This piece on CNN Money says that “market observers tried to say the downgrade by itself shouldn’t matter — that it was expected and that the United States still has a strong credit rating … But the market wasn’t buying it.” And then it goes on to note that investors are rushing to buy up US Treasuries. Which seems to suggest that in fact the downgrade has not affected investors belief in the relative security of US debt. Indeed, it seems to be the only possible explanation of this move.
Earlier today I noted this point — not something I came up with but following the lead of economists who are actually following what the bond market is saying. Yet at the same time various readers are practically going wild insisting that there should be capital punishment for anyone who says the S&P downgrade has anything to do with what’s happening today.
Nothing to do with it at all? That hardly seems right.
But why does it have to be one or the other. The current sell off seems to be driven by renewed evidence of a stalled economy in the US and unmistakable evidence of an uncontrolled debt crisis in Europe — perhaps with some further evidence of the retreat from fiscal policy in the US. On top of that, something unprecedented like a downgrading of US debt can’t help but give investors even more jitters about the direction of the world economy, even as they still quite clearly believe that US debt is safest investment in the world.
