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Monday, August 08, 2011

If the Data Doesn't Support the Conclusion, Change the Data

Standard & Poors were in such a rush to get their downgrade statement out that the ink was barely dry on the first draft they sent out. As a result, the first time was most definitely not the charm.


Classroom with 1+1=5 written on chalkboardThe draft press release, according to POLITICO’s Morning Money, included projections that overestimated U.S. debt by $2 trillion. The initial projections were the general government debt-to-gross domestic product ratio would rise to 81 percent in 2015 and 93 percent by 2021.

In the final release, those numbers were revised down to 79 percent and 85 percent, respectively. Treasury officials noted that the corrected numbers put U.S. debt in line with other AAA-rated nations, including the United Kingdom and France, arguing that the U.S. ratio won't reach France’s level for a decade.

In other words, S&P's initial assessment was BS -- and the corrected assessment is hardly any better. Basically, S&P chose a completely arbitrary number -- $4 trillion -- and demanded the US meet that number in debt reduction. And then, to prove that is was in fact a number chosen at random, the agency's own math is off by 50% of that Most Important and Special Sum.


Paul Krugman noted Friday that the Most Important and Special Sum would actually have very little effect on long term solvency. "The agency has suggested that the downgrade depended on the size of agreed deficit reduction over the next decade, with $4 trillion apparently the magic number," he wrote. "Yet US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term. What matters is the longer-term prospect, which in turn mainly depends on health care costs."

"So what was S&P even talking about?" he continued. "Presumably they had some theory that restraint now is an indicator of the future -- but there's no good reason to believe that theory, and for sure S&P has no authority to make that kind of vague political judgment."

And they were in such a rush to that political judgement that their initial release had more holes than a summer blockbuster's plot. This release was expected on Friday and, goddam it, it was going out on Friday.

What's the obvious conclusion here? Well, the data didn't match the conclusion and had to be fixed -- meaning the conclusion was foregone, regardless of what the data showed. S&P's initial release had the distinct odor of a Creationist paper or the neocon BS about how we had to invade Iraq now, now, now -- bass-ackwards, with the conclusion driving the research, instead of the other way around. They knew what they wanted to put out, they had no real data to back up their assessment, so they plugged up their holes with arbitrary numbers and bad math.

The downgrade was entirely political and not a conclusion reached by analysis. The analysis was conducted to support the already-arrived-at conclusion. Keep in mind that only this one agency -- out of several -- has reached this conclusion. Also keep in mind that S&P kept a high rating on securitized sub-prime mortgages that were such junk they later became known as "toxic assets" -- i.e., financial poison -- and brought down the global economy. So feel free to question their competence.

"In short, S&P is just making stuff up -- and after the mortgage debacle, they really don't have that right," concluded Krugman. "So this is an outrage -- not because America is A-OK, but because these people are in no position to pass judgment."

The downgrade is BS. If you want an idea of the exact category of BS fit into, here's an article on how the biblical flood created the Grand Canyon.

It's like that.


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