When confronted with the fact that his government’s bonds had been downgraded:
Prime Minister Naoto Kan had little reassurance to offer. “I just heard that news,” a flustered-looking Mr. Kan told reporters. “I am a little ignorant on those kind of matters,” he said. “Let me look into it more.”
Can you imagine a Western head of government responding in this way? What almost brings a tear to my eye is that it is of course how honest the response is.
I am – hear me Bryan – willing to take 50 to 1 odds that President Obama doesn’t understand what a downgrading of US Treasuries would mean. He could probably trot out some line about investor confidence but what this actually meant and the significance or more to the point, lack thereof, he would not be able to explain cogently.
Nonetheless, he could never get away with the honest statement that “look I don’t really understand the bond market”
On a different note, when I last looked at Japan they had a debt-to-GDP ratio of around 134%. To my eyes that looked completely manageable given Japan’s fundamentals. Now we are at 204% My gut tells me that this is not a serious concern either, though I haven’t looked at it.
Where I would start to get nervous just from hearing the headline numbers is somewhere in mid 300s. Not that Japan couldn’t handle a debt-to-GDP higher than that nor that particularly bad policy or bad luck couldn’t trigger a crisis with a debt-to-GDP lower than that.
To compare US debt-to-GDP is somewhere in the 60s right now. Before the crisis began Ireland’s debt-to-GDP was in the 20s.
Which is to say that the particulars matter a lot when trying to determine if a country will default.
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Friday ~ January 28th, 2011 at 4:09 pm
Ethan D
50 to 1 odds he doesn’t understand what it would mean? And I’m willing to bet 100 to 1 odds you would restrict an acceptable level of “understanding” on his part to be some absurdly low interest rate differential, no? Because you must be pretty condescending to believe that this POTUS, nevermind a layman, like Bush, can’t understand the basic concept of the risk and reward correlation in debt financing. So if Obama got up and said “A lowering of our sovereign credit rating could have drastic impacts on our ability to finance our current debt, as well as our ability to borrow in the future” this would not suffice to win the 50-1 side of your wager, would it? Understanding the precise impact from a downgrade on our spreads relative to other sovereigns (+X basis points) is a high bar to set, even for a professional bond trader. Goldman and PIMCO frequently get this same questions wrong, I expect. But it seems the object of this post was not to suggest that the President should know anything about the bond market, but instead exaggerate a modestly stated “Let me get back to you on the specifics” from a defensive and embarassed government official, and then draw a lame equivalence between this (no doubt overstated) ignorance to take a not so subtle dig at Obama. As a frequent reader, I must say you are actually better than this.
Friday ~ January 28th, 2011 at 6:26 pm
Karl Smith
“A lowering of our sovereign credit rating could have drastic impacts on our ability to finance our current debt, as well as our ability to borrow in the future” this would not suffice to win the 50-1 side of your wager, would it?
No, because I would consider that wrong. I think Kevin Drum is closer to correct when he says it would have zero impact. Though there is a larger story about cross-correlation in default risk.
However, my point wasn’t that bonds are easy and the POTUS is dumb, but that bonds are hard and people shouldn’t expect him to be able to give an answer. As you said pros get it wrong.
And, that’s ok. Its not necessary for the President to know everything or be the smartest man in the world.
Friday ~ January 28th, 2011 at 7:16 pm
Ethan D
No disagreement here that ratings agencies are about as useful as a Monday morning QB, and if anything serve to dangerously placate people and stymie independent analysis. I just made that comment as an example of the sort of statement (albeit wrong!) that could be juxtaposed with a more technical analysis that would confirm deeper understanding.
But Bond markets aren’t difficult in their generalities, they are hard at the margin, and in terms of the appropriate response from a government official, I would lean towards the general. And to that end, your wager that Obama couldn’t help people understand what was happening and why it was or wasn’t important, is an argument that Obama is not sufficiently intelligent and knowledgeable to make a correct and well-reasoned response to such a question. I’m not saying he is omniscient, by any stretch, but you really are underestimating the man here, and thats unnecessary, and from your stance, probably foolish.
basically, in a post that you say was meant to be a call for reasonable expectations regarding our leaders competencies and breadth of knowledge, you present an example that leads the reader to believe that you think Obama is stupid. Its a not-so-subtle dig, and it really erodes your so-called point – if you are assuming Obama is not knowledgeable enough to make a meaningful public statement about Bonds, that would broadly disqualify him from the presidency in most people’s mind I would think – so then what would be the further benefit of talking about standards he would only be aspiring to?
Friday ~ January 28th, 2011 at 5:41 pm
rjsigmund
japan has an upside down population pyramid…their population will be cut 2/3rds unless they bring in immigrants…
Sunday ~ January 30th, 2011 at 1:39 am
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[...] 30th, 2011 | Uncategorized | admin Karl Smith on the possibility that ratings agencies will downgrade U.S. debt from its current AAA rating: I am [] willing to take 50 to 1 odds that President Obama doesn’t understand what a [...]