Monday, August 08, 2011

The S&P Downgrade: Competence and Consequences


Amplify’d from economistsview.typepad.com
I was asked to comment on S&P's downgrade of long-term US debt:
As I explain, I don't expect much in the way of market or interest rate reaction to the downgrade. Also, I didn't mention this, but S&P's demonstrated incompetence on matters such as choosing the right baseline is another reason to ignore their pronouncement:
I Heard It Through The Baseline, by Paul Krugman: Oh, my. Treasury has a fact sheet explaining that $2 trillion error by S&P; it may sound technical, but to anyone who follows budget issues, it’s a doozy.
Donald Marron:
S&P's 2 Trillion Dollar Error: ...The error is understandable but remarkably sloppy for such an important analysis.
The source of the error is painfully familiar to anyone who deals with U.S. budget projections. S&P’s analysts didn’t use the right measuring stick — i.e., the right budget baseline — when analyzing the effects of the recently-enacted Budget Control Act.
He adds that:
It’s own revised calculations show net general government debt hitting 85% of gross domestic product in 2021 instead of 93%. That’s a big difference. ... S&P was too dismissive in its clarification.
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