Monday, August 8, 2011

In Case You Haven't Heard - the U.S. Debt was Downgraded by S&P

For those living in a remote cave over the weekend, welcome back to the Matrix, and I am here to inform you that S&P downgraded U.S. debt late Friday
  • S&P lowered its rating on the U.S. by a notch to AA+ and said the outlook is negative as well, as it threatened another reduction in two years. The rating agency said the deal reached by lawmakers to cut the federal deficit by an estimated $2.1 trillion over a decade didn’t go far enough, and “America’s governance and policymaking [is] becoming less stable, less effective, and less predictable than what we previously believed.”

What's that?  Tim Geithner assured you just 1.5 years ago that would never happen?

Hmm... have you ever seen the 'Ben Bernanke was Wrong' video?

Feb 8, 2010:  Geither Says U.S. Will 'Never' Lose Aaa Rating

“Absolutely not,” Geithner said, when asked in an ABC News interview broadcast yesterday whether a downgrade is a concern. “That will never happen to this country.”

Meanwhile two bit bloggers such as those at Fund My Mutual Fund have been raising the concern for years.  But what do we know, not being U.S. Secretatry Treasury or some other cool title holder.

[Apr 15, 2008: Could the US Lost its AAA Rating?]
[Nov 12, 2008: CNBC Europe - USA May Lose its AAA Rating]
[Mar 29, 2009: CNNMoney: Should USA Still be AAA?]
[Mar 16, 2010: US, UK Move Closer to Losing AAA Rating Moody's Says]

The market is reacting in sharp knee jerk reaction down but frankly I don't see the 'big deal'.  Anyone paying attention would realize we are not the best credit in the world, and we implicitly are partially defaulting on our creditors by use of the printing press.  They borrow from us, and we pay them back in devalued dollars... not something someone of the highest credit would do.  Japan has been playing this game for years on end, and has the same credit rating the U.S. now has from S&P - have they fallen off the face of the Earth?  No.   

That said, almost no one pays attention unless its the lead story on basic cable news networks, so I am sure it is a jolt to the majority of Americans, especially psychologically. 

Egan Jones - which is not part of the "Big 3" rating agencies, downgraded the U.S. a while back, and I find their word more worthwhile than these institutions that are by government fiat the rulers of all things credit rating.

The 10 year bond is ironically down under 2.5% as the stock market rout and worries about the debt situation overseas dominate.  If the S&P downgrade really meant something serious, or was not already implicitly understood, you'd see the market pricing U.S. debt at a higher interest rate - not lower.

Frankly the much more important news came out of Europe late last night, which I will discuss in the next post.

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