The Downgrade Rally

August 8th, 2011 at 3:30 pm David Frum | 49 Comments |

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The bond market has reacted to the S&P downgrade of US debt with a big rally in US Treasuries. As I write, the US government can borrow money for 10 years at about 2.3% and for 2 years at under one quarter of a point. The market wants to buy, buy, buy US debt.

What the market wants to sell are stocks:  ie, claims on the future earnings of private-sector companies.

In other words, the market is saying: We fear recession and deflation. The Washington consensus is that we need to fight debt and inflation. It’s utterly upside down, utterly perverse.

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49 Comments so far ↓

  • Idle Resources

    Point the finger at Karl Rove’s destruction of consensus politics. In 2000, the OMB could accurately point to future stable development, with deficit pay-down. Then came 8 years of: low tax whoring; military waste, excessive islamophilia, perma-politics, fiscal insanity, ad nauseum.

    The crisis won’t end until people learn to hate this piece of shit and the open sewer that he left.
    http://cache.gawker.com/assets/images/gawker/2008/01/nyahnyahnyah.jpg

    • Oldskool

      That no one has been held accountable for much of anything in the last 11 years explains this feeling of disorder. In 1974, we could get on with things because balance had been restored. We even threw people in jail in the 1980s for the saving and loan scandal. Not so today. The few who have answered for their behavior can be counted on one hand. And one of those was Martha Stewart.

      • Redrabbit

        There seems to be some sort of silent consensus that we cannot hold anyone accountable for anything, because it would lead to some kind of undefined chaos. No one has explicitly said this, but many in power and in the press seem to be uneasy with the idea of genuinely holding these people accountable.

        Here is a modest proposal. Bring back judicial flogging, but restrict it so that it can only be used on the top 1% of the top 1% of earners.

        • greg_barton

          Well, since there’s already a fair amount of chaos there will come a point where people will say, “More chaos? So what?” Then you’ll see the fit hit the shan.

    • Smargalicious

      You are conveniently forgetting 2 years now of a massive welfare reparations spendathon by everyone’s favorite African…

    • paul_gs

      Rove? Give us a break and give it a rest! How lame!

      And “concensus politics” is quite rare and we’ve had far far worse political acrimony.

    • JimBob

      One thing is for certain, You are a loser in this game called life.

      Karl Rove’s fault. LOL

  • ottovbvs

    “It’s utterly upside down, utterly perverse.”

    Er…yes. It’s completely wrong headed as Krugman explained with his customary elegance a couple of days ago with reference to Italy which was undergoing a JUMP in bond rates AND a stock market sell off whereas the US is undergoing a FALL in bond rates and stock market sell off. While the big falls on Wall Street are being assigned to the ratings downgrade it in fact has very little to do with it except as perhaps a proximate cause.

    Btw a ten year treasury at 2.3% means that we’re effectively borrowing for zero given anticipated inflation.

    • the irish rover

      Capital has to find something to do with itself.

      The fact of the current economy (OECD-wide anyway) is that demand for goods and services has evaporate, so there is no investment in new production to produce those goods or services, leaving a flood of capital out there with no place to go. Big fall in demand with no decrease in supply, so the price of treasuries falls.

      If Frum was wrong interest rates on treasuries would be soaring. Others (including me) thought the debt ceiling uncertainty would make rates rise to compensate for the uncertainty. They haven’t, suggesting deflationary pressures far worse than generally appreciated.

    • Smargalicious

      otto, Krugman is a widely known whackjob. Best to not use him in your posts.

  • Michigan Outsider

    It’s not impossible, or even implausible, for the S & P decision to downgrade to be correct and for US Treasuries to remain, relatively speaking, a much better investment than most.

    • SteveT

      Exactly. Among other forces at work money has no where else to go. The US sovereign debt is the absolute linchpin of the financial world. Without it as a baseline there is literally nothing else.

      I hope this puts the nail in the coffin of S & P et al. That would be a good start.

      • Redrabbit

        America is on top because we are the LEAST worst of all the available options.

        Such a high bar we have set.

    • ottovbvs

      So if it’s correct while haven’t all the other agencies followed in unison? They usually do. They essentially downgraded on the basis of a political opinion not a threat of default. In fact what’s happened with bond rates is ludicrous in the context of a downgrade. Frum is correct it’s totally perverse. The market sell off is about anticipated levels of economic activity not a threat to US creditworthiness. Would you like to borrow $10 million for ten years at zero real interest?

    • the irish rover

      American Exceptionalism 2011 version: “Everyone else is worse than we are”

      • Smargalicious

        BHO is indeed the most destructive person we’ve ever had occupy the WH.

        NOVEMBER 2012

  • Barack obama guardian group II - Page 159

    [...] The bond market has reacted to the S&P downgrade of US debt with a big rally in US Treasuries. The Downgrade Rally | FrumForum Nanny Government for the wealthy elites and the corporation and Darwin for the "little [...]

  • Getting this S&P thing backward | Hotspyer – Breaking News from around the web

    [...] Frum: The bond market has reacted to the S&P downgrade of US debt with a big rally in US Treasuries. As I write, the US government can borrow money for 10 years at about 2.3% and for 2 years at under one quarter of a point. The market wants to buy, buy, buy US debt [...] [...]

  • Getting this S&P thing backward - Online Political Blog

    [...] Frum: The bond market has reacted to the S&P downgrade of US debt with a big rally in US Treasuries. As I write, the US government can borrow money for 10 years at about 2.3% and for 2 years at under one quarter of a point. The market wants to buy, buy, buy US debt [...] [...]

  • ottovbvs

    For those interested in an intelligent comment on todays’s sell off here’s an interesting theory about margin calls. Probably a bit of truth in it. He’s certainly right about the plunges in the blue chips. Their prices fall rapidly because they are easy to sell. This was a sell off driven by economic expectations not concern about the US debt downgrade whatever Maria Bartiromo breathlessly tells you tonight on the news.

    http://brontecapital.blogspot.com/2011/08/who-has-got-margin-call.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BronteCapital+%28Bronte+Capital%29

  • The Irony of the Day : Delaware Liberal

    [...] David Frum agrees: The bond market has reacted to the S&P downgrade of US debt with a big rally in US Treasuries. As I write, the US government can borrow money for 10 years at about 2.3% and for 2 years at under one quarter of a point. The market wants to buy, buy, buy US debt [...] What the market wants to sell are stocks: ie, claims on the future earnings of private-sector companies. In other words, the market is saying: We fear recession and deflation. The Washington consensus is that we need to fight debt and inflation. It’s utterly upside down, utterly perverse. [...]

  • Alex

    i have entered bizzaro world where republican david frum argues for keynesian stimulus to move the economy forward while democrat barack obama wants to cut the social safety net while protecting the pentagon.

  • seeker656

    Prior to being elected president, Obama observed that our politics were too small for the problems we face. My sense is that our politics have become too large for the problems we face. The political class members are so wrapped up in blaming the other side for our problems and in doing what they perceive as necessary to win the next election that they are impervious to any evidence that does not confirm their ideological position.

    It seems to me that the policy changes needed to help us recover from our current malaise are clear. We had two commissions consisting of members from both political parties that, after months of work, laid out the evidence and suggested rational policy options. The president chose to ignore what they had presented and Republicans chose to create an unnecessary crisis to force an agreement that is wholly inadequate to the task at hand.

    Now Standard and Poor’s, for reasons not clear to me, after contributing enormously to the 2008 collapse, has now declared war on our economy with a politically based down grade. Why do these people have any credibility at all?

    It’s all politics all of the time with no time or energy available for the hard task of governing.

    What a country.

    • Oldskool

      Believe it or not, it’s always been bad. If you were around in 1968 you would have sworn the world was ending. Today, we don’t even have riots in the street.

      • spud

        What was the line, “In times like these it helps to recall that there have always been times like these.” ?

  • aBright

    TeaBagger disaster! We now see what a horrible cock-up the Tea Party is. I believe that the public will most likely place the blame for the downgrade on the Republican party as a whole. And who can blame them? The TeaBaggers have threatened the future of the Baby Boom generation. Has ideological purity made them forget that old people vote in much higher numbers than anyone else? TeaBaggers have likely destroyed the GOP’s chances in 2012, an election which could hand super majorities to the Dems, and single party government for a generation.

    True Believers are a disgrace to any party, religion, or organization. TeaBaggers have probably wrecked the GOP. Hey, you ideological, fundamentalist purists who have been duped into the anti-tax religion of Cantor and Norquist; are you proud of yourselves? You have succeeded. You have also delivered catastrophe to the GOP.

  • seeker656

    Oldskool, thought provoking comment.

    Actually I was 32 during most of 1968 and it was certainly a year of national turmoil. The assassinations of Martin Luther King and Robert Kennedy were traumatic but their deaths were not the consequence of government incompetence. Dr. King had obviously motivated changes in our nation that were troubling for many. Those changes were brought about because our government was able to enact laws that I think many would agree were consistent with our fundamental values of freedom and equality. I still remember Kennedy’s impromptu speech on the night of Dr. Kings death.

    King was an authentic leader and Kennedy was developing as a leader. Lyndon Johnson for all of his human flaws was a strong political leader.

    A contrast for me is that today our dysfunctional politics have ground the wheels of government to a halt. What have we accomplished in the last decade as compared to the sixties?

    On the other hand the controversy over and resistance to the Vietnam War was a public reaction to failed policies.

    My memory of that period is that there was more public reaction to what was going on in Washington and I think it was more widespread than the current Tea Party uprising but that may be my own bias influencing my memory and thinking.

    For whatever reason, perhaps its my age, I see our current predicament as more serious than in the sixties and although I am in the protected class with Social Security, Medicare, and reasonable savings I am much less optimistic about the future for my progeny than at any previous time in my life.

    • Oldskool

      True, we don’t have any more Lions of the Senate, or the House for that matter. We have Mitch McConnell who’s as much of a jackass as your average teabagger.

      On the other hand, we hated people like Nixon, but, he was an upstanding citizen compared to someone like Shrub.

  • sdspringy

    aBright/Oldskool are the typical rinse and repeat libs. They blame the Republicans for the downgrade yet are unable to count the votes for the debt ceiling where more Democrats in the House and Senate voted AGAINST the legislation than Republicans.

    If the S&P is looking at political gridlock as reason for the down grade they have to look no further than Pelosi/Reid. Even Gabby Gifford with a head wound is capable enough to vote FOR the legislation yet 95 other Dems in the House were unable.

    The downgrade highlights the Washington political class inability to manage spending.(Meaning both political parties) As well as the hard headed partisanship displayed by those Democrats in the House and Senate.

    To place the blame on 30 members who actually had enough common sense to require some fiscal discipline continues to show why the Democrat ruling party will be the ones held accountable in 2012

    • paul_gs

      It is ludicrous blaming only the Tea Baggers. If they are as stupid as the Dems claim they are, it should have been easy for the Democrats to outmaneuver them.

      As far as punishment goes, both will take a lot of heat in 2012.

      • Oldskool

        Hey kids, don’t listen to us, your leader is willing to admit it.

        “I think some of our members may have thought the default issue was a hostage you might take a chance at shooting,” he said. “Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming.”
        -Mitch McConnell

  • Idle Resources

    Whiteboards For Dummies

    Once again – drop the deflective barriers and let this impact on your confused brains – David Frum was a Westwing employee of GWB, until he offended Karl Rove by speaking the politics of principle, in contravention of the Rove rule: principle is for losers. Over the next 8 years the National Debt was more than doubled, and a destabilized economy was passed on to the successor President. Gradually Frum learned that Rove politics was as destabilizing, and sought models for balanced development. GOP members won’t listen because they are trapped between the extremes of the Zero-Sum-Scum like the Rove-Rodents who puke their poison here, and the Tea Party drones who follow unworkable and divisive street agendas.

    It is offensive to the extreme, for a Rove-Rodent to pollute this blog. David Frum doesn’t live off page-views like the banter-and-quip cess pool blogs. He wants to contribute to a Stable Economy, and is disserved by all the lying and carping done in this consensus blog.

    If you don’t blame Rove’s 24-7-365 smear-factory operations for 100% of the $10 T deficit which was saddled onto BHO, then you are part of the problem. And you are a vulgar troll here. Point the fucking finger in the right direction.

    I will start your deprograming of Rove-rage with the attached WhiteBoard messages. If you adult-infants can’t speak anything but Troll, then I will translate for you, because I learned the language of those goofs. Don’t post anything unless it is SOLUTION oriented. And thank me from the bottom of your hearts for my generous offer. Otherwise you can suck the crap stains out of Karl Rove’s panties. And leave your addresses, because I will be sending you a bill for the Double-AA surcharge of $100 B. Whether by act of omission or commission, association or dissassociation, I blame you for it. Study those WhiteBoards.
    http://www.whitehouse.gov/whiteboard

    Karl Rove = Cancer In Human Form
    David Frum = Well Positioned Champion of Consensus-Politics and Perma-Stability.

  • me

    We should do something about downgrading the personal credit of these failed politicians:

    http://americaspeaksink.com/2011/08/bad-credit-from-very-bad-politicians/

  • medinnus

    Palin and others castigating Obama for the downgrade is like a child who murders his parents asking for leniency at his trial because he’s a poor orphan.

  • JimBob

    The lefts favorite commie the fat slob himself buffoon Michael Moore calls on Obama to arrest the top people at S&P

    http://www.washingtontimes.com/news/2011/aug/8/michael-moore-obama-show-some-guts-arrest-sp-head/

    I’ve always said if you scratch a liberal hard enough you’ll find a totalitarian communist.

    • ottovbvs

      “if you scratch a liberal hard enough you’ll find a totalitarian communist.”

      Say hello to Mussolini

  • D Furlano

    I called what would happen to the treasury market if there was a downgrade, investors would search for security as they sold off traditional investments and treasuries would fall. The downgrade is meaningless.

    What I never saw was the drop in stock market, seems to be from tail hedging. Although, I thought investors would have pulled out for other reasons like the whole debt reduction nonsense.

    • ottovbvs

      “Although, I thought investors would have pulled out for other reasons like the whole debt reduction nonsense.”

      Er…they did. The sell off was about fears of economic slowdown and secondarily the European debt situation. The ratings downgrade was just the catalyst but as such not entirely meaningless.

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