They predict a riot
Credit rating agencies Moody’s as revolutionary socialists?
Who’d have thought it?
But here they are, suggesting that the way in which they are trying to screw economies down to massive retrenchment packages in order to retain what they regard as ‘market credibility’ may lead to major social unrest:
Debt hang-hover will test social and political cohesiveness
In those countries whose debt has increased significantly – and especially those whose debt has become unaffordable – the need to rein in deficits will test social cohesiveness. The test will be starker as growth disappoints and interest rates rise.
In several countries – including some highly advanced ones like Iceland or Ireland, but also Latvia or Hungary, as well as in some much poorer countries like Jamaica – a great sacrifice is required from the respective populations. …………….
In 2010, the ongoing crisis will further test such fortitude. We are closely monitoring signs of economic rebound as well as of political and social tension as early indicators of the sustainability of fiscal efforts.
Am I missing something here, or are Moody’s really saying that they will measure the effectiveness of countries’ retrenchment efforts by the extent to which their populations start to riot on the streets?
So if the credit agencies are the new revolutionaries, intent on pushing capitalism to the extreme and provoking a working class fightback, who are the moderates?
Interestingly, the moderates appear to be the very investors that the credit agencies are supposed to be serving.
Mainstream media (and blog) opinion may be that investors reacted badly to the UK PBR announcements on the basis that it didn’t give enough reassurance about managing the deficit.
Sadly for the mainstream media and blogs (and the Conservatives), the data doesn’t actually back that opinion.
Instead, the data suggests that investors react unfavourably to aggressive retrenchment measures, and favourably to more sensible continued stimulus measures that ‘lock in’ growth.
As Michael Burke of Socialist Economic Bulletin says:
The Financial Times was in no doubt, the culprit for the sell-off was Chancellor Darling’s failure to make sufficiently savage cuts in public spending to reassure bond investors. ‘Investors took fright at the perceived timidity of the government’s plans to balance the books with one of the biggest sell-offs of British gilts this year.’
But that verdict is simply and demonstrably untrue. SEB has previously shown, by analysing European government bond markets, that there is a preference for lending to economies where there is a reflationary policy. This is simply because, from the perspective of the bond market, government spending to boost the economy, especially investment, improves the chances of getting your money back.
Read the whole thing for the evidence form last week, including the following evidence:
The day following the PBR the Irish government enacted its own Budget. Budget cuts there of €4bn were described by the FT as “brutal” and even “masochistic” and included public sector pay, jobseeker’s allowance, even disability benefits. The British Tory Party and their supporters in the media have lauded the ‘resolute action’ of the Irish Finance Minister Lenihan. George Osborne is preparing to emulate him. But yields on Irish 10-year government are now even higher than those on British government debt at 4.87%, and now stand at 187bps over German bunds, compared to 66bps for Britain, even though the two have similar of government deficits, close to 12% of GDP.
But what of the European benchmark, surely German yields are low because they are pursuing a policy of fiscal retrenchment, as recommended by virtually all the commentators? German debt yields remain the benchmark low in Europe, all the while the new German government continues to reflate the economy through increased government spending, which of course is financed in the first instance by increased borrowing.
This is not simply a case of investors flocking to the traditional German safe-haven bond market, although that is often a factor. Other bond markets have avoided a sell off, and maintain tight spreads to Germany, notably France and Belgium. What all three economies have in common is that they have been engaged in fiscal expansion to lift their economies.
The commentary from the Financial Times and most bond analysts can be discounted as it does not conform to reality. The actions of bond investors illuminate the real picture; inactivity is better than fiscal contraction, but reflation is better than both.
(This, of course, explains the ‘as Darling spoke graph provided last week by Duncan, but which information was conveniently ignored in the ensuing days as commentators rushed to incorrect judgment.)
This crisis and recession has thrown into stark relief some of the strange contortions of modern capitalism, but this must be one of the strangest.
Here we have a credit rating agency – a powerful institution set up and legislatively enabled to create stability in the market place – advocating measures that they prophecy may lead to a major anti-capitalist fightback – and indeed appearing to revel in the consequences of they advocate.
Meanwhile, the investment community, that the credit agencies were set up to inform and protect, prefer to act moderately, seeking a long term compromise between their need for fiscal stability and the social needs of embattled and embittered populations.
It’s a strange world.
I read what they are saying as ‘we will keep an eye on whether social unrest might prevent governments from cutting services’, i.e. social unrest being a bad thing, rather than social unrest being a sign that it is hurting and so working.
i.e. ideally they don’t want people to resist the cuts, but accept them passively.
Good article.
The evidence cited by Michael Burke is insufficient. Using five countries to assess a relation between two variables in complex systems is scant evidence. There theory that tight control of budget finances leads to a reduction in yields is well grounded in many empirical and theoretical models and does not rely on the current experience.
None of that means the theory is right, but Burke’s analysis holds little water.
I would have thought that any financial modelling is, to say the least, rather suspect these days. The more sceptical among us might say that such pursuits are nothing more than a distraction, and meant to be. For any given financial model that asserts one position, another model can refute said assertion.
Dan @1: Yes, there was a a little bit of divilment in my interpretation. I think they most probably mean to say what you charitably interpret them as saying, but that is not in fact what they say; you’d have thought an important worldwide outlook from an important source might at least have been checked over for accuracy of meaning before it went out.
However, the difference of interpretation doesn’t get in the way of the fact that Moodys support fiscal retrenchment which they acknowledge may lead to significant social unrest.
Barney @2: I agree that Burke’s analysis in itself is not conclusive proof. Ineed, as tgmac @3 suggests, I’m not convinced there is a single model of the relationship between fiscal action and yields which can be proven.
My point – and one I did envisage coming out early in the comments – was to argue out that Burke’s interpetation of the data may be as valid or more valid as more mainstream interpretation, especially in circumstances of worldwide pressures on sovereign debt which many in the ‘investment community’ have never experienced before. There is certainly logic in investors adopting a posiition on sovereign debt in favour of actions which DO NOT bring the risk of social unrest (and potential default).
The notion you raised usefully in a previous comment was that of the ‘feedback loop’. This feedback loop currently operates in favour of fiscal retrenchment, with Moody’s and the press (re)inforcing a supposed investment position which then becomes the real innvestment position which then r(re)inforces the press and Moody’s analysis of what are sound investments. It is, however, perfectly possible to envisage a feedback loop, in different political circumstances, in which continued fiscal support for long term growth is reinforced in a like maner through the institutional framework set out.
The real issue then, for a leftwing analysis, is not of which ‘mode’ reflects what has gone before, but one of power. Fiscal retrenchment has gained popular credence as the ‘sensible’ way to deal with current cicumstances because, as Moody’s makes quite clear, there is a belief that when it comes to it the ‘social unrest’ can be faced down/controlled by the state-in-support-of-capital, with varying degrees of violence. That in the end is what brings the ‘theoretical and empircal models’ the legitimacy you suggest they have. Conversely, the clearest way to combat this asymmetric power is for the workers to take the kind of action that is often supported on this blog.
tgmac @3: I agree. See my comments to Barney above.
“Am I missing something here, or are Moody’s really saying that they will measure the effectiveness of countries’ retrenchment efforts by the extent to which their populations start to riot on the streets?”
Is that odd? Surely that is how we should think. It’s just part of the political calculus. Look , the UK has £8trn in wealth, and wage income of £900bn or so each year, plus capital income. Can we pay the £60bn of annual interest? Yes. Of course. Can we be made to? Well, its a political question.
By the way, Chris Huhne wrote an interesting column about ratings agencies in the Times. he founded Fitch, as you may know
Giles
‘It’s part of the political calculus’. Well yes, I think we agree there,and it’s honest of you as a liberal to ackonwledge it rather than hide behind a conception of ‘reality’/'it has to be done this way’. The only reason it’s done this way is power inequality, and recognising that is to recongnise the need for class struggle.
Yes, interesting from Chris Huhne – ta for pointer. I was only aware of his background after you told me another time. The idea of public disclosure of payments from bond issuers is interesting as a proposed reform, within its limits. Might it become Lib Dem policy? If so, I’d advocate Labour nicking it in advance of more radical ‘tell the agencies to stick their ratings where the sun don’t shine’ international measures of the type Brown is really, really good at securing.
Stephanie Flanders has been doing credit rating and sovereign debt on BBC website too – worth a look if you’ve not seen. Quite balanced – I prefer her to Robert Peston.
Indeed, everyone’s doing credit rating agencies and sovereign debt now. At least us two can stand proud and say we were ahead of the game, looking at the issues months ahead of them being on th tip of every commentators’ tongue.
“The more sceptical among us might say that such pursuits are nothing more than a distraction, and meant to be. For any given financial model that asserts one position, another model can refute said assertion.”
Your conclusion being that we should give up modelling and start guessing?
Paul: your analysis focuses on perception. I was suggesting that the feedback loop is composed of real driving forces. (Though I will admit a role for Keynesian animal spirits I think these graft onto fundamental drivers – only by changing the drivers can you change the spirits)
As if financial modelling isn’t guessing with a bit of panache?
Indeed, the best predictive models are based upon committees of people with various experiences in a given class of endeavour. They guess what possible outcomes are possible. Oh, they may have past data and are aware of the structural parameters that limit their scope of conception, but they really just guess how much of something they can produce in order to sell next year, for example. Of course, these people know that they are completely unable to predict the future, so they instead make plans based upon a range of options with a view to limiting possibe unsatisfactory outcomes whilst attempting to perpetuate desirable outcomes. Indeed, it was Rumsfeld who tried to articulate the Pentagon’s latest theories on prediction; although he made a ham fisted attempt when mumbling about unknown unknowns and so on. Basically, after of billions spend over the years, the Pentagon realised more than anything else that it needed to be technologically superior, have more resources than possible foes, and needed to be prepared for as many eventualities as possible; all the while knowing that, as Marine like to say, shit happens.
Anyway, isn’t the arrived at momentary price between buyer and seller supposed to be the ultimate in a feed back loop? The only feed back loop item that allows one to jot up one’s profit or losses?
What perplexes me a wee bit, beyond the pleasure one gets from writing out one’s thoughts and hopefully arguing the toss in a pleasant manner, is the idea of bringing a system diametrically opposed to basic Socialist thought and somehow thinking that we’ll square the circle, so to speak. The foundational parameters of the currently dominant system are not conducive, in the end, to agreeing or compromising on the political economy. What is currently taken for normative dialogue predetermined by the current ideology isn’t bridgeable at some point.
It’s a bit like two designers – one designing an aeroplane, the other a submarine. They can indeed discuss basic science parameters and production processes. At some point their ulitmate goals and mediums in which they operate necessitate a parting of the ways. The same words they use mean different things due to the fact of the mediums in which they operate and the goals they hope to achieve. The general underlying notions or conceptions are similar but the specifics, and especially how they’ll communicate their ideas to others to achieve the goals, diverge due to their different objectives.
There is no squaring of the circle because the two projects (Socialism v Capitalism) are very fundamentally different projects with very different goals. Personally, I’m not that excercised by feed back loops, Black-Sholes models, CAPM and so on. They do not inform on any level that serves my understanding of the project I pursue. About the only concept I’ve taken from my finance background is that to do with risk and reward, but even this concept has to be seen in a different light given my inclinations and the analyses that follows from it.
Of course economists, whatever their economic orientation, will produce models and futilely, imo, try to predict the future. If they’re anything like the Irish government, when times are good, they are the masters of the universe. When times ain’t so good, it’s some one else’s fault. About the closest I’ve come to hearing a main stream economist approach the actuality of present circumstances is an LSE economist who claims we’ll just have to live with the business cycle – whatever the business cycle is or is defined as.