Apr 19, 2011
The decision by bond rating agency Standard and Poor’s to have a “negative outlook” for Treasury bonds caused a slump in the stock market, but the stock market wasn’t the target: it was Washington. And in Washington, not much immediately seemed to change.
S&P’s mission, of course, is to gauge whether something is a good investment or not, and the question of whether, or when, our national debt gets so big that the U.S. government becomes a bad investment is a central fear underlying the budget debate.
And yet, the bond markets, the people most affected, didn’t seem to care that much about the S&P report. They already know the long-term fiscal projections are bad, and at this point, they don’t have a good alternative.
If you look at S&P’s statement, what they’re really saying is that the United States can still pay its debts. We can always raise taxes, cut spending or some of both. But what S&P is questioning is whether we’ll have the political will to do it. And that is a fair question.
What They Said
The Wall Street Journal’s Market Beat blog did a very good job covering this story, so if you want to read S&P’s statement, with commentary, that’s a good place to start. So is their live blog of S&P’s call with media and analysts, which turned into a Q&A on the agency’s thinking. If you’re curious about the short list of other countries who have top AAA ratings for their bonds, the list is here.
To be specific, the U.S. retained its AAA rating, but S&P warned there was a one-in-three chance that rating would be downgraded in the next two years.
Does it Matter?
There was a lot of commentary on this, as you can imagine, and the The New York Times’ Room for Debate feature is a good place to start. When it comes to whether this matters, they’ve got opinions running the gamut from “of course” to “are you kidding?”
There are other roundups of economists at Real Time Economics and Atlantic Wire.
In Washington, however, the White House and Treasury Secretary Timothy Geithner said the move was political and that our bond rating would never drop. Members of Congress pretty much took the opportunity to say what they usually say anyway, which may prove S&P’s point.
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Fiscal Future Daily is produced by Public Agenda for Choosing Our Fiscal Future, in partnership with the National Academy of Public Administration and with support by the John D. and Catherine T. MacArthur Foundation. The editor in chief is Scott Bittle, with contributors Francie Grace, David White, Jen Vento, Hart Hooton and Tom Watson.