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Debt Ceiling, Economy, The Budget

The United States – no longer AAA

There’s no shortage of commentary on the S&P Downgrade.  Here’s a few analyses that I found interesting.

Jeff Macke lays out the case for why United States deserved the downgrade.

Our GDP is under 2%, our unemployment rate is over 9% and both numbers are likely much worse than advertised. Our nation turned our desperate eyes to Washington, looking for grownups who could give us hope. Austerity, stimulus, a jobs program, corporate hiring breaks … just a different strategy of some sort. What we got was a batch of simpletons and whiners working the mic like bad professional wrestlers for two weeks before giving us a faux solution at the 11th hour. It was actually worse than professional wrestling; at least The Rock would have given us better rants.

Also remember that no rational person on earth was unaware that the state of the United States financial system was not as pristine as a AAA rating implies. The question wasn’t whether or not a downgrade was deserved but if the ratings agencies had the guts to cut the AAA for the first time in history. S&P walked the talk, Moody’s folded like a cheap tent in the wind. Make of it what you will, but you can’t say we couldn’t see this coming. There’s cause to be concerned about rates across the board moving higher, but there’s room for it to happen without triggering an economic crisis.

The Economist has two great blog posts covering the downgrade.  The Free Exchange discusses how the downgrade has a lot do with the potential unwillingness, not inability, of the United States to honor its debts.

Our economy is lubricated by a sophisticated and stable credit market whose most vital component is also the most ephemeral: trust. As the crisis amply demonstrated, when trust erodes, the system freezes up. America has built a reputation for responsible and credible management of its finances over the centuries, and that reputation has been reduced to a political football, like a federal judgeship. Henceforth a foreign pension fund or central bank that once mindlessly ploughed his spare cash into Treasurys will have to think twice.

Democracy in America covers the “Chutzpah” from the Tea Party and the White House in the aftermath of the downgrade.

So many of the actors in this mini-drama displayed such shallow self-understanding, combined with impressive audacity, that it was impossible to ignore their impudence.

On the left, Paul Krugman essentially trashes S&P and blames the Tea Party for the current gridlock.

No, what makes America look unreliable isn’t budget math, it’s politics. And please, let’s not have the usual declarations that both sides are at fault. Our problems are almost entirely one-sided — specifically, they’re caused by the rise of an extremist right that is prepared to create repeated crises rather than give an inch on its demands.

My thoughts:

1) Attacking S&P isn’t the correct course of action.  Yes, they have blood on their hands from the financial crisis, and the $2 trillion error in their math is inexcusable.  But Geithner needs to dial down the attacks.

2) Threatening to default has REAL consequences.  Credit is based on trust.

3) Anyone who plays the blame game should at least read the S&P Report.  You’ll notice the refusal to consider revenue increases and the toxic nature of Washington are cited.

4) In the ultimate of ironies, as expected, yields on treasuries have actually DECLINED during the flight to safety.

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