The Downgrade By Standard & Poor's: Not So Big A Deal



The two other rating agencies have, for now at least, retained the AAA rating. None of these organizations have themselves much claim to impeccable credibility, in view of their ignorance of the actual risks of -- or worse, knowingly complicit participation in -- the much-overrated paper at the heart of the 2008 credit crisis.

This downgrade seems likely to produce yawns in the credit markets, but a very large dose of hand-wringing in the 24/7 media environment.
 

 

The weaknesses in the long range structural deficit are well understood (even if politicians across the spectrum misrepresent the facts and their consequences). There is no real surprise here among people who make actual investment decisions.

Even in the face of a near failure to extend the debt limit and, thus, a required triage among ugly choices of suddenly reduced spending or deferred debt service, government yields remained at historic lows. Why should we expect the bond markets to suddenly, now, to react with shock?

There is no new shock; no economic fact is better understood or more thoroughly analyzed than the state of America’s ability and willingness to pay its creditors. The verdict has already been rendered: the US will be good for its debts. And, with frustration and regret by the holders of that debt, perhaps, there’s no real alternative.

This is not to say that everyone is at all happy with the current situation, only that there is no other real choice, today, for an adequately robust, sufficiently scaled, lowest risk depository of value. The risk doesn’t have to be zero to be lower than anything else.

The potentially good result from the S&P downgrade is political. The members of Congress chosen to conjure up the deficit reduction formula may now be pressed to actually do something that could result in a long range improvement in the structural problem.
 

The heat (if not the light) has been turned up. So Congress and the Administration may actually have less room to permit the US to continue to retreat from the deleveraging and reformulation of governmental involvement in social welfare and in economic activity that is now seriously taking place throughout the world.

This is not to suggest what the pace of deleveraging should be or what the outcomes of that reformulation should look like; it is to say, however, that pretending it doesn’t have to happen must come to an end.  This downgrade might actually help, a little, in achieving that end.
 

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