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QBAMCO's Take On The US Downgrade

Tyler Durden's picture


It is still not too late to submit one's thoughts of what the US downgrade means for various asset classes and for the economy, and world, in general. Here is one of the few worth reading, courtesy of QBAMCO's Paul Brodsky and Lee Quaintance. Their conclusion: "the downgrade is effectively a currency downgrade, which seems very reasonable, overdue and, in real terms, insufficient. We would argue that in real terms, US Treasury obligations are non investment-grade. We think Treasury obligations today and always will be money-good, but principal and interest will be repaid with bad money."

Full note:

Takeaway: We believe the downgrade of US Treasury obligations is legitimate and, in one very relevant way, insufficient.

First, the nominal creditworthiness of Treasury obligations is solely a function of controlling the printing press. Congress ultimately retains the legal right to print the nation’s money. It may even decide unilaterally to maintain the US dollar as the nation’s currency or change it. Thus, in light of the prolonged Congressional impasse on raising the debt ceiling, S&P’s downgrade based on Congress’ willingness rather than Treasury’s creditworthiness seems reasonable.
AA+ remains a long way from non investment-grade. US Treasury obligations would become non investment-grade if, for example, Congress were to either maintain the debt ceiling as-is for a long period, which would force Treasury to divert available revenues away from other government services towards principal and interest payments, or if Congress were to completely abandon the US dollar as the nation’s currency, which would force outright default of Treasury obligations.

US Treasury obligations are denominated in US dollars. The current US monetary base, (M0 or currency in circulation plus dollar-denominated bank reserves held at the Fed), is only about 19% of Treasury obligations. So, there is currently insufficient money to repay Treasury debt. Thus, a divided Congress or government may theoretically block further money creation, which would either increase pressure on Treasury to divert available funds towards meeting principal and interest obligations or eventually lead to outright default. We believe S&P’s downgrade is legitimate in light of growing public sentiment, reflected increasingly in the House, not to raise the debt ceiling.

Second, we believe the downgrade is substantially insufficient when viewed in real terms. (Importantly, rating agencies and Treasury are not mandated to address or provide positive real rates or returns.)

The stark difference separating nominal return of principal and interest from the return of inflation-adjusted principal and interest for holders of US Treasury obligations is the critical issue. The necessity to manufacture more money to service and repay existing Treasury debt suggests substantial diminution of the purchasing power of existing US dollars in which Treasury interest and principal have to be repaid. We believe unlevered holders of Treasury obligations are locking-in negatve real interest rates and levered holders of longer duration Treasury obligations are at great risk of capital loss in real terms.

We believe Treasury is already in the process of defaulting in real terms and that such default will be magnified and recognized by more sponsors of Treasury obligations over time.

Non-inflationary solutions to Treasury’s debt and deficit problem, (as well as other public and private sector dollar denominated debtors), are limited to: 1) politically-sponsored austerity (via the the allowance of credit deterioration); 2) a change in tax policy, or; 3) some combination of both. (Base money printing is inflation, per se, and would not reduce debt and deficits, merely lessen the burden of repayment for all current debtors while raising that burden for future revenue producers.)

Although S&P is careful to point out that a downgrade of government obligations does not imply risk among all commerical entities within that domain, we believe this sovereign credit downgrade does imply increasing risk for all US dollar-denominated financial assets. Implicit in S&P’s downgrade is the growing likelihood that the Fed will have to manufacture sufficient base money with which systemic debt can be repaid. (Currently the ratio of dollar-denominated claims to base money is 26:1.)

Thus, the downgrade is effectively a currency downgrade, which seems very reasonable, overdue and, in real terms, insufficient. We would argue that in real terms, US Treasury obligations are non investment-grade. We think Treasury obligations today and always will be money-good, but principal and interest will be repaid with bad money.


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Sun, 08/07/2011 - 19:12 | 1534402 Hugh G Rection
Hugh G Rection's picture

Somebody forget to payoff the S&P?

Sun, 08/07/2011 - 19:12 | 1534405 zorba THE GREEK
zorba THE GREEK's picture

Monetizing the debt is still default.

Sun, 08/07/2011 - 19:16 | 1534414 MoneyWise
MoneyWise's picture

DOW will finish Green or flat tomorrow on ECB bond buying program aka EZ QE1, read statement Though some freaks will be jumping out, creating buying opportunityin the Morning

Read ECB statement:

Sun, 08/07/2011 - 19:19 | 1534443 Snidley Whipsnae
Snidley Whipsnae's picture

Wow, you're a fountain of information... 

The only way Dow finishes green tomorrow is to bring in lots of extra help for the plunge protection team...

Nice try troll

Sun, 08/07/2011 - 19:15 | 1534420 Newsboy
Newsboy's picture

I'll take what they are givin', cause I'm workin' for a livin'.

But, I'll accumulate gold and silver as possible, because the debasement of currency is an unstoppable death spiral.

Sun, 08/07/2011 - 19:17 | 1534434 darkstar7646
darkstar7646's picture

I've said it before and I will say it again:

Especially in a currency debasement, you have to watch out for a confiscation event, rendering your PM purchases worthless.

That is basically the only reason I'm not a goldbug, on this or any other discussion.

Sun, 08/07/2011 - 19:22 | 1534463 Newsboy
Newsboy's picture

"That is basically the only reason I'm not a goldbug, on this or any other discussion."

I read you and copy that. I share that concern. The silver can be used, I think.

The gold might have to be held quietly for an important moment in one's life.


Sun, 08/07/2011 - 19:27 | 1534483 Cheesy Bastard
Cheesy Bastard's picture

"The gold might have to be held quietly for an important moment in one's life.""

Such as bribing a border guard?

Sun, 08/07/2011 - 19:32 | 1534496 nmewn
nmewn's picture

Or a mayor in a small town far far away ;-)

Mon, 08/08/2011 - 01:35 | 1535944 darkstar7646
darkstar7646's picture

Like in another country? (Which see the border guard comment...)

Sun, 08/07/2011 - 19:28 | 1534487 tsx500
tsx500's picture

black market baby.

Sun, 08/07/2011 - 19:32 | 1534502 gwar5
gwar5's picture


But they're already confiscating your money in the banks through deficit spending and debasement, have been for decades. I think last year they took 13% from everybody holding USD.  Now, the USA is in soft default by paying back loans in even more inflated money.

As long as the Chinese and Saudis think gold and PMs are money, there will always be a market for it. Make them come and get it. Why feed the bear and make it easy for these criminals by leaving it in the bank?

"Keep it secret, keep it safe" -- Gandalf


Sun, 08/07/2011 - 23:32 | 1535314 StormShadow
StormShadow's picture

Let 'em come try to take it.  That's what the other precious metals are for (Steel, Brass, Copper, Lead--for diversification purposes ;)

Sun, 08/07/2011 - 19:17 | 1534421 vast-dom
vast-dom's picture

Absolutely insufficient downgrade. In utter agreement. 


Hey Ty there's something funny going on with the ZH IP bias ;) Careful now or u may end up in the ring and liking a little taste of ur own blood ;p

Sun, 08/07/2011 - 19:16 | 1534424 darkstar7646
darkstar7646's picture

The fact is that the game is over.

The only real question, at the end of the day, is whether the actual end (when the benefits stop, in all realistic discussion, is the end of the game -- the riots follow and most I've read said that's when the cities go feral) comes in weeks, months, or maybe a year or two.

But this is absolutely correct:  It's a currency downgrade, and wholly insufficient to cover the present situation.  Western Finance has failed -- and. as one I've read on the subject today said, we had a three-year grace period.

It all blew up when Fannie and Freddie got nationalized.

Sun, 08/07/2011 - 19:25 | 1534478 oogs66
oogs66's picture

it all blew up when the fed wouldn't let bear fail

Mon, 08/08/2011 - 01:37 | 1535952 darkstar7646
darkstar7646's picture

I disagree for one reason. If Bear failed, it would've forced the hand on Fannie/Freddie several months sooner.

The facts are that the whole system has to have a "ground" -- and that "ground" was a $1Q notational derivatives system which went thermonuke the moment Fannie/Freddie got nationalized. At that point, the "house-as-ATM" and liar loans which were really the only basis of real consumption in this country _ended_.

Sun, 08/07/2011 - 19:16 | 1534425 DormRoom
DormRoom's picture

If Aliens came to Earth, and you told them the world's reserve currency was AA+, while other currencies were rated AAA, they'd leave our solar system, and think we're all mad.

Sun, 08/07/2011 - 19:16 | 1534428 nmewn
nmewn's picture

Munch munch munch.

"We think Treasury obligations today and always will be money-good, but principal and interest will be repaid with bad money."

So, I'm not insane. Thats reassuring.

Sun, 08/07/2011 - 23:35 | 1535329 StormShadow
StormShadow's picture

Greenspan said it himself.  I rest my case.

Sun, 08/07/2011 - 19:17 | 1534431 infolode
infolode's picture

...put it in your pantry with your cupcakes.

Sun, 08/07/2011 - 19:17 | 1534435 maxmad
maxmad's picture

Dow finishes -600 tomorrow... TPTB pulled the plug

Sun, 08/07/2011 - 19:17 | 1534436 AUD
AUD's picture

That's a corruption of the term 'money good'.

Sun, 08/07/2011 - 19:22 | 1534439 Quixotic_Not
Quixotic_Not's picture

5 minutes ago on CNBC:

Jim Rogers:  Why did the S&P wait so long to downgrade the US, and why only to AA since the US is the largest debtor nation in the history of mankind and will never be able to repay its debt?

S&P David Beers:  Surprised look, followed by blank face (pretends he can't hear Jim)

CNBC host checks the link and asked Jim to try again...

Jim Rogers restates the question, another shocked look followed by silence!

OMG...too fuckin' hilarious!!!

<img src="">

Sun, 08/07/2011 - 19:22 | 1534462 slaughterer
slaughterer's picture

Jim Rogers exaggerates for effect, and those who follow his investment moves lose.  

Sun, 08/07/2011 - 19:24 | 1534472 Doña K
Doña K's picture

Sorry, I bought a Porsche from Jim's tips 

Sun, 08/07/2011 - 19:40 | 1534538 Quixotic_Not
Quixotic_Not's picture

I took the proceeds from my house sold in 2001 and my biz profits and bought Ag  :-)

Don't think you could do much better than that over the last 10 years...

P.S.  Who is that asian cocksucker dood on CNBC right now?

Talk about a koolaid swillin' liar-for hire!  LOL

Sun, 08/07/2011 - 19:43 | 1534548 Quixotic_Not
Quixotic_Not's picture

*TBTF DoS Burp*

Sun, 08/07/2011 - 19:54 | 1534584 gwar5
gwar5's picture


But please tell me you got that sweet gold-plated Bang Dai HoMobile Porsche pictured on ZH last week and you wear a Zero Hedge T-shirt with the top down.

Sun, 08/07/2011 - 19:25 | 1534475 Spastica Rex
Spastica Rex's picture

Have you noticed that you're kind of playing by yourself?

Sun, 08/07/2011 - 19:37 | 1534528 JohnG
JohnG's picture

WTF!?!?!  Are you serious or just trolling?

He called commodities over two years ago.  I've made a killing.

You might try some research on JR.

Sun, 08/07/2011 - 22:02 | 1534948 TwelfthVulture
TwelfthVulture's picture

Rogers has been bullish on commodities much longer than 2 years. Few can boast of his trading record.

Sun, 08/07/2011 - 19:27 | 1534482 Sambo
Sambo's picture

You dont think Beers would want to end up as a corpse, do you?

Sun, 08/07/2011 - 19:19 | 1534441 automato
automato's picture

Thank GOD, these guys get it! The only question is where do we go from here? Precious metals? A basket of commodities? Most things can't be trusted anymore because of all the accounting tricks and obscene leverage! Look at China, most equities, and sadly commercial and residential real estate.

Sun, 08/07/2011 - 19:21 | 1534452 slewie the pi-rat
slewie the pi-rat's picture

if the FED keeps printing new currency and increasing the amount of "money" yes, we will debase the currency of the IOUs below investment grade, already have, to S&P.

which is why the FED should stop printing money and expanding its balance sheet, now. 

however, if deflation goes too fast, benzelbub might hit those afterburners, again. 

gold = $1685 and not too shabby, world-wide against all other paper, too!  trade any fiat you want, anywhere on the planet tomorrow, as always, for PMs, or the banksters will also gladly buy your PMs for green stamps or red or whatever.  really.  play your own hand with PMs. 

so, currencies aren't doing well, eh?

Sun, 08/07/2011 - 19:22 | 1534455 Henry Chinaski
Henry Chinaski's picture

Exactly.  As long as the FED keeps buying treasuries, downgrade is no biggie.  'Cept for the inflation thingy.  The world turns...

Sun, 08/07/2011 - 19:28 | 1534457 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Gold/silver/dollar are tracing their last move 1:1:1.

A fascinating move is under way.  Where it leads is likely a hyperinflationary event, but not before Bernanke throws gold under the bus so he can afford QE 3.  Don't worry, any loans Bernanke makes only make gold worth more in the long run, but the initial impact will be a rise in supply (albeit in paper only), and a quell of demand, similar to the SPR release.

Sun, 08/07/2011 - 19:30 | 1534493 darkstar7646
darkstar7646's picture

If, but ONLY if, you can't get it repossessed in a hurry at the business end of a gun.

Sun, 08/07/2011 - 19:39 | 1534536 Irelevant
Irelevant's picture

At $60 mil per ton the chinese will empty Fort Knox faster than the DHL crue on Heatrow.

Sun, 08/07/2011 - 19:22 | 1534461 MoneyWise
MoneyWise's picture

Well they can repay and will repay in Zimbabwe dollars :)))

Sun, 08/07/2011 - 19:25 | 1534474 Re-Discovery
Re-Discovery's picture

Silver trading exactly like a currency tonight . . . moving in direct relationship with gold . . . so far.

Sun, 08/07/2011 - 19:25 | 1534477 Itsalie
Itsalie's picture

If it is a "currency downgrade", why is oil CAD AUD NZD all tanking? Give the investment committees a week to convene, then you assess the damage to treasuries, practically every member of every european fund is on the beach or under the sun. The economic and financial impact cannot be judged by stoopid algos and computers working night shift, time for ZHers to make the distinction.

Sun, 08/07/2011 - 19:28 | 1534488 darkstar7646
darkstar7646's picture

Because they were bubbled too, on the demand of a lot of the players in the game.  The whole mess may be beginning to come down.

I expect something desperate to come down the pipe in very short order.

Sun, 08/07/2011 - 23:40 | 1535358 StormShadow
StormShadow's picture

Netanyahu, Israel, Iran...anyone?

Mon, 08/08/2011 - 01:37 | 1535956 darkstar7646
darkstar7646's picture

But can you pull that off without further squeezing the poor and middle classes here into riot?

Sun, 08/07/2011 - 19:26 | 1534479 Long-John-Silver
Long-John-Silver's picture

This will be posted at all financial institutions soon.

US Dollars are not redeemable for other Currencies, Gold, or Silver.

Sun, 08/07/2011 - 19:29 | 1534490 darkstar7646
darkstar7646's picture

Which ends all American financial institutions, the instant that happens.  One of the reasons that many inflationistas believe the final nail in the coffin will come when OPEC effectively reprices oil in one of:  RMB, Euros, or Gold.

Sun, 08/07/2011 - 19:36 | 1534511 Long-John-Silver
Long-John-Silver's picture

Gold became the worlds reserve currency Friday evening. Few will understand or accept it for a while but they will point to 5-AUG-2011 as the day the US Dollar lost it's reserve status.

Sun, 08/07/2011 - 21:44 | 1534864 politicskills
politicskills's picture

Oh Stop Iiiiiiiitttttttttt!  You're hurting our self-esteem!!!! Boo Whoooooooooooooooo.

"What I think the S&P thing did was to hit a nerve that there's something basically bad going on, and it's hit the self-esteem of the United States, the psyche" said Greenspan

Andrea needs to drive him to the hospital for evaluation. 

Mon, 08/08/2011 - 01:38 | 1535962 darkstar7646
darkstar7646's picture

Reiterating: At that point, every US financial institution falls.

Sun, 08/07/2011 - 19:32 | 1534497 Miss Expectations
Miss Expectations's picture

Here's a good place for some vintage Ron Paul (1983):

Sun, 08/07/2011 - 19:33 | 1534503 machineh
machineh's picture

'Implicit in S&P’s downgrade is the growing likelihood that the Fed will have to manufacture sufficient base money with which systemic debt can be repaid. (Currently the ratio of dollar-denominated claims to base money is 26:1.)'

Money circulates many times a year; it's called velocity. There is no requirement that base money equal the quantity of debt.

The quoted statement is nonsensical, and so are all conclusions derived from it.

Sun, 08/07/2011 - 19:33 | 1534506 MoneyWise
MoneyWise's picture

Take some Prozac,
At the end you will see that US debt Downgrade is positive
for USD and Interest rates will go down even lower tomorrow after
initial spark, Who cares about S&P (this going to be the largest slap in the face by Markets!)
markets have their own
opinion and US Treasuries still Safest assets on planet earth
even during 2008 collapse.. USDCHF moving up!

Sun, 08/07/2011 - 19:37 | 1534527 Long-John-Silver
Long-John-Silver's picture

Better check that pill bottle, I don't think your taking Prozac.......

Sun, 08/07/2011 - 19:36 | 1534519 markar
markar's picture

gold is NOT going to be confiscated. Too few own it and it doesn't back anything the govt. does, unlike in '33.

Sun, 08/07/2011 - 19:45 | 1534557 Long-John-Silver
Long-John-Silver's picture

Everything the government backs is fiat, fake, and foux. Gold always has and always will be real. It's the only thing people will trust in the future.

Mon, 08/08/2011 - 00:06 | 1535532 glenlloyd
glenlloyd's picture

I agree, conditions are not the same, a confiscation would be much more dubious this time around since the currency isn't backed by it. However, I'm not ruling it out, when governments get desperate they will do anything.

Sun, 08/07/2011 - 19:39 | 1534533 Hulk
Hulk's picture

Moody's and Fitch soon to follow, now that S&P has absorbed all the blows. Thats when the real pain begins. Rogoff, on Brinker today, stated that the downgrade needed to be bigger...

Sun, 08/07/2011 - 19:42 | 1534547 MoneyWise
MoneyWise's picture

Moody's and Fitch already made their statements, unless you mean "soon" in like another 3-5 years.

Sun, 08/07/2011 - 19:45 | 1534556 Re-Discovery
Re-Discovery's picture

Chinese PM lift off about to commence!!

Sun, 08/07/2011 - 19:47 | 1534563 Long-John-Silver
Long-John-Silver's picture

They’ve got to dump their Fiat Bucks into something sound.

Sun, 08/07/2011 - 19:46 | 1534558 Yen Cross
Yen Cross's picture

 Someday the Helicopters will go AWAY!

Sun, 08/07/2011 - 19:47 | 1534561 chump666
chump666's picture

It's all asia next 50mins or so. 

Sun, 08/07/2011 - 19:47 | 1534562 casaananda
casaananda's picture

God help us if US tries gold confication. I won't give up an ounce. I suspect most others won't too. At that point I buy a boat and sail to the Bahamas, with the gold well hidden in the bilge tanks. Fuck the bastards, who have killed so many these past 10 years!

Sun, 08/07/2011 - 20:51 | 1534616 Billy Shears
Billy Shears's picture

Bad money drives out good. NOT INVESTMENT GRADE, BITCHEZ! BAD MONEY!


Sun, 08/07/2011 - 21:23 | 1534768 IQ 101
IQ 101's picture


Why is it so familiar?

How about a bit of data from or

or fus'ledyhonkywacker .net or some old school 1960's web sites like

Fuckahonkygringolicious . castro .net.


Sun, 08/07/2011 - 21:39 | 1534839 IQ 101
IQ 101's picture

Duh! oops! my bad, read the article first, yes?

Sun, 08/07/2011 - 21:41 | 1534849 Nels
Nels's picture

US Treasury obligations would become non investment-grade if, for example, Congress were to either maintain the debt ceiling as-is for a long period,

I just do not follow this logic.  Congress stops adding debt, and takes the steps necessary to not default, and that deserves a downgrade? Limiting the supply of Treasury bonds and notes will reduce their value?

Austerity might not be fun in the USA, but the our creditors would think it a good thing if it helped ensure steady payments on the debt.  And lowering the supply of debt, or at least its growth, should not cause a price reduction.

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