I totally get why Standard and Poor’s and the other credit rating agencies will downgrade U.S. government debt if the debt ceiling isn’t raised and there’s a default. No argument there.
But the idea that S&P wants to dictate the size and scope of deficit reduction is not only mystifying to me but I think it’s actually quite dangerous:
If an agreement is reached to raise the debt ceiling but nothing meaningful is done in terms of deficit reduction, the U.S. would likely have its rating cut to the AA category, S&P said.
“While banks and broker-dealers wouldn’t likely suffer any immediate ratings downgrades, we would downgrade the debt of Fannie Mae, Freddie Mac, the ‘AAA’ rated Federal Home Loan Banks, and the ‘AAA’ rated Federal Farm Credit System Banks to correspond with the U.S. sovereign rating,” S&P said in its report.
Aside from the current insanity of the Republican Party threatening to push the U.S. into default, there’s no indication that in the short or medium term the U.S. will be unable to meet all of its outstanding and potential obligations. There’s some indication that in the long-term the U.S. could come under significant financial strain but there’s no historical precedent for the U.S. political system failing to make the necessary course adjustments to address long term weakness.
But it goes beyond that. In deciding how much deficit reduction it finds acceptable, S&P is not making simply an accounting or bookkeeping decision, it’s making a political decision. For example, if the President and Congress were to agree that in the immediate term boosting economic output to stave off another recession and address the jobs deficit was in the long-term best interest of the country, would S&P stand in the way of that by downgrading U.S. debt?
Or consider it in starker terms. If the national security required an immediate and substantial increase in defense spending, would S&P downgrade U.S. debt and drive up the cost of fighting a war? Or if another President decided to undertake a series of foreign wars that might cost a few trillion over the course of a decade — sound familiar? — would S&P issue ominous warnings that such fiscal imprudence might cost the U.S. billions in additional borrowing costs?
It feels like we’re getting into a situation similar to when third world debtor nations complain their sovereignty has been usurped by the demands and conditions of the World Bank or IMF. No small irony, of course. No small irony at all.
The Europeans might see irony in this predicament, too, since the the three major rating agencies are based in the U.S. and their decisions to downgrade sovereign debt in the EU has, depending on who you ask, either highlighted the extent of the debt crisis there or precipitated it.