S&P states the much-needed obvious on U.S. debt

April 18, 2011

By Agnes T. Crane and Richard Beales
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

Standard & Poor’s has taken its share of flak in recent years. But at least the credit rating firm isn’t too shy to state the much-needed obvious on America’s debt situation. S&P’s shift on Monday to a negative outlook on Uncle Sam’s AAA credit shouldn’t come as any surprise. But it should act as a reality check.

S&P doubts that President Barack Obama and congressional Democrats and Republicans are capable of reaching a meaningful agreement to rein in deficits, which the rating firm reckons could push the nation’s debt load above 90 percent of GDP by 2013. And the fact is that even if they do reach agreement, there’s nothing to stop lawmakers from reversing course in the future.

Markets, which should be well acquainted with Uncle Sam’s ugly fiscal situation, took the news on the chin. Stocks initially fell around 2 percent while the yield on the 30-year Treasury bond spiked as much as 0.11 percentage point. However brief, there’s a chance such a jolt could help refocus many investors’ myopic obsession with short-term performance on somewhat more distant but still real challenges.

Austan Goolsbee, a White House economic adviser, called S&P’s decision a political judgment. But the heart of the rating firm’s reasoning is that without decisive action, the United States will soon look measurably sicker in financial terms than other AAA-rated sovereigns and it will be increasingly difficult to justify its top rating.

Unfortunately, the Federal Reserve’s current ultra-low interest rates make doomsday scenarios seem abstract, even to supposedly rational market players. That’s even more the case inside the Beltway, where budget dogma on both sides of the aisle still persists in place of the pragmatic assessment of both revenue and expenditure — and the communication to voters of the hard realities — that should be under way.

S&P and other rating firms would hate to cut America’s rating. That would fracture the bedrock on which the debt world has rested for decades. But S&P is right to up the ante. Any U.S. lawmakers living in D.C.’s spendthrift past should perhaps heed the lyrics of “Once Upon A Time,” the song one participant reported hearing while waiting for the firm’s conference call: “How we always laughed, as though tomorrow wasn’t there.”


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Corporate (mainly finance sector) debt has been socialized; thus kicked down the road a bit, but perhaps not as far as market participants (speculators) may have hoped for.

Now, once again the piper is beginning to call the tune. Markets, we must remember, were at hovering around FMV (on a long term basis–and what other sensible measure exists for millions of retiring investors?) about two years ago, and have been resting on false optimism, qe1 and qe2 since then. The stage is now being set for a return to FMV on the S&P, as qu3 looks increasingly impolitic, and the oceans and seas of overvalued equities begin inexorably to reflect economic fundamentals.

Posted by johnlewisgrant | Report as abusive

S&P should be downgraded itself to such a low status that no one pays attention to them anymore. If they could rate sub-prime mortgage backed securities as AAA, then how can you trust their recommendation, or their motives, and they certainly showed they had motives in their derivatives ratings, ever again? They should not be in business anymore, neither should Goldman or any of the others who brought about this fiscal crisis which is causing the huge run up in the US debt. They were criminal in their actions and here we are running around panicked because of their ‘recommendations’. If they were so completely wrong about the sub-primes, maybe they’re wrong about the US debt as well. Maybe they are only acting in their own best interests again.

Posted by lhathaway | Report as abusive

The Tech Bubble, The Housing Bubble, and now the US Equity Bubble. All were there in plain sight. All were ignored. We were told each time why messengers of doom were crackpots.

Ugly results all around.

So will we commit our nation to fiscal responsibility? Would we dare pass a Constitutional Amendment mandating balanced budgets?

Probably not. And when the bubble bursts, who will bail us out this time?

Posted by charliethompto | Report as abusive

S&P gave AAA ratings to junk bonds because the issuers paid for them. They should be in prison. They should not be dictating U.S fiscal policy.

Posted by Fishrl | Report as abusive

The government has become unable to govern. There is no longer a common good. I truly don’t know how much longer the union can survive. I would be shocked if the current 50 states were still a cohesive political entity by the end of the century.

Posted by anarcurt | Report as abusive

Haha, and this people call them self still great Nation. I would call them broke Nation. They should stop meddling in other countries affairs and concentrate on their economy but I think their ego is to big for that.

History told us that any Empire or World-Power will come to an end. The same thing will happen to America. I wish that I’m still alive to that.

To the American people: Wake up and tell your Government what top do. How comes that a President choose the same people who brought this financial crisis in 2008 to the World as their financial advisers. It must be a big joke. No prosecution nothing. It shows clearly that the USA is the same way corrupt like any other State in the World. This big fishes eat always the small once.

Posted by KnutSchumacher | Report as abusive

This is the breakdown of America, buying into this propaganda is pressure to tax unfairly, just like the inflation tax by the fed, people must default on this illusive debt and bring these users to justice.

Posted by arron | Report as abusive

johnlewisgrant – Well said.

Posted by AdamSmith | Report as abusive

Quote: “the United States will soon look measurably sicker in financial terms than other AAA-rated sovereigns”

There was news today that Greece’s deterioring payments condition this week is worrying many observers that the contagion may yet spread to Spain, as earlier feared. And if so, the very existence of the Euro is in doubt.

So, my QUESTION is: When you say the United States will soon look measurably sicker than other AAA-rated sovereigns, exactly which AAA-rated sovereigns are you talking about?

Posted by AdamSmith | Report as abusive

Precisely, johnlewisgrant!

Bernanke has already indicated that the Federal Reserve will continue reinvesting dividends as QE2 draws to a close.

He knows that QE2 has been masking and mediating some very unpleasant market forces. Now that we are only several weeks away from the end of QE2, Bernanke, Obama and anyone else with an interest in the health of the American economy must be worried.

Reinvesting Federal Reserve dividends won’t provide anywhere near the economic lubrication that QE2 provided.

If the economy doesn’t hit its stride as the QE2 mask falls away, we’ll finally see just how ugly this situation has become.

Posted by breezinthru | Report as abusive

What aggravates me the most is that Clinton fixed this problem. Our only worry was what to do with “the Surplus.” For 8 years I watched the surplus turn into a growing deficit. I cannot remember a single day that I didn’t hear Dick Cheney utter the words “we’ll just tack it onto the deficit.” What aggravated me the most was all my conservative friends and the lame stupid excuses I kept hearing when I pointed this out and expressed concern about the growing debt. “Other countries owe us more than we owe them” or “we don’t really owe that money” and my favorite: “the world depends on us too much to let us fail.”
It is scary how many educated people seemed to think that somehow the country was getting money for free. That this could just go on and on without consequence just because the GOP told them not to worry about it. Now that a democrat is in office of course the debt suddenly matters and is a problem.
We’ve been through this before people! Clinton balanced the budget. Go back and look at 1994/95. It’s the exact same story – same lines – new faces.
Either Obama will balance the budget again and then the next GOP president we get will cut taxes for his rich friends and family and give us another deficit. The GOP has promised to provide us with eternal deficits. They insist that cutting taxes (on the rich of course) raises revenue. So they will always give us a bigger deficit.
Reagan cut taxes. The economy recovered and revenue increased. Revenue always increases when an economy recovers. Reagan then raised taxes three times in the coming years to restore lost revenue for concern over the growing deficit.
Clinton raised taxes. The economy recovered. Revenues increased as they always do. One could just as easily argue that raising taxes fixes an economy. It worked for Clinton. Right?
Cutting taxes on the working poor always helps the economy because almost all that money goes into consumption and debt reduction. Cutting taxes on the wealthy could only have this same effect if all that money were either spent towards consumption or invested in job creation in this country. In reality most of that money goes to finance public debt or is invested in job creation somewhere in the world (not likely in this country).
The GOP policy of shifting the tax burden off of the rich onto the working class is sending more money into creating jobs overseas and less into feeding our economy. And as long as the GOP exists this will only get worse.

Posted by yoda4President | Report as abusive