Friday, August 5, 2011

S&P Downgrades US Credit Rating to AA+

Welcome to the economic Singularity. For the first time in history, the United States debt has been downgraded. The economic prosperity of the last half century has been predicated on US Treasury Bills being considered 'safe'. All other investments were measured against it to calculate if the interest above the safe rate justified the risk. We are in uncharted territory here and things have the potential to go really bad, really fast, even in comparison to what we going through now.

The downgrade has nothing to do with how the debt deal got done. The deal is signed, it did not cause the US to default, and we were never in any real danger of defaulting on our debt obligations. The downgrade is because of our debt, a debt which is now larger then our GDP, and getting worse by the second. We were downgraded because our political class has decided that we can deficit spend ourselves into oblivion and that will somehow bring about prosperity. It has not, and it will not. It may have started getting bad under Bush, but when the Democrats took control of the Legislature and Obama took the White House they may Bush look like a fiscal conservative.

This is what that spending has earned us and we have precious little time to turn it around. We need real spending cuts, not fake Washington; 'we are spending less than we had planned on spending, so even though it is more money than last year (even adjusted for inflation) we will call it a cut'. We need real economic reform that will let entrepreneurs and small business create jobs so we can grow our way out this mess.

Unfortunately I do not have much hope for change with our current leaders. We need to finish in 2012 what we started in 2010, because that may be our last chance to avert a real cataclysm. That is, if we have that long...

You can read the S&P report here (PDF) (via)

"A cornerstone of the global financial system was shaken Friday when officials at ratings firm Standard & Poor's said U.S. Treasury debt no longer deserved to be considered among the safest investments in the world.

S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn't do enough to address the gloomy long-term picture for America's finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein and more than a dozen other countries, and on par with Belgium and New Zealand.

The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled. Around 1:30 p.m., S&P officials notified the Treasury Department that they planned to downgrade U.S. debt and presented the government with their findings. Treasury officials noticed a $2 trillion error in S&P's math that delayed an announcement for several hours. S&P officials decided to move ahead anyway, and after 8 p.m. they made their downgrade official.

S&P said "the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.

"Standard & Poor’s announced Friday night that it has downgraded the United States credit rating for the first time, dealing a huge symbolic blow to the world’s economic superpower in what was a sharply worded critique of the American political system.

Lowering the nation’s rating one-notch below AAA, the credit rating company said “political brinkmanship” in the debate over the debt had made the U.S. government’s ability to manage its finances “less stable, less effective and less predictable.” It said the bi-partisan agreement reached this week to find at least $2.1 trillion in budget savings “fell short” of what was necessary to tame the nation’s debt over time and predicted that leaders would not be likely to achieve more savings later on.

The decision came after a day of furious back-and-forth between the Obama administration and S&P. Government officials fought back hard, arguing that S&P made a flawed analysis of the potential for political agreement and had mathematical errors in its initial report, which was submitted to the Treasury earlier in the day. The company had overstated the U.S. deficit over 10 years by $2 trillion, officials said.

“A judgment flawed by a $2 trillion error speaks for itself,” a Treasury spokesperson said Friday.

The downgrade will push the global financial markets into uncharted territory after a volatile week fueled by concerns over a worsening debt crisis in Europe and a faltering economy in the United States.

The AAA rating has made the U.S. Treasury bond one of the world’s safest investments — and has helped the nation borrow at extraordinarily cheap rates to finance its government operations, including two wars and an expensive social safety net for retirees.

Treasury bonds have also been a stalwart of stability amid the economic upheaval of the past few years. The nation has had a AAA rating for 70 years.

Analysts say that, over time, the downgrade could push up borrowing costs for the U.S. government, costing taxpayers tens of billions of dollars a year. It could also drive up interest rates for consumers and companies seeking mortgages, credit cards and business loans.


  1. nice try spinning this.

    There is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: if not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

    On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

    Just to make it perfect, it turns out that S&P got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade.

    More than that, everything I’ve heard about S&P’s demands suggests that it’s talking nonsense about the US fiscal situation. 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. 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? 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.

    In short, S&P is just making stuff up — and after the mortgage debacle, they really don’t have that right.

    So this is an outrage — not because America is A-OK, but because these people are in no position to pass judgment.

  2. and before you spread some bullshit about how the debt deal the republicans force on the country had nothing to do with the downgrade, that this is all the result of "spending" (i.e. its not) , and raising taxes- just remember that “No new revenues” wasn’t just a GOP bargaining position, it turned out to be something they were really committed to even in the face of an imminent financial crisis. You can see why that would dent confidence in the long-term fiscal trajectory of the country.

    According to Boehner “When you look at this final agreement that we came to with the white House, I got 98 percent of what I wanted. I’m pretty happy.”

    How happy is he now?


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