August 08, 2011
It’s apparently hard to get economic news at the Washington Post. How else can one explain the fact that it explains the movement of markets over the weekend only in reference to S&P’s downgrade of U.S. debt and completely ignores the debt crisis in Europe that could lead to the collapse of the euro. The latter threatens the same sort of freeze up of the financial system that we saw in the wake of the Lehman bankruptcy. It is likely that markets were more concerned about this prospect than the downgrade by one of the three major credit rating agencies.
The article also includes a bizarre quote from Kazahiro Takahashi, general manager of investment research with Daiwa Securities:
“But he still thinks the fallout is likely to be severe, as evidenced by Japan’s 1998 credit downgrade. After ratings agency Moody’s took away Japan’s top-notch credit rating, the Japanese economy experienced deflation, or a period of falling prices, which led to stagnated economic growth, he said.
‘The same kind of problem should be expected for the U.S. economy, too, … Of course, if the U.S. economy, the largest economy in the world, becomes deflationary like Japan, that would have a great impact for the world economy.'”
It is unlikely that the Post could find many other analysts who believe that the United States is about to experience deflation and even fewer who believe that the downgrade makes deflation more likely. If the U.S. was actually having difficulty taxing and borrowing to meet its debt payments, then it would most likely print more money to pay its debt. This would tend to increase inflationary pressure, not deflationary pressure.
It also would have been worth noting that S&P’s downgrade of Japan’s debt in 2002 had no noticeable impact on Japanese interest rates. The government can still borrow long-term at interest rates just over 1.0 percent. Furthermore, this was a clear example where Moody’s was completely wrong. It is now 13 years after the downgrade, no one believes that Japan is anywhere close to defaulting on its debt. And, because of the deflation over this period, bondholders are getting repaid in yen that are worth more than the yen they lent.
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