The S&P Downgrade of U.S. Credit has Backfired

Posted by Michael A. Kamperman on April 18, 2011

S&P has made a huge mistake by downgrading the outlook for the U.S. credit rating from stable to negative.  We won’t waste space rehashing how they rated liar loans AAA.  The fact is S&P has an agenda.  They want to force the U.S. to be more aggressive in cutting its near term defict, or risk losing its cherished AAA rating.  But the whole S&P charade has already backfirred.  In today’s trading the dollar went up and interest rates on Treasuries went down after the S&P downgrade.  This is the opposite reaction expected from their warning the chicken littles that the sky is falling.  In fact, CNBC Senior Economist Steve Liesman interviewed a representative of S&P about the possible downgrade.  He specifically asked if the negative outlook and potential downgrade would amount to S&P stating they believed the chance of a default on its debt by the U.S. has increased.  The spokesman said yes, that’s exactly what it means.  Steve Liesman proceded to ask how it is possible for the U.S. to default since it was able to print the currency it owes, making the risk of a default all but impossible.  The S&P person said that S&P had reviewed history and that in fact it matters what the fiscal and monetary policies of a nation are, even one that is able to control its own currency minus some chataclismic event wiping the U.S. off the face of the earth.  It is impossible to understand what S&P reviewed since no country in the position of the U.S. that owes everyone in their own currency that they can print has ever come close to defaulting.  Basically, Steve Liesman pointed out on international televion that the U.S. cannot default because it can print dollars.  This is the first time I have heard this clearly stated.

What will follow is a complete re-examination of the risk of the debt position of the U.S.  If the U.S. can never default, then federal debt cannot be an existential threat to the U.S.  If the debt is not a threat, then the deficit must also not represent an existential threat to the U.S.  If both the debt and the deficit are not threats, then why is the U.S. voluntarily placing itself into a position of significant economic underperformance when it doesn’t have to?  S&P has unknowingly forced the country to face the truth about its true fiscal situation.  And the truth will end the mass hysteria to rush into austerity.

The country, and the global community, recently had a mass hysteria that proved to be a false alarm.  That would be Y2K.  Remember when everyone had to update their computers by New Years day 2000 to avoid the computers from being rendered unoperable?  Anyone who said this wasn’t necessary was considered a lunatic.  When the date came the sun came up the next day and computers that weren’t changed low and behold still worked.  The hysteria about federal government spending and the debt level is just like Y2K, at the end of the day if we do nothing to slow the deficit and the rise in the debt, nothing will happen.  Japan is in the same situation as the U.S.  They owe everyone Yen, a currency they control.  In 2002 S&P downgraded Japan’s credit rating from AAA to AA.  So what’s been the result.  Today Japan has the highest debt to GDP ratio in the world at over 200%, far higher than the U.S.  Yet Japan also has the lowest interest rates in the world and a strong currency.  The reason this is possible is because S&P’s ratings of sovereign U.S. and Japanese debt is a sham.  Not surprisingly S&P simply doesn’t know what it is talking about.  By forcing an honest assessment of out true fiscal position, S&P has greased the skids to turn away from austerity, which of course wasn’t their intention.  God Bless Them.