S&P’s $2 Trillion Mistake

August 7th, 2011 at 8:18 am

For those who want to muck around in some dark and tangled weeds, here’s Treasury’s description of the big math error made by S&P in their initial downgrade analysis.  Apparently, they fell prey to the old baseline mistake…hey, it happens.

The figure shows the increase in debt as a share of GDP with and without the error.  It’s lower, of course, once you use the correct (lower) baseline.   But it’s still rising.

Source: US Treasury (by acting asst sec’y John “Baseline” Bellows)

Which leads me to once again underscore what I think is A CRITICAL AND THUS FAR OVERLOOKED POINT.  (Sorry to shout at you on Sunday morning like that—I just think it’s really important).

As I show here, if you combine the savings from the debt ceiling deal with the expiration of the highend Bush tax cuts, you do actually stabilize the debt to GDP ratio–not forever–nothing’s forever, especially without bending the health-cost curve.  But within the ten-year budget window, the debt/GDP trend flattens out.

That, my dear super-committee, is the way forward.

Parents—here’s a great opportunity to tell your children that someday, they may very well use all that math they’re (supposed to be) learning.

Though in the spirit of full disclosure, I guess you have to tell them the mistake didn’t make much difference.  S&P was hell-bent on the downgrade and wouldn’t let a $2 trillion boo-boo get in their way.


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4 comments in reply to "S&P’s $2 Trillion Mistake"

  1. Red Planet says:

    Wouldn’t it be nice if the “Dear Debt Ceiling Committee” noted that none of this, BCA, Bush Sunset, decimating Social Security and Medicare, makes 10¢ worth of difference if the government sits on its borrowing power while Americans remain out of work and Jeffrey Immelt’s cohort keeps shipping jobs overseas.

  2. perplexed says:

    Yes, but, speaking of math, none of this answers just how this “translates” into a new probability of default that results in a lower rating on some objective measure because there is some evidence that the securities are riskier than those with a lower probability of default. By not exposing these “wizzards of oz” you give them undeserved credibility as they attempt to increase rates paid to wealthy rentiers who are looking for a safe place to store their lairs but want the American public to pay them more for it. The investment banks already showed us how to deal with these companies: only give your business to those who give you the triple A rating! Free markets at their finest! If it results in defrauding a third party, that’s their problem; no one will hold the rating agencies accountable for anything they do, they’re responsible only to their stockholders (many of whom also probably own these low-yielding government bonds).

  3. foosion says:

    In 2009, S&P was happy with 90% debt/GDP

    Now a lower number is unacceptable.

  4. Geoff Freedman says:

    I had some hope that after this latest debacle that there might be a chance that both sides could work together a little better. After listening to the rhetoric from both sides after Friday’s downgrade, I realize that slim and none best decides that prospect.

    Regardless of how poor the ratings agency performance is rated (and there are BIG issues – AAA junk security obligations, etc.), why would you not think that our polictical brinkmanship would not impact their assesment. Look at Italy and how the political spat between Berlusconi and Tremonti contributed to what happened over there. We can’t just say and do whatever please and think there will be no consequences.

    Americans seem particularly myopic when it comes to self examination. If you look at the poles, it shows most people want Government to spend less without cutting any programs. Won’t work.
    Maybe we have the government we deserve.

    Fixing this mess will not be without pain to everyone. We are all in the same boat and we need to look clearly into the mirror.

    Obama needs to stand big and take on Congress and try to force the issues, and I don’t see that as his style. Otherwise he’s a one term President.