Why S&P’s Downgrade is No Joke – The real impact is political, not economic.

It’s tempting to dismiss Standard & Poor’s downgrade of U.S. long-term Treasury bonds as no big deal in the real world. It’s also tempting to describe it as a broad criticism of the whole political system, a pox-on-both-your-houses curse at the intransigence of both Republicans and Democrats.

Both of those conclusions would be mistakes.

It’s probably true that S&P’s first-ever downgrade of  U.S. Treasuries from AAA to AA+  will have little impact on interest rates.   Credit ratings, though hugely important, are only one of many factors affecting the cost of borrowing.  The more important factors are broad forces of supply and demand for Treasuries, and the outlook for inflation and growth.  That’s why Japan has been downgraded three different times in the past decade (it’s currently AA-) yet its long-term rates are lower than those on U.S. Treasuries.

(TEXT: S&P’s Statement Announcing Downgrade)

It’s also true that S&P is hardly some kind of Delphic Oracle.  It and the other rating agencies were almost criminally negligent about the risks of subprime mortgages during the housing bubble.  And it’s not as if S&P told investors anything about U.S. fiscal problems on Friday that they didn’t already know.

So what’s new?

The big new element on Friday was an official outside recognition that U.S. creditworthiness is being undermined by a new factor: political insanity. S&P didn’t base its downgrade on a change in the U.S. fiscal and economic outlook. It based it on the political game of chicken over the debt ceiling, a game that Republicans initiated and pushed to the limit, and on a growing gloom about the partisan deadlock.   Part of S&P’s gloom, moreover, stemmed explicitly from what a new assessment of the GOP’s ability to block any and all tax increases.

S&P was remarkably blunt that its downgrade was mostly about heightened political risks:  “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” it said.

(TEXT: Politicians React to Downgrade)

via Why S&P’s Downgrade is No Joke – Edmund L. Andrews – NationalJournal.com.

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