S&P credit downgrade proving insignificant
Interestingly, S&P's credit downgrade of US debt is not looking like near the disaster many expected.
The headlines today are full of declarations that stocks are falling because S&P downgraded US debt from AAA to AA+. These headlines are simply wrong. The stock market is not a measure of investor confidence in the US's ability to repay its debt. The interest rate the nation must offer on its treasury bonds to attract buyers is that measure. If investors have less confidence in our nation's ability to repay its debt, that interest rate will rise.
The exact opposite is happening. Interest rates on US treasury bonds fell today. People are selling stocks and buying US treasury bonds, still considered the safest place in the world to keep money.
Of greater concern to investors is the Euro-zone economic crisis that's showing no signs of letting up. Of greater concern to the US economy as a whole is the continuing high joblessness and underemployment rates as well as the stagnant growth rate.
By the way, why are we listening to credit rating agencies like S&P? They completely destroyed their credibility by being a major cause of the 2008 financial collapse. They gave AAA rating after AAA rating to the mortgage backed securities that were pure, toxic garbage. They handed out these absurdly high ratings because they were competing with one another for income from the very banks that were selling the mortgage securities and paying the rating agencies to rate them. They're corrupt profit mongers with no credibility. The S&P gave Lehman Brothers an A rating right up to the month of its bankruptcy. They're morons. Krugman has more today on this topic.
Speaking of government spending and deficits during a bad economy, we've been here before and massive budget cuts is not the answer. Facing criticism of high deficits, FDR slashed his New Deal programs in 1937. The unemployment rate had dropped from well over 20% to 14% in the prior few years. In a matter of months after he slashed the New Deal programs, it was back up to 19%. After about a year, FDR realized his error and worked to restore the program funding. The result? The recovery began anew.
The headlines today are full of declarations that stocks are falling because S&P downgraded US debt from AAA to AA+. These headlines are simply wrong. The stock market is not a measure of investor confidence in the US's ability to repay its debt. The interest rate the nation must offer on its treasury bonds to attract buyers is that measure. If investors have less confidence in our nation's ability to repay its debt, that interest rate will rise.
The exact opposite is happening. Interest rates on US treasury bonds fell today. People are selling stocks and buying US treasury bonds, still considered the safest place in the world to keep money.
Of greater concern to investors is the Euro-zone economic crisis that's showing no signs of letting up. Of greater concern to the US economy as a whole is the continuing high joblessness and underemployment rates as well as the stagnant growth rate.
By the way, why are we listening to credit rating agencies like S&P? They completely destroyed their credibility by being a major cause of the 2008 financial collapse. They gave AAA rating after AAA rating to the mortgage backed securities that were pure, toxic garbage. They handed out these absurdly high ratings because they were competing with one another for income from the very banks that were selling the mortgage securities and paying the rating agencies to rate them. They're corrupt profit mongers with no credibility. The S&P gave Lehman Brothers an A rating right up to the month of its bankruptcy. They're morons. Krugman has more today on this topic.
Speaking of government spending and deficits during a bad economy, we've been here before and massive budget cuts is not the answer. Facing criticism of high deficits, FDR slashed his New Deal programs in 1937. The unemployment rate had dropped from well over 20% to 14% in the prior few years. In a matter of months after he slashed the New Deal programs, it was back up to 19%. After about a year, FDR realized his error and worked to restore the program funding. The result? The recovery began anew.
posted by Patrick at
2:44 PM
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