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  • How Many Divisions Does S&P Have?

    Posted by Joseph Fouche on August 11th, 2011 (All posts by )

    In 1935, French foreign minister Pierre Laval visited Moscow to win greater Soviet support against Hitler’s Germany. During his visit, Laval asked Joseph Stalin to ease up on his rough handling of Soviet Roman Catholics. Laval argued that this public show of toleration toward Soviet Catholics would increase French diplomatic clout with the Vatican and help Laval persuade Pius XI to oppose the rising Nazis threat more fervently.

    Stalin dismissed Laval’s request out of hand, snorting sarcastically, “The Pope? How many divisions has he got?”

    Stalin may have been surprised when it turned out that at least one Pope commanded enough divisions to make a strong contribution towards fatally undermining Stalin’s own handiwork. Marxist-Leninism, with its emphasis on purely material factors, may have mislead Stalin into discounting the Pope’s divisions of the imagination. Or Stalin was being misleading since he used his own invisible legions of useful idiots, fellow travelers, and fifth columnists to great effect.

    But, in this current frantic moment, when the division between imagined and real is in blurry flux, we might find it useful to ask another version of Stalin’s question:

    How many divisions does Standard and Poors (S&P) have?

    Last Friday, S&P took its services for evaluating the safety and soundness of debt securities to a new level of ambition when it moved its score on the full faith and credit of the United States from AAA down to the next highest notch. S&Ps divisions, another army of influence, were unleashed. They’ve already had an impact, at least on the equally unreal automated software routines that transact 70% of all securities trades in the United States.

    Here is the prospect of fiction acting upon fiction to produce reality. The real question you ask when you ask how many divisions S&P has is this: does S&P’s army of the imagination herald a permanent reduction in American power or, in the overall scheme of American history, are S&P’s oracular pronouncements little more than static?

    In the past, I’ve used this framework to examine limits on American power:

    [w]hile we need to acknowledge the growing limits on American power, we also need to identify the nature of those limits. To help this identification, let’s divide American power into three categories:

    • intrinsic power: the total raw power of a political community
    • realizable power: the power that a political community can actually use
    • elective power: the power that a political community actually chooses to use

    Then we can clarify whether the creeping limits on American power are:

    • limits on its intrinsic power or
    • limits on its realizable power or
    • limits on its elective power

    These three broad categories:

    • separate the clearly impossible from the possible
    • separates the merely improbable from the probable
    • separates the vaguely voluntary from the involuntary

    Intrinsic power is all of the raw power hypothetically available to a political community. It expands and contracts with changes in the extractive power of a community’s social forms, the technological tools they’re built to support, how power is divided within and without a community, the slow but jumpy evolution of human nature, and the play of chance and probability. It is the intrinsic power of a political community that places the outer bounds on what’s completely impossible for it and what is not completely impossible.

    For example, Alexander the Great did not have the intrinsic hard power of the F-22 Raptor or the intrinsic soft power of Apple’s iPod at his disposal. Conducting strategic precision airstrikes deep behind Persian lines or wearing down Darius III with the enticements of Macedonian propaganda with full digital playback were not options Alexander had. For him, airstrikes and digital music players were impossible.

    Realizable power is the intrinsic power that a political community can actually mobilize. Beatrice Heuser introduced a useful distinction between active and passive culture in her recent book The Evolution of Strategy:

    • Active culture is the ephemera of culture that’s readily amenable to human action.
    • Passive culture is the deep habits of a community that remain resistant to human action over decades or even centuries.

    Constraints on realizable power are largely passive. There is nothing in the intrinsicpower of the United States of America that actively prevents it from invading Iraq, killing every male or female over ten, imposing American culture on the survivors, occupying the entire Tigris-Euphrates watershed for 100 years, and pumping its oil wells dry. There is nothing in the intrinsic power of the United States that actively prevents it from irradiating Afghanistan to kill every living thing within its borders and leaving behind an eerie green glow and calling it peace.

    However, the accumulated weight of hundreds of years of cultural conditioning passively remove that decision from being conscious considered by most Americans. The realizable power of the United States could not be mobilized for such an massive act of cross-cultural proselytizing or democide. Though an American invasion of Iraq or Afghanistan in the tradition of HulaguTimur, or Nader Shah is not impossible, it is highly improbable.

    Elective power is the power a political community voluntarily chooses to use. The United States of America has a national debt for S&P to fret over because it elects to have a national debt. The United States elects to keep a national debt because it finds it convenient for nourishing an investor class. The United States elects to spend money on its strange version of Bismarck’s welfare state because its designed popularity with its beneficiaries largely insulates it from its critics. The United States elects to keep taxes low while spending at an ambitious clip because of the highly contingent collision of a sound bite and its political fallout.

    Nothing about its debt constrains the intrinsic power of the United States. While the passive frown against default passed down through America’s English inheritance mitigates against it, nothing about its national debt constrains the realizable power of the United States.

    The United States could, at any time, elect to fully or selectively default on its debt. It could do something peculiar like mint a 14 trillion dollar coin to pay off its debt. America’s foreign and domestic creditors lack the intrinsic or realizable power toforce the United States to compensate them for the full face value of their Treasuries. If the U.S. chose to become a deadbeat, it would choose to become a deadbeat with nuclear weapons.

    Russia became a deadbeat with nuclear weapons in 1998. One a friendlier investment climate was ushered in by Vladimir Putin’s “dictatorship of law”. Russia even went through the ritual act of “paying off its debt”. Dumb money flooded back in. There’s nothing so irrational as a foreign investor looking for yield, as foreign debt buyers enabling of Latin America’s repeated cycles of borrowing, default, forgiveness, and borrowing again reveals.

    The United States is not Greece right at this moment. It would have to try really hard to become Greece at any moment. Greece is a Franco-German colony that is unable to resist the demands of its foreign rulers. That’s not true of the United States right now.

    S&P’s divisions are only those of the imagination. Their power to conquer Americans exits only inasmuch as Americans elect to give them the power to conquer. If you stop believing in ratings agencies, they fade away, like fairies, Smurfs, or the Matrixsequels.

    Government is violence. Government issued currency is a claim against a share of the spoils of current government violence. Government issued debt like bills or bonds are a claim against a share of the spoils of future government violence. As long as the United States of America has the power to wheedle (at best) or coerce (at worst) the spoils of realizable power from the members of its political community, it can’t go bankrupt and it can’t be driven into austerity against its will. If the United States chooses to keep Dr. Bernanke’s magical printing press running, it cannot run out of money. The dollar is backed by the full faith and credit of the Federal government’s threat and use of violence.

    There is no comparison between a household balance sheet and the “balance sheet” of a truly sovereign political community. If you’re not a ruling dynasty, Mafia family, or family dominated corporate board, your household rarely has the ability to coerce funds from your neighbors. If you can shake down the Joneses next door, congratulations. You have the makings of a sovereign state. Install a printing press in your basement and enjoy the fruits of your own currency.

    The balance sheet of the United States is a elective and self-imposed accounting identity, not an external and material check on its power. There is a use for keeping up the rituals and pieties that mask ugly reality. But government is everywhere and always ultimately based on command of the preponderance of violence within a discrete chunk of territory. The consent of the governed is everywhere and always based on the governed’s ability to coerce their rulers, whether by armed resistance or (more realistically) triggering an élite split that leads one faction of a ruling élite to sick its share of a political community’s means of coercion against another faction’s.

    The naïve self-proclaimed realist follows the fable of Galileo Galilei in choosing to bow down before the reality of the world and feel its power with his bare outstretched palms. But he differs from Galileo in declaring that power does not move. It remains stationary at the center of the universe of human action.

    And yet it does move.

    Man, a technologically-mediated monkey whose biological and cultural evolution is both enabled and constrained by the power of his tools, is a changeable creature. His elective power can shift his realizable power and his realizable power can shift intrinsic power. His intrinsic power can fence in his realizable power and and his realizable power can geld his elective power. The line between intrinsic power, realizable power, and elective power is ever shifting, for good and for ill.

    The shift can be long, drawn out, and indiscernible. It can be short, sudden, and violently obvious. In case of the first, S&P is a power. In the second instance, S&P is line noise. The emerging world will judge if S&P is a prophet without honor in its own country or piss in the ocean. Ratings downgrades that merely needle the rough beast, its hour come at last, only make its wrath fiercer it as it stumbles towards Bethlehem to be born.

     

    5 Responses to “How Many Divisions Does S&P Have?”

    1. PenGun Says:

      WOW. You will lose your reserve status soon if you do not quit trying to pay your debts with printed money. When that happens … well look at Greece.

    2. Anonymous Says:

      PenGun,

      You will lose your reserve status soon if you do not quit trying to pay your debts with printed money.

      I doubt it. We had a 14% inflation rate back in the 70s and we remained the reserve currency.

      The question of reserve currency isn’t actually the integrity of dollar itself but rather a question of other options.

      A reserve currency must be both reliable and of sufficient size to support storing a great deal of the world’s value/information. However, reliability is a relative measurement. We could have very poor reliability historically but as long as we are the most reliable right now, we will remain the reserve currency.

      There are more reliable currencies such as the Swiss franc, but there are only so many Swiss francs to go around so the Swiss franc doesn’t have the size necessary to be a reserve currency. Germany isn’t big enough and besides has to pull the rest of Europe along. Japan has been “stimulating” itself since the mid-90s and is as bad or worse state than the US.

      In theory, the Euro could be a reserve currency, that was certainly the hope but it is looking very shaky right now because it is clearly based on good wishes instead of hard practicality.

      Sadly, the US dollar will remain the reserve currency for planet earth for the foreseeable future. This in turn will let our politicians ignore long term economic reality for the short-term.

    3. Shannon Love Says:

      Sorry, Anonymous August 11th, 2011 at 5:50 pm was me.

    4. Michael Kennedy Says:

      There is a sad reality that those who save and invest and who not US residents, have other options. One of them is gold and that is why gold has gone over $1800 an ounce. There are other polities which offer residence and security to the investor class. One is Singapore. In 1939, Argentina had the largest gold reserves in the world.

    5. ErisGuy Says:

      “In 1939, Argentina had the largest gold reserves in the world.”

      So our Peron will squander it?