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Downgrades have no effect
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- Empirics prove – no impact to a downgrade
- Cuts cause downgrade – falling exports – and credit ratings are unreliable anyway
- Spending expands demand – excess savings mean it doesn’t crowd out privates
Downgrades have no effectMike Dorning, John Detrixhe and Ian Katz, Bloomberg Press, 07/16/’12, [Downgrade Anniversary Shows Investors Gained Buying U.S., http://www.bloomberg.com/news/2012-07-16/downgrade-anniversary-shows-investors-gained-buying-u-s-.html] VN More Entrenched Because the consequences that had been forecast for a downgrade haven’t occurred, lawmakers may become more entrenched in their positions in the next standoff over fiscal policy, approaching at the end of the year. The threat of a downgrade has lost some of its power, said Steve Bell, a former Republican staff director for the Senate Budget Committee. “You cried wolf, and no wolf appeared,” said Bell, who’s now a senior director at the Bipartisan Policy Center in Washington. “It has persuaded a fair number of members of Congress that the effect of a downgrade is overstated and it will not lead to some serious economic or financial problem.” Empirics prove – no impact to a downgradeBloomberg 2012 (“Downgrade Anniversary Shows Investors Gained Buying U.S.,” 7/16/2012, http://www.bloomberg.com/news/2012-07-16/downgrade-anniversary-shows-investors-gained-buying-u-s-.html )hhs-ps When Standard & Poor’s downgraded the U.S. government’s credit rating in August, predictions of serious fallout soon followed. Republican presidential candidate Mitt Romney described it as a “meltdown” reminiscent of the economic crises ofJimmy Carter’s presidency. He warned of higher long-terminterest rates and damage to foreign investors’ confidence in the U.S. U.S. House Budget Committee Chairman Paul Ryan said the government’s loss of its AAA rating would raise the cost of mortgages and car loans. Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said over time the standing of the dollar and U.S. financial markets would erode and credit costs rise “for virtually all American borrowers.” They were wrong. Almost a year later, mortgage rateshave dropped to record lows, the government’s borrowing costs have eased, the dollar and the benchmark S&P stock index are up, and global investors’ enthusiasm for Treasury debt has strengthened. “The U.S. Treasury is still the widest, deepest and most actively traded in the world,” said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City, which advises community banks on investments of more than $40 billion. “That becomes all the more important when you have signs of weakening global economic growth and continued problems in Europe.” Even in a slow recovery, the U.S. has unparalleled assets in the global market, including the size and resilience of its economy and the dollar’s standing as the world’s reserve currency. Low Treasury yields show that most investors think the U.S. government will meet its obligations, no matter how dysfunctional the political climate becomes in Washington. Cuts cause downgrade – falling exports – and credit ratings are unreliable anywayMalcolm Sawyer, Professor Emeritus of Economics at Leeds University Business School, May 2012, “Fiscal austerity: the cure that makes the patient worse,” http://classonline.org.uk/docs/2012.05.20_Malcolm_Sawyer_-_the_cure_that_makes_the_patient_worse.pdf The ‘fear of the credit rating agencies’ argument is a convenient scare tactic and needs to be critically examined. It may first be noted that the credit rating of a government should be based on the ability of that government to service its debt. It is well-known that a government can always service debt provided that it is denominated in its own currency. At the limit the UK government can ‘print the money’ in order to service the debt: this would not take form of literally ‘printing money’ but rather the Central Bank being a willing purchaser of government debt in exchange for money. Second, the credibility of a programme designed to reduce a structural budget deficit cannot only be judged by the perceived commitment of the government to make public expenditure cuts and raise taxes. An achieved reduction of the budget deficit requires, as a matter of an accounting identity, some combination of a rise in the balance between private investment and savings and a rise in net exports (exports minus imports). Fiscal austerity threatens to bring that about through a decline in output and income which depresses savings and imports. The government’s hope (the return of the ‘confidence fairy’) is for a boom in investment and exports, which finds support in the forecasts of the Office for Budget Responsibility. But (as argued in Fontana and Sawyer, 2011, 2012) those forecasts are close to incredible. “The Office for Budget Responsibility's forecast of a return to growth next year, driven by a surge in investment and exports, has looked absurd for months. The idea that business investment will jump 40% by 2015/16, the biggest since 1945, is risible” (Hutton, 2012). Third the reputation and judgement of the credit rating agencies had been severely undermined by their roles in the build-up to the financial crisis. An oft-quoted example has been the degree to which triple A ratings were given to mortgage backed securities and credit default swaps. This would not deny that in the event of the credit ratings agencies downgrading government debt the government concerned could well be faced with higher interest charges and difficulties in borrowing, as funds are moved from that government’s debt to others. But what is questioned is the basis on which the ratings are made, and what actions by a government would lead to a downgrade. Case—Spending Good—AT: Crowdout Spending expands demand – excess savings mean it doesn’t crowd out privatesPaul Krugman, Nobel Prize Winner for Economics, Professor of Economics and International Affairs at Princeton, 5-2-09, http://krugman.blogs.nytimes.com/2009/05/02/liquidity-preference-loanable-funds-and-niall-ferguson-wonkish/ In any case, I thought it might be useful to re-explain why our current predicament can be thought of as a global excess of desired savings — which means that fiscal deficits won’t drive up interest rates unless they also expand the economy. Here’s what I imagine Niall Ferguson was thinking: he was thinking of the interest rate as determined by the supply and demand for savings. This is the “loanable funds” model of the interest rate, which is in every textbook, mine included. It looks like this: where S is savings, I investment spending, and r the interest rate. What Keynes pointed out was that this picture is incomplete if you allow for the possibility that the economy is not at full employment. Why? Because saving and investment depend on the level of GDP. Suppose GDP rises; some of this increase in income will be saved, pushing the savings schedule to the right. There may also be a rise in investment demand, but ordinarily we’d expect the savings rise to be larger, so that the interest rate falls: So supply and demand for funds doesn’t tell you what the interest rate is — not by itself. It tells you what the interest rate would be conditional on the level of GDP; or to put it another way, it defines a relationship between the interest rate and GDP, like this: This is the IS curve, taught in Econ 101. Now, we usually explain how this curve is derived in a different way: we say that given the interest rate, you can determine investment demand, and then through the multiplier process this determines GDP. What you’re supposed to understand, however, is that the derivation I’ve just given is just a different way of arriving at the same result. It’s just different presentations of the same model. So what determines the level of GDP, and hence also ties down the interest rate? The answer is that you need to add “liquidity preference”, the supply and demand for money. In the modern world, we often take a shortcut and just assume that the central bank adjusts the money supply so as to achieve a target interest rate, in effect choosing a point on the IS curve. Which brings us to the current state of affairs. Right now the interest rate that the Fed can choose is essentially zero, but that’s not enough to achieve full employment. As shown above, the interest rate the Fed would like to have is negative. That’s not just what I say, by the way: the FT reports that the Fed’s own economists estimate the desired Fed funds rate at -5 percent. What does this situation look like in terms of loanable funds? Draw the supply and demand for funds that would obtain if we were at full employment. They look like this: In effect, we have an incipient excess supply of savings even at a zero interest rate. And that’s our problem. So what does government borrowing do? It gives some of those excess savings a place to go — and in the process expands overall demand, and hence GDP. It does NOT crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap. Now, there are real problems with large-scale government borrowing — mainly, the effect on the government debt burden. I don’t want to minimize those problems; some countries, such as Ireland, are being forced into fiscal contraction even in the face of severe recession. But the fact remains that our current problem is, in effect, a problem of excess worldwide savings, looking for someplace to go. Directory: files files -> Answer True False 2 points Question 2 files -> Integer programming and game theory files -> 4 Integer Programming files -> Bpa vehicle Window Repair Scenario #1 task: Procure vehicle window relacement. Objective files -> Pop Warner History files -> North Carolina Inclusion Initiative Mapping Where Children with ieps are Being Served Purpose files -> Fall 2013 Spring 2014 Program Data: Standard 1 Exhibit 4d files -> Hanban – asia society confucius classrooms network 2010 request for proposal files -> Northern England’s set-jetting locations Download 1 Mb. Share with your friends:
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