August 11, 2011 Leave a comment
The S&P downgrade of US sovereign credit has been heralded as both a pivotal event and at the same time an inconsequential event. The profusion of opinions and notions about it make it difficult to evaluate in an analytically rigorous manner. Here I hope to offer a way to “unpack” the profusion of views so we can understand them in a multi-dimensional mental model and are able to “turn them around in our mind” to see their various merits and oversights. The point of this is not to inflate the importance of this one act but to investigate whether economic events lend themselves to an analysis that considers how language might be operating in politics and economics. In an opinionated or simplified commentary, commentators have in my opinion collapsed these dimensions to instrumentalize this event to support their view of economics, with sometimes ethically benign and sometimes ethically suspect intentions. However it helps for critical consumers of economic and other public utterances to be able to have “tools” to think about the “moving parts” of important events.
The co-occurrence of the downgrade with what seems to be a stock market downturn and potentially a still deeper recession in the real economy, may lead to false attributions of causality. Nevertheless the downgrade has at least symbolic importance in an era of bad economic news.
Sociolinguistic and Semiotic Tools
Formally, in sociolinguistic and semiotic terms, the S&P downgrade is both a symbol in an ordinal scale (AAA,AA+ to D), i.e. the rating, and a text with an author or authors. The rating is determined, simultaneously rationalized in a press release, and published by Standard and Poor’s Financial Services LLC, a division of McGraw Hill publishing. McGraw Hill is a large publishing company with an influential board of directors. S&P is, because of government regulation and financial industry practice, a division of that publisher with a special authority and status: S&P is one of three Nationally Recognized Statistical Rating Organizations (NRSRO) designated by the SEC, so enjoys a government mandated oligopoly. S&P also manages a widely-followed stock index, the S&P 500 which gives it a semi-official role in the assessment of and perception of the value of the New York stock market overall.
The selection of a symbol in the ordinal scale, the rating, is used as a shortcut to evaluate and communicate the agency’s assessment of the risk of repayment for bonds and other debt obligations issued by a particular company or government. S&P shares this rating system with Fitch’s another rating agency/financial publisher. Moody’s, a third rating agency, has a scale that is almost identical.
The rating agencies translate the fairly meaningless symbol in the ordinal scale to an English word or phrase that is slightly more meaningful to those who do not have the time to memorize symbols. AAA is “Prime”, AA+ to AA- is “High Grade”, A+ to A- is “Upper Medium Grade”, BBB+ to BBB- is “Lower Medium Grade”, BB+ to BB- is “Non-investment grade speculative”, B+ to B- is “Highly speculative”, CCC+ is “Substantial risks”, CCC is “Extremely speculative”, CCC- to D are various grades of “In default”. These words, if accurately applied, are meaningful to investors though as with any single word or letter grade, do not capture the specifics of any given bond issue or bond issuer.
Changing or re-affirming the rating along the ordinal scale is an event that requires the rating agency to justify their maintenance of the rating or change in the rating. The ratings agencies produce texts which are ostensibly summaries of their numerical or qualitative analysis of the investment or the debt issuer. These texts are issued as reports and press releases and have their highest impact and meaning at the time of their publication.
The downgrade document and rating can also being viewed as an “utterance”, as the downgrade text has been issued at a particular time and is treated by news outlets and commentators as a speech act by the corporate “person”, in this case S&P. Unlike a work of imagination like “Hamlet” or a fact-based text like an encyclopedia, the timing of the downgrade text’s publication was a critical component of its coming into being, very much like an utterance in a conversation. As you probably know from experience, utterances gain meaning if not their entire raison d’être from the context of a particular conversation that occurs in real time, which then quickly becomes historical time. The text produced by S&P was timed to be issued after the markets close on Friday August 5th, 2011 after the conclusion of weeks of budget deficit negotiations involving the executive and legislative branches of theU.S. government. There are other contextual factors in the timing of the issuance of the text which will be touched upon below.
One critical element of how people evaluate both texts and utterances is the value they attach to and relationship to who is the speaker/writer. Views of Standard and Poor’s will range from those who accord it decisive authority on the matters of the solidity of various investments to, on the other hand, those who see the agency as a corrupt institution whose every utterance and publication is suspect. These views and their diversity are based on a wide range of factors.
That Standard and Poor’s is considered a publisher as well as a ratings agency gives it both special authority but also invites challenges to its authority. A “text” or publication has the appearance of independence from the speaker/author that “utterances” and “news releases” don’t have. That S&P has additional standing as a publisher with a government mandate as well as a unique position in the financial industry adds to the at least formal perception that its publications are supposed to have standing. However formal “publications” are supposed to be joint works between writers and independent reviewers or editors, a process which is supposed to make the contents of the publication more reliable or of higher quality. That Standard and Poor’s is both the author and publisher of its work invites questions about the objectivity of its views.
The receiver or consumer of S&P’s utterances/texts is also a factor in the interpretation. Whether one has a history with S&P ratings personally, an economic interest effected by the rating, or a political position that is influenced by S&P’s publications will effect how one assigns value or meaning to their utterances/ratings/texts. This feeds into what I have called the “perspectival” nature of economics, which makes its status as a science, as well as the status of other social sciences, complicated if not problematic. Perspectival doesn’t mean an entirely subjective model of social reality, either. If an extreme subjectivist position is taken, the whole point of communication is itself lost and leads to contentless cynicism: if reality is entirely dependent upon the receiver, there is no point in talking or uttering anything and everybody is exclusively preoccupied with private delusions.
Below I will classify interpretations according to three constellations of speaker, receiver, utterance and context that I will call semantic, performative, and reflexive. The semantic view says that words “contain” meanings or prescribe a limited set of interpretative acts on the part of receivers of utterances or readers of texts. The performative view says that speech acts (including transmission of and/or publications of writings) also perform actions that cannot be reduced to some exterior or pre-existing world. The reflexive view blends performative and semantic views of the world, portraying the social and economic world as a historical series of hermeneutic (interpretive) and performative acts that have a critical dependence upon each other.
Semantic Perspectives: What Facts/Meanings does the Rating Downgrade Contain?
The simplest, most “commonsensical” view is the semantic view which says that words have meanings which are inherent in the words themselves or that words prescribe a certain constrained set of interpretative acts by readers/listeners. Dictionaries are written based entirely on a view of language as semantics: a word is supposed to “map to” a meaning that is explicable by reference to other words and/or by implication to a non-linguistic reality represented by those words.
A semantic view of the S&P downgrade and explanation would look at the content of the downgrade texts themselves and see if it maps to a reality that we can agree exists independently of S&P’s utterances and assumed motivations and wishes. This view is analogous to a view of economics and business events being an “objective” reality out there in the world over which economists and business analysts make accurate or inaccurate statements, observations that do not effect the events being observed.
Standard and Poor’s, in a simplistic idealized world, would view their own rating and the justification of their rating as largely semantic or, adding a small performative dimension, as their “performance” of a semantic act, a “naming”, justified by an objective world described in their analyses and publications. Consumers of S&P’s rating who “believe in” S&P’s view of the United States as a debtor will share this view and act accordingly if they are in a position that requires them to act based on bond ratings. Some people would call this stance “naive realism”, the idea that representations of the world are largely transparent views onto the world as it is, objectively beyond all of our wills, of can be made so via the application of the correct semantics.
In the same simple idealized world, business people and economists will accept the representation of the world contained in S&P’s rating and will treat it as a fact, even though they must “average” this fact with other views that may contradict S&P’s view. Nevertheless the content of the rating is supposed to predominate. In certain social contexts, rules of the discussion dictate that one is supposed to focus purely on the semantic, intended meanings of what someone else says and not their “agenda”, tone or other non-semantic elements of their speech. People are supposed to “mean what they say” even if you believe that they don’t mean it.
There are at least five possible positions in this, four of which are represented in the current set of reactions to the downgrade:
- Full acceptance of rating and propositional content of rating justification - Those who think that S&P’s text corresponds to a real world “out there” would accept that its credit rating of the US as AA+ rather than AAA corresponds to real events that have occurred in the world since S&P’s last rating of the United States as a bond issuer. They would take S&P’s scope of evaluation as material to the quality of credit risk that the US government represents. A full acceptance of S&P’s “observations” about the US federal government as debtor can be used for a variety of political programs including those on the right-wing who think that this is due to federal spending programs. Alternatively those on the left can take the report and view it as an indictment of the Right’s anti-tax program and efforts to use the debt ceiling as a political lever. Earlier reports that S&P has issued regarding the creditworthiness of the United States favored more the Right’s anti-government spending agenda, giving the current rating justification a different and perhaps more explicable context.
- Critical/partial acceptance of propositional content and/or rating – Some readers/listeners may find flaws or disagree with aspects of S&P’s rating of the US and its justification. To some it may appear that parts of S&P’s analysis is correct, while other parts are off-base.
- S&P may have advanced true propositions that do not impact on the creditworthiness of the US government. Many believe, and we will see this borne out, or not, by events in the next weeks and months, that US debt will continue to be treated as “Prime” by bond markets, even if it now holds the rating of AA+ from one of the three rating agencies. The other two rating agencies still rate US debt as “prime” and even if they didn’t, if US Treasury debt remains a refuge for investors, it will still be “virtually prime”
- Some on the progressive or Left side of the political spectrum may find total agreement with this statement in it is causally attributed to the political Right: “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”
- Economists, many of which are on the Left side of the political spectrum, would be critical of this statement as a rationale for downgrading sovereign credit ratings: “By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest,Canada) and 83% (highest,France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.” The linking of level of debt burden to GDP suggests an anti-Keynesian perspective, as Keynes recommended deficit spending during ‘liquidity traps”. The counter-example of Japan’s very high debt to GDP ratio is overlooked. The way to improving the financial position of the country may then be a temporary move towards MORE public debt rather than constrain public debt formation in the near term.
- The political Right might focus on the same critical points but using an opposing spin. They have been claiming though, with, in my observations, a shaky basis in fact, that it is the Obama Administration’s responsibility that we have so much public debt (now a “party line” for the Republicans). They will also assert that political turmoil around the debt ceiling is purely the doing of the Democrats, again with only slight basis in fact. Republican leader Boehner has claimed that Obama has changed his position throughout the negotiations, an observation which accords with some observations of critics of Obama on the Left that he has been using the debt crisis for political gain.
- Disputing Analysis or Methodology for Applying Rating– TheUS Dept. of the Treasury and others have disputed the methodology by which S&P has evaluated the US’s debt position and ability to pay. The S&P $2 trillion dollar error is striking; an error which S&P upon accusation later admitted was justified. Nevertheless S&P continued on with its downgrade without reference to this error.
- Disputing Materiality/Relevancy of Claims - Some critics are agreeing with the propositional content of much of what S&P has written in its justification of its downgrade but have pointed out that assessments of political turmoil are not relevant to the ability of the US to pay its debts in the medium term.
- Total dismissal of propositional content and rating – Purely on the basis of the content alone, very few are arguing with all of S&P’s claims without reference to the overall disputed authority and politics of the rater, author itself. Rather than viewing this as a dispute in semantics, I am categorizing this type of disagreement under performative and reflexive perspectives on the S&P downgrade below.
A purely semantic view of economic events is in agreement with a self-styled “natural scientific” view of economics and business, even though this view appears to be naïve and unrealistic. We will see below that there are a profusion of views of the S&P downgrade that plausibly include factors outside the simple truth-claims of the rating and the justification for the rating.
A Performative Perspective: The Downgrade As Action
Linguists have differentiated semantic from performative dimensions in the generation of meaning: the semantic dimension refers to words as containers of meaning while the performative aspect of language highlights how the action of using specific words themselves in specific contexts co-creates meaning. For instance, a minister or judge performs a marriage by stating: “I pronounce you man and wife (or more recently, ‘spouses’, ‘husband and husband’ or ‘wife and wife’)”. Technically the marriage did not exist prior to the pronouncement, the words which created the union. There are many special-use language performances like weddings with designated officiators but a vast majority of language performances occur in everyday speech. People, for instance, “promise” or “swear” that they will do something or not do something. The promise did not exist prior to the utterance of words like “I promise” “I swear”. A weaker form of promise is to “say that” you will do something.
Performativity is necessarily sociolinguistic, an aspect of language that is often ignored by the mainstream of linguistics, computer science, and analytic philosophy. Sociolinguistics studies languages in their social contexts, including consideration of speech roles, i.e. “who is the speaker/writer” and “who is the listener/reader”. A dynamic and historical perspective is possible within a sociolinguistic perspective, which is a good thing for the advancement of workable theories about how things have come to pass.
If the downgrade is considered to have a political dimension this is of necessity a performative aspect of the downgrade as well, as politics can be construed as a series of speech actions around the acquisition, exercise and maintenance of power. Consideration of the characteristics of the rater, i.e. S&P also falls into the performative category, as when we view the performance, we attribute it often to be a characteristic of the performer of the action. There is a school of sociology of the sciences that asserts that knowledge production and economics is a largely performative activity, i.e. the purpose of the activity is to “act as a economist” rather than to produce semantic knowledge, a position that is, in my opinion, extreme though interesting to contemplate.
I am dividing performativity regarding S&P into two categories: Basic Ratings Performance and Additional Performative Dimensions. Everybody recognizes the S&P’s “Basic Performance” of an investment rating but only some delve into “Additional Performative Dimensions”.
A) Basic Ratings Performance – An S&P rating or ratings from other agencies are not just texts or utterances but involve the performance of an action with real consequences in the world. This action is a basic naming or simple semantic act. There are also, supposedly fiduciary as well as legal duties involved in rating investments, especially for the three NRSRO’s recognized by the SEC. Thus, like the minister at a wedding or a judge in a courtroom, S&P whether deserved or not, has the right to take these verbal actions. The actions also have more profound consequences because of both the sanctioned role of S&P as well as because of its high public profile. Everybody agrees that these ratings have this minimum characteristic, including those who focus on the semantic aspects of the rating. A bond or stock rating is not simply text- or knowledge-production.
B) Additional Performative Dimensions – Most readers/receivers of the agency’s rating will be looking at more than just the bare minimum aspects of the rating as an action. In general, the more critical or dissatisfied one is with the propositional content of the rating itself or the institution of the ratings agencies more generally, the more one considers the rating itself as an action by an entity in the world, with additional characteristics.
- Characteristics of the Rater – S&P’s action to downgrade is looked at by some in the context of Standard and Poor’s own institutional structure, business model and history.
- Rater’s Economic Interest/Business Model – S&P and other ratings agencies are paid to rate private issue securities from Wall Street firms by the firms themselves, from which they derive most of their income. Thus their economic interests are aligned with neither the consumers of their ratings nor sovereign debtors like the United States government but with private Wall Street firms.
- Corporate Parent’s or S&P’s Political Agenda – Some commentators have pointed out that McGraw Hill publishing or its S&P division may have a political agenda because of relationships between its board of directors and the Business Roundtable. The downgrading of US debt may serve the purpose of undermining the current Administration or the emergence of a more “Keynesian” agenda. The downgrade justifications assumes that temporary increases in public debt will not help the economy and the US’s future ability to service its debts.
- Accuracy of Previous Ratings – S&P has a long history of inaccurate ratings. Consumers of its ratings as well as commentators on the downgrade have pointed out that because of the track record of S&P that one should ignore or discount the downgrade.
- Analytical/Mathematical Competency To Rate - An additional line of inquiry or criticism points to the ability of S&P or S&P employees to “do the math” or research required to rate securities. This sees the $2 trillion error in calculation as part of a pattern of sloppy research by S&P. Some have called S&P one of the “stupidest” firms in a stupid industry.
- Competency to Rate Political Systems– As the downgrade rating was based on a political analysis, S&P is claiming a competency to rate political systems which is not thought to be a core competency of the ratings agencies.
- Habitual Fraudulence/Criminality – The harshest view of S&P is that it perpetrates fraud on a habitual basis. Thus the downgrade of US debt is seen as part of a pattern of fraudulent ratings; critics here maintain that S&P does not attempt then to make its rating accurate, i.e. have no ethical commitment to a semantics of truth.
- Characteristics of the Rating-Action – Viewed as a political-economic action, the downgrade has attracted attention that look beyond the minimum conditions for it to be a rating “event” at all.
- Information Value of Rating/Analysis - The rating rests entirely on public information, all of which is political in nature. S&P’s analysis offers no additional information nor analysis to consumers that is not accessible elsewhere. Therefore it has questionable information value for market participants.
- Self-Correction/Over-compensation – Given S&P’s history of cheerleading for investments, the action may have been an effort at overcompensation for previous leniency.
- Economic “Cover” for Political Allies/Diversion of Washington’s Attention to Debt rather than Job Creation - Assuming a Republican anti-welfare state bias at S&P, the timing of the downgrade suggests that the downgrade was an implicit endorsement of a still more savage cuts to social welfare spending. This view is substantiated by earlier endorsements by S&P of $4 trillion in spending cuts which were not achieved by the deal agreed to on August 2nd.
- Pre-emptive Counter-attack/Distraction from own errors – S&P has been the most controversial of rating agencies and might be legally liable if prosecutions for financial wrongdoing were ever pursued. As the US government would be the source of this prosecution, to create an environment where the US government is pre-occupied with its own liabilities is beneficial to S&P’s current management. Furthermore, it would seem retaliatory to prosecute S&P after the downgrade.
- Characteristics of the Ratings Industry
- Ratings are Irrelevant to Treasury bonds - As we have seen the market sell-off of August 8, 2011, there has been a “flight to quality” as investors have bought US Treasuries as they leave stocks. Thus markets have ignored the downgrade and they may as well ignore other ratings of these financial instruments
- Ratings business Model is flawed – As mentioned above, many contend that all bond rating agencies have a flawed business model that doesn’t serve the public or investor interests.
These are just some of the possible interpretations and narratives that can with some justification be told about the S&P downgrade as a action in language.
Reflexive Perspectives on the Downgrade
Reflexivity is a concept that has gained currency in economics via the work of the investor and philosopher George Soros, though it has been an occasional concern in the theory of the social sciences and in other areas for several decades. Reflexivity is not unlike the Heisenberg Uncertainty Principle in physics, in that observers and observations of social phenomena have an impact on the phenomena that they observe. Reflexivity suggests that society and the economy are like an “echo chamber” within which single utterances and publications can have multiple effects over time. Soros, drawing on his experience in financial markets, has pointed out how ideas about the valuation of assets can change the value of those assets, which is commonsensical to the stock trader but not to many economists and fundamentalist stock traders, who take a purely “semantic” approach.
Reflexivity depends also on the assumption of a critical intersubjectivity, i.e. that we are not isolated consciousnesses but influence each other via our communications and meaning-making activities.
For reflexivity to be analyzed empirically or at least understood in greater analytic clarity, it is my contention that it must be disaggregated into performative and semantic components. Reflexivity represents a “higher level” concept that stands “in between” or utilizes both semantic and performative aspects of language and meaning-making activities. As such, it also represents something of a longer historical arc, which makes it difficult to assess how the recent downgrade of US credit risk by S&P will affect this arc.
Here are a few of many possible perspectives on the downgrade informed by reflexivity:
- Paradoxical strengthening of treasury debt as an investment - We have already seen that while S&P’s downgrade of treasury debt has contributed to an overall climate of economic gloom it has actually strengthened the position of Treasury bonds, as there has occurred a flight to safety, which Treasury bills represent in contrast to stocks or other securities.
- Reactions to downgrade as wound to American self-esteem – I will explore this theme in greater detail in another post, but many Americans have been caught up in a decades long cultural trend of defensive self-aggrandizement. The downgrade from “prime” to AA+ will either be perceived as a useful or a harmful slight to American self-esteem: some politicians and political commentators might take it as a call to positive action while others may retire into a resentment-laden withdrawal from society.
- Market differentiation opportunity for other ratings agencies – Moody’s and Fitch’s might reassert their AAA rating of the US longer as a way to differentiate themselves versus Standard and Poor’s in the hopes of gaining market share.
- Political Re-definition of economic progress as recovering “AAA” rating/Narrowing scope of economic policy – The rating may itself be meaningless but some may take the recovery of a AAA rating by all three agencies as the primary goal of economic policy.
As noted above it is too early to tell whether this event will have meaningful long-term “echoes” within the economy and economic policy environments.
The Sociolinguistic Foundations of Political Economy
I’ve taken the S&P downgrade of US Treasury debt on August 5th, 2011 as an example of how meaning and communication interact dynamically with economic institutions. Opinions about what this event should mean have been so various, often from people who are allied politically, that it provides as good as any an example of the insufficiency of our understanding of how the future is created from the present and the past. I’ve tried to show how there is a dynamic edge to economic institutions that involves political fights over not only material resources but also symbolic terrain.
An underlying assumption here has been that viewing economics as a political economy rather than an autonomous “economy” is a truer representation of how economies move and evolve. The contests over meaning and power that are waged through language and speech acts help shift the direction of the economy and are only thinkable if we think of how language and symbol manipulation create a variety of outcomes. If we think of an economy shaped in part by people’s will and drives, expressed through action and language, we find interesting variations and exceptions in what were thought to be invariant laws of supply and demand. An economy embedded in society and governmental institutions gives us a chance then at developing human self-understanding far more realistically than one which assumes an ahistorical economy.
It would seem that these language phenomena are not a superficial layer on a numerical, material economy but part of the structure and motive force of that economy.