The blogosphere has had a day to digest the news. Here's Bruce Bartlett on how waiting helps the left:
[I]f interest payments as a share of revenues is the key measure of debt sustainability, then waiting until the last minute to act absolutely guarantees that only tax increases will calm financial markets. It will be too late at that point to cut spending quickly enough to reduce interest on the debt. Indeed, it would require a very large surplus to accomplish that in the absence of any rise in revenues.
Now that the US is on negative outlook, there’s at least a one-in-three chance that the US will lose its triple-A credit rating in the next two years. Or that’s what S&P is saying, anyway. I’m not convinced: the entire S&P business model is based on the idea that creditworthiness is a one-dimensional spectrum which ranges from risk-free, at one end, to defaulted debt, at the other. If US Treasury bonds aren’t risk-free, then nothing is risk-free, and the triple-A bedrock on which the S&P ratings apparatus is built crumbles away.
Karl Smith agrees:
Anyone holding any credit is facing enormous risk from a US implosion. You can’t run away from the risk. It may sound all hippie-like but the math supports the following assertion: a risk that is everywhere is nowhere.
[T]he fundamentals of the American fiscal situation haven't changed, and I'd be surprised if traders actually found themselves feeling more bearish on the prospects for American government debt as a result of the S&P's action. Eventually they will, and at that point yields will rise, and at that point Congress wil probably do something meaningful about the debt. But I see S&P as describing this process rather than influencing it.
Stephen Bainbridge nods:
This is, of course, exactly what one would expect in efficient capital markets. The fundamentals of the US financial system and its feckless political system are all well known and have long since been priced into the markets. Only new information–such as the political system suddenly becoming even more feckless, if such a thing is possible–should affect prices.
Matt Yglesias yawns:
There are two metrics to keep an eye on when assessing American debt. One is the interest rate the Treasury has to offer to get people to buy the debt. Currently that number is low. The other is the “spread” between bonds that are indexed for inflation and bonds that aren’t indexed for inflation which serves, among other things, as a gauge of market assessment of the risk that we’ll have no choice but to inflate the debt away. Currently that number, too, is low.
One of the reasons I take our medium and long-term deficit fairly seriously, even though current financial indicators suggest the market is unconcerned, is that financial indicators can turn around in a flash. There are limits to how far a big country like the United States can get from fundamentals, but we're still susceptible to the kinds of mob emotion that power both bubbles and bank runs.
Exactly. At some point, several feet ahead of the edge of the cliff, you look down and the denial disappears.
(Photo: Traders work on the floor on the New York Stock Exchange on April 18, 2011 in New York City. By Spencer Platt/Getty Images)