How Many Divisions Does Standard and Poors Have?

The first American historian to exploit the untapped historical treasure trove that is Josef Stalin’s personal library once speculated that, if kindly Uncle Joe had been born Joseph Steele in Gorey, Georgia, USA on December 18, 1978 instead of Ioseb Besarionis dze Jughashvili on 6 December 1878 (Old Style) in Gori, Georgia, Russia, he would be one of the great consumer marketers of the age. Though this counter-factual was gleaned from his detailed forensics on the color pencil annotations Stalin festooned his personal readings with, perhaps there is other evidence for his contention.

From witnesses, we know Stalin that routinely presented different faces to different audiences. To useful idiots he was Josef the Peacemaker and Josef the Progressive, fighting the good fight against the warmongering imperialists who teetered fearfully on the brink of the ash heap of history. To Russians, he was the new Little Father. To his mother he was a dutiful, if distant, son:

Mother Stalin: Joseph—who exactly are you now?

Uncle Joe: Do you remember the tsar? Well, I’m like a tsar.

Mother Stalin: You’d have done better to have become a priest!

Other witnesses suggest that Stalin occasionally played the supervillan for visiting Westerners. Whether he played off his mass murderous reputation among some of his Western contemporaries out of political calculus or mischief we don’t know:

  • At Tehran, Stalin, with Molotov playing his usual role as straight man, proposed killing 50,000-100,000 German staff officers at war’s end. FDR gamingly suggested they stop at 49,000. Churchill stormed out in fury. Stalin and Molotov followed Churchill out into the hall and reassured him that Stalin was only joking…
  • At Yalta, Beria waited impatiently for his introduction to FDR. Poor Beria rarely had the chance shine on the international stage. Now it was his time to shine. Stalin, after drawing things out, making Beria wait and wait, introduced Beria to FDR as “our Himmler”…

In 1935, visiting French politician (and future Vichy collaborator) Pierre Laval asked Stalin to ease up his rough treatment of Soviet Catholics. Laval argued that this thrown bone would strengthen France’s clout with the Vatican and help France to persuade the Pope to oppose the rising Nazis threat more fervently. Stalin dismissed Laval’s request, snorting sarcastically, “The Pope? How many divisions has he got?”

Ironically for Uncle Joe, it turned out that there was at least one Pope could command enough divisions to contribute towards fatally undermining Stalin’s own handiwork.

Stalin, though politically an ideological fanatic, was the ultimate tactical realist of the twentieth century, conducting amoral power politics with classic nineteenth century Bismarckian brio. This realism was helped along by Stalin’s intense belief that agreements with imperialists were, like Brest-Litovisk, short-term expedients. Such bourgeois pieces of paper, along with the doomed bourgeois they were negotiated with, would be swept away in a Red tide of inevitability. One partial explanation for the “low point” of Stalin’s career, that curious lassitude he displayed in the months leading up to Barbarossa, is his perfectly realistic calculation that not even Hitler was stupid enough to voluntarily fight a two front war in Europe.

Unfortunately, Hitler’s actions marched to the very different beat of the little Austrian corporal’s drummer and Stalin studiously ignored what he could hear of Hitler’s drumbeats. LIke Papen, Hugenberg, Schacht, Hindenburg, Chamberlain, and others before him, Stalin failed to grasp that Hitler’s rules were not Stalin’s rules and that Hitler’s ideas of the possible were not Stalin’s ideas of the possible. Bridging the yawning gulf between the two men’s perceptions consumed the destinies of billions.

In our own frantic moment, when the imagined and the real are in flux, we might echo Uncle Joe’s sarcasm: How many divisions does Standard and Poors have?

Since 1906, S&P has peddled its services to issuers of financial securities. Originally, they focused on analyzing the safety and soundness of securities issued by private issuers. Then they expanded to evaluating the safety and soundness of government-issued securities. S&P’s product lineup was usually associated with analyzing the creditworthiness of Third World states. It would be summoned to prophesy whether purchasing the debt of a Brazil or a Venezuela or a Argentina was a possible permanent loss of capital or certain permanent loss of capital, a reasonable precaution given their solid history as serial defaulters on foreign-owned debt.

However, all along S&P was evaluating the creditworthiness of governments with more sterling reputations like Britain, Holland, or the U.S. Federal government. Last Friday, S&P took its evaluations to a whole new level of ambition by moving its score of the full faith and credit of the United States from its highest notch “AAA” to the next highest notch. That anyone paid attention to the false prophecies of a corrupt organization that knowingly rubber-stamped legitimacy on a $500 trillion-dollar fraud will strike future observers as tragedy compounded by farce and multiplied by madness.

But let us judge not lest we be judged. S&Ps divisions, an army of the imagination, have been unleashed. They’re already having a real impact, at least on the equally unreal automated software routines that conduct 70% of all securities trades in the United States. Here is the prospect of fiction acting upon fiction to produce reality. The question is whether S&P’s phantom divisions herald a permanent reduction in American power or whether, in the longue duree of American history, S&P’s pronouncements are nothing more than static.

In a post last year, I used this taxonomy for classifying the limits of 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

The world is a dynamic place, though some of its dynamism is more dynamic that others. There are three broad limits on power, differing in the firmness and intensity of their dynamism. One separates the clearly impossible from the possible. One separates the merely improbable from the probable. One separates the vaguely voluntary from the involuntary.

Intrinsic power is 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 and the tools they’re built on, the division of power within and without the community, the slow but jumpy evolution of human nature, and the play of chance and probability. It’s intrinsic power that places the outer bounds on what’s completely impossible for a political community and what is not.

Alexander the Great did not have the intrinsic hard power of the F-22 or the intrinsic soft power of the iPod at his disposal. Conducting strategic precision airstrikes deep behind Persian lines or wearing down Darius III with the enticements of Macedonian propaganda projected through Steve Jobs’ reality distortion field were not options Alexander had. For him, airstrikes and MP3 playback were impossible.

Realizable power is the intrinsic power that a political community could actually mobilize. Beatrice Heuser provides 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.

Limits on realizable power are passive constraints, many of which are largely unconscious. There is nothing in the intrinsic power of the United States of America that prevents it from invading Iraq, massacring every male or female over ten, destroying all post-Sassanid cultural artifacts, imposing American culture on the survivors, occupying the Tigris-Euphrates watershed for 100 years, and pumping its precious, precious oil till the ground is sucked dry. There is nothing in the intrinsic power of the United States that prevents it from irradiating Afghanistan, killing all life, leaving behind an eerie green glow, and calling it peace.

However, the accumulated weight of hundreds of years of cultural buildup passively and largely unconsciously remove that decision from conscious consideration for most Americans. The realizable power of the United States could not be mobilized for such an intensive act of cross-cultural enforced proselytizing or democide. An American invasion of Iraq or Afghanistan in the grand tradition of Hulagu Khan, Timur the Lame, or Nader Shah is not impossible, only improbable.

Elective power is the power a political community can voluntarily choose 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 a rentier class. The United States elects to spend money on its peculiar version of the Bismarckian welfare state because its designed popularity with its beneficiaries largely insulates it from its rentier critics. The United States elects to keep taxes low while spending at an ambitious clip because of the contingent collision of a sound bite and its political fallout.

Nothing about its national debt constrains the intrinsic power of the United States. While the passive frown against debt default embedded in America’s English heritage mitigates against it, nothing about our national debt constrains the realizable power of the United States. This nation could, at any time, elect to fully or selectively default on its debt. It could do something peculiar like minting a 14 trillion dollar coin to pay down its debt. America’s current creditors (foreign and domestic) lack the intrinsic or realizable power to force the United States to pay them the face value of their Treasuries.

If the U.S. chose to become a deadbeat, it’d become a deadbeat with nuclear weapons. Russia was a deadbeat with nuclear weapons in 1998. One a more rentier friendly investment climate was ushered in through Putin’s “dictatorship of law” (“Even when you’re trying to be good you’re evil!”, Lisa Simpson complained to Mr. Burns). Russia even went through the ritual of “paying off its debt”. Investor money flooded back in. There’s nothing as irrational as an investor looking for yield, as Latin American countries repeated cycles of borrowing, default, forgiveness, and borrowing again reveals.

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

Make no mistake. Government is violence. Money is a claim on a share of the spoils of current government violence. Bonds are a claim on 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 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 its magical printing press, it cannot run out of money: its currency is backed by the full faith and credit of the 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 family will rarely have 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 blessings of your own currency. You can’t compare apples and oranges when the apple is a fire-breathing Great White shark with high voltage razor-sharp teeth.

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 may be utility in maintaining rituals and pieties that mask the ugly reality that government is ultimately based on command of a preponderance of violence within a discrete chunk of territory. However, the consent of the governed is based on the governed’s ability to coerce their rulers, whether by active resistance or (more realistically) triggering an élite split that leads one faction of a ruling élite to sick its share of a political communities means of coercion against another faction.

The naïve realist follows the mythical Galileo 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. Here the naïve realist shows his true colors, those of an absolutist for the status quo.

And yet it does move.

Human power does rotate on its axis. Man, a technology-mediated monkey whose biological and cultural evolution is enabled and constrained by the power of his tools, is a protean creature just a little lower than the angels. His elective power can shift realizable power and his realizable power can shift intrinsic power. Intrinsic power fences his realizable power and gelds his elective power but fencing and gelding can shift, for good and for ill. The shift can be long, drawn out, and indiscernible. It can be short, sudden, and violently overt.

Stability is a virtue but not if it allows kindling to imperceptibly build in the shadows of the current world order, kindling that only awaits the right spark to burst into flames. Rearranging chairs on the world scene to try band-aid the ever-expanding gash in its hull only brings the day of inferno closer. In one world S&P is a power. In another world it’s low yield fuel for the flames. Ratings downgrades that merely needle the rough beast, its hour come at last, only annoy it as it slouches toward Bethlehem to be born.

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About Joseph Fouche

L. C. Rees carefully selected the nom de guerre "Joseph Fouche" to profoundly irritate unnaturally rampant pro-Buonopartist sentiment at Skyline High School, Millcreek, Salt Lake, Utah, United States. The Corsican Ogre once claimed that he would have remained "Emperor of the French" if he'd had two men shot: Charles Maurice de Talleyrand-Périgord and Joseph Fouche. SInce Rees bears no resemblance to a club-footed defrocked bishop, Joseph Fouche it was.

One thought on “How Many Divisions Does Standard and Poors Have?

  1. Maybe not the division you were thinking of (which they sold in 1972) … in the fall2008 congressional hearings into the rating agencies, there were statements that the rating agencies (changed) “misaligned” their business process in the early 70s opening it up for conflict of interest. During the hearings, news commentators were saying that the rating agencies would avoid federal prosecution (for selling triple-A ratings on estimated $27T in toxic CDO transactions) with blackmail downgrading gov. credit.

    There were virtual-machine based online commercial computer service bureaus formed in the 60s. One of them quickly moved up the value chain to provide online financial information (like 100yrs of stock prices) and in 1972 bought the “pricing services” division (possibly be construed as no longer needing to know value of what was being rating). This company is still around providing online financial information over the internet.

    In dec2008/jan2009 there were a couple references to the treasury using this company (presumably its pricing service division that was purchased in 1972) to value bank toxic assets for purchase (original purpose of the TARP funds). This was before they realized how huge the amount of toxic assets (just four largest too-big-to-fail institutions were carrying $5.2T offbook) and the appropriate TARP funds wouldn’t have dented the problem … so they quickly came up with alternative use of the TARP funds (and there was no more mention of “toxic asset” relief program or purchase of toxic assets). In the late 2008 time-frame there had been tens of billions of triple-A rated toxic CDOs that sold for 22cents on the dollar. If the too-big-to-fail institutions had been forced to bring the toxic assets back on book and value at the market price, they would have been declared insolvent and forced to liquidate.

    Disclaimer: I knew a lot of the people that founded the company and they attempted to hire me when I graduated.

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