Downgrade Mania … The World Gone Mad

The S&P downgrade of the United States led to the absurd ironies that (1) the world paid attention to a ratings agency that got it so wrong for giving triple-A grades to the toxic mortgage securities that led to the 2008 collapse, and now (2) the world frantically unloaded trillions in stocks to buy those same U.S. Treasury notes that just got downgraded.

You may also be aware that the initial S&P report got the forecast for the U.S. wrong by a mere $2 trillion in the U.S. disfavor. They fixed that — and downgraded anyway.

Less known is what that S&P opinion said. Politico got hold of a copy that you can read here. S&P said that the "plan that Congress and the Administra- tion recently agreed to falls well short" of curing the nation's long-term debt problem. But what they then said reveals that their decision was not so much economic as political:

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened...based on this year's prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate...further near-term progress...is less likely than we previously assumed and will remain a contentious and fitful process.

Congress has shown itself to be so intractable, with threats to do it again, that S&P's real judgment is that we have become a dysfunctional country. Nevertheless, as the furor over the S&P action rose, Dean Baker of the Center for Economic and Policy Research reminded us that "The debt is issued in dollars. That means it is payable in dollars. The U.S. government prints dollars".