Standard & Poor’s didn’t downgrade America’s AAA credit today. What they did is subtler: They attached a “negative outlook” to our AAA credit. That means they upgraded the chance of a future downgrade. So if you ask the S&P’s Magic 8 Ball whether America will be triple-A in five years and then give it a shake, it now says “don’t count on it” rather than “you can rely on it” (all answers taken from this list of actual Magic 8 Ball replies).
I’ve seen some observers react to the S&P’s decision by saying that the rating agency blew the subprime crisis and thus there’s no reason we need to listen to it now. But that seems shortsighted. S&P’s concerns are perfectly reasonable. The company believes “there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013. If you don’t agree with that, you’re not paying enough attention. At this point, the rating agency only puts the chances of a downgrade at one in three — which strikes me as, if anything, a little low.
Matt Yglesias, as Andrew pointed out first, yawns:
You should almost certainly ignore this: “Standard & Poor’s Ratings Service has lowered its long-term outlook for the United States’ sovereign debt to ‘Negative’ from ‘Stable’ due to risks from the country’s growing deficit.”
The thing about the United States of America is that we’re not an obscure country. Nor is our sovereign debt an obscure financial instrument. No major investor is going to be outsourcing his research on the desirability of American bonds to the S&P ratings service.
But fellow Lib, Kevin Drum sez:
I agree with [what Matt Ygelsias said] completely, and I've made a similar comment in the past. And yet.....
And yet, there's something to think about here. One of the reasons I take our medium and long-term deficit fairly seriously, even though current financial indicators suggest the market is unconcerned, is that financial indicators can turn around in a flash. There are limits to how far a big country like the United States can get from fundamentals, but we're still susceptible to the kinds of mob emotion that power both bubbles and bank runs. And the thing is, there's never any telling what might spark such a turnaround. One day everything is fine. Then Bill Gross announces that he's no longer thrilled about holding treasuries. The next day S&P makes some negative noises. A day after that the Chinese government cuts back on treasury purchases. Then an auction of 10-year bonds is slightly soft, and suddenly everyone panics.
This most likely won't happen. Certainly not anytime soon, given the underlying fundamentals of the American and global economies. Still, it could happen in the near future, and there's no telling what might set it off. So in that sense, this kind of announcement from S&P actually is meaningful. Maybe not today. But a similar announcement someday might be. It's true that major investors don't outsource their opinion on U.S. treasuries to S&aP, but even major investors can get nervous if enough people start telling them they're being idiots. Sometimes perceptions are as important as reality.
Krugman crushed the media:
I think the financial press is being even denser than usual on this one. If S&P warns that US bonds might not be safe, and the price of those bonds rises, you really have to wonder how anyone can write with a straight face that this warning caused other market movements. And it’s much worse to have this implausible theory reported as a settled fact.
Here's a little of what Ezra referred to as "short-sightedness" from Melissa Harris Perry:
Dr. Harris-Perry is a PhD in Political Science from (grrrrr) Duke, so though she teaches African-American studies at Princeton, she can speak a little authoritatively on subjects like Political Strategy and Communication, and even the President's handling of the Budget. At the same time, I would have preferred an actual Economist on the panel talking about the S&P, and the closest thing we had last night on the The Last Word...was Lawrence himself.
