[ Read Archive ]
The Ralph Rant
For the first time ever, Standard and Poor's has removed the triple-A rating that U.S. sovereign debt has held for 70 years. On Friday evening, S&P downgraded long-term U.S. debt to AA+, a score that ranks below more than a dozen other nations. S&P also put the new grade on "negative outlook," meaning the U.S. has little chance of regaining the top rating in the near term.
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.
The Wall Street Journal reports: “The downgrade from S&P has been brewing for months. S&P's sovereign debt team had grown increasingly skeptical that Washington policy makers would make significant progress in reducing the deficit.”
I, on the other hand, am more confident than ever – because of, not in spite of, the debt ceiling battle - that policy makers will make significant progress in reducing the deficit. I probably won't like how they do it – but this is the first time EVER that I have seen Congress working primarily on that issue.
S&P seems surprised and discouraged that it produced a lot of bickering along the way. Are these children at S&P? Do they not know that any major political course correction includes a lot of blood-letting? When has historical political transformation happened with leaders of both parties holding hands and skipping down the yellow brick road toward the solution to mounting dangers?
Maybe John Tamny, editor of realclearmarkets.com, was close to being right when he told me Friday that the market seems to be predicting an Obama election. As it turns out, the market was reacting Thursday and Friday to leaked information about the decision by S&P to downgrade, but perhaps S&P was predicting an Obama reelection because that is the ONLY thing that will stop the progress toward spending control that started with the 2010 election and continued with the debt ceiling battle.
My belief is that the S&P decision reflects the politics of the S&P, not the politics they are observing from some imaginary “objective” perch. I believe the S&P decision makers have swallowed the political argument that the debt projection line cannot be bent downward without increased revenues, the argument that the Obama administration has taught the main-stream media to repeat as if it is gospel.
What the S&P downgrade is likely to do is put more pressure on Republicans to accept revenue increases as part of the solution – which makes the downgrade a political tool to accomplish President Obama's goal. I have no evidence that the Obama administration conspired with S&P over the downgrade, and you are certainly hearing all of the appropriate howls of protest from the White House and Treasury over the decision. But wait and see how administration officials use the downgrade in their new arguments to raise revenues.
The S&P downgrade is purely political. The justification S&P used reflects the exactly opposite of the political reality, but it will shape arguments in the debt battle going forward - in a way that benefits the goals of President Obama.
To be clear, the political reality is that the U.S. government - for the first time since mounting debt projections signaled an actual threat of eventual default - has in recent months demonstrated that it fully understands the seriousness of the rapidly rising debt, and is fully engaged in the effort to avert it. For S&P to see that and describe the opposite is evidence to me that the bond rating agency is either irreparably incompetent or corrupt.
I'm not suggesting that the crisis has been averted, but the potential crisis has been evident for many years. It has not been publicly acknowledged by many members of Congress, the media or the voting population, but it has been there and a competent bond-rating agency would have seen it long ago. For them to reduce the rating so soon after Congress publicly acknowledged the danger and began fighting over how to avoid it strikes me as incompetent at best. More likely, they are trying to influence the composition of the eventual solution.
[ Read Archive ]
Read Full Article »