of that "1000 vs 10,000" nuclear weapons discussion. Everybody is dead after 1000 bombs go off. It isn't like 10,000 bombs are going to kill you that much more.

    The point being the economy is still going down the tubes...

  • by Anonymous Coward on Monday August 08, 2011 @09:03AM (#37020956)

    It was S&Ps rating system that the banks gamed with repackaged mortgages in the first place. Fuck um.

    How long before the media points that out? Think they will?

  • 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.
    • Re: (Score:3, Informative)

      by Lifyre (960576)

      My only comment to this is hindsight is 20/20. The problem with statements like this is that they very obviously weren't at the time. Not just from the rating agency's point of view but many economists were feeling the same way. There were a few economists who cautioned against them and had them correctly evaluated but they were far from the majority and even then most of their opinions were hedged with speculative language.

  • 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.

    • Re:Political (Score:5, Insightful)

      by SwedishChef (69313) <craigNO@SPAMnetworkessentials.net> on Monday August 08, 2011 @09:08AM (#37021014) Homepage Journal

      You're right... it's just too bad that S&P didn't warn investors about the even greater risks involved in bundling questionable home loans and calling the result "investments".

    • We had few if any congressmen arguing that a sovereign default was "no big deal". We had quite a few arguing that a failure to raise the debt ceiling was no big deal. Their argument was that even if the debt ceiling was not raised, the U.S. government would not need to default.
      The fact is that treasuries do not have risks they did not have 5 years ago, those risks are just 5 years closer now (and at this point, it is becoming clear that those risks are even closer than estimates put them 5 years ago). It
  • Amateur hour (Score:4, Insightful)

    by TimHunter (174406) on Monday August 08, 2011 @09:08AM (#37021018)

    S&P stands revealed as not understanding basic analysis of budget estimates.

    http://krugman.blogs.nytimes.com/2011/08/07/i-heard-it-through-the-baseline/ [nytimes.com]

  • by Chrisq (894406) on Monday August 08, 2011 @09:16AM (#37021100)

    The countries that can gloat [wikipedia.org] are: Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Hong Kong, Isle of Man, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, and the United Kingdom

    Forgive us for gloating that we have a higher credit rating in the UK, its just about the first chance we've had to gloat about anything related to our economy since 2008. I know that this probably won't last long - they probably just haven't got round to downgrading us yet!

  • 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.

  • by Stormy Dragon (800799) on Monday August 08, 2011 @09:36AM (#37021354) Homepage

    The CBO assumed discretionary spending will grow at the rate of inflation. S&P assumed it grows with GDP. Both of these are perfectly valid assumptions (if any complaint is to be made, they're both too optimistic since historically the growth in discretionary spending has far exceeded both measures); a legitimate alternate choice of economic models is not an error. This is the Obama administrations typical "all reasonable experts agree" tactic of painting legitimate differences in opinion as disengenuous.

    As for S&P's "acknowledgement", it was more along the lines of "we just reported your long term unfunded obligations are $211 trillion and you lack the political will or ability to do anything about it. And you want to have an argument over whether it's really $211 trillion or $209 trillion? If it's that improtant to you, we'll use your numbers, but you're completely missing the point here."

  • by GrahamCox (741991) on Monday August 08, 2011 @09:49AM (#37021386) Homepage
    The new standard: we're all poor.
  • by sgt scrub (869860) <saintium&yahoo,com> on Monday August 08, 2011 @09:54AM (#37021448)

    Having Standard & Poors downgrade the creditworthiness of the United States, and warn it about further downgrades, is a little like having the Catholic Church lecture scout leaders on the proper behavior toward boys. http://news.yahoo.com/why-congress-standard-poors-deserve-other-092005860.html [yahoo.com]

    I laughed; but, I still don't know if it is funny or just plain sad.

  • by davek (18465) on Monday August 08, 2011 @10:39AM (#37022026) Homepage Journal

    Government: We planned to increase the budget deficit by $4 trillion next few years, but now we're only increasing it by $2 trillion! We cut spending by $2 trillion dollars!

    S&P: You still increased spending. You didn't cut anything. You still spend almost twice as much as you make. You are no longer credible.

    Government: Traitors! Terrorists! Hostage takers! Can't you idiots in private industry do math?

    Pathetic. Even the slashdot title of this article is complete rubbish.

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