S&P Cuts U.S. Debt Outlook - The American Spectator | USA News and Politics
S&P Cuts U.S. Debt Outlook

At about 9:00 this morning, S&P downgraded the outlook for U.S. government debt to negative (from stable) while reaffirming the current AAA rating.

While noting that the U.S. economy is “flexible,” Standard and Poors points out that we have higher debt and deficits than other “AAA peers.”

They then offer a little political warning: “We believe there is a material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

In response, US 10-year interest rates rose a substantial 7 basis points, the dollar weakened, and gold and silver spiked up, with gold going up about $16 in 10 minutes. (After giving back about half of that gain, gold has moved up again and is near an all-time high now around $1497/ounce.) S&P 500 stock index futures plummeted, trading down 18.50, or just under 1.5 percent, going into the market opening.

This should be quite a wake-up call for our politicians, if only because of the market reaction. A spike up in 10-year note yields represents “Danger, Will Robinson!” for future U.S. deficits as the cost of servicing our already nose-bleedingly high debt increases. Furthermore, although the weaker U.S. dollar does help our export industries, it is inflationary at a time when inflation represents a substantial risk to our economy.

More fundamentally, the weakening US dollar represents the savings and assets of Americans (other than precious metals) becoming worth less. It’s not something that most Americans pay attention to on a daily basis, namely currency cross-rates, but that doesn’t make it any less important. The markets’ reaction to our government’s inaction is to make us all poorer and there’s no reason to expect that to change given President Obama’s and congressional Democrats’ fundamental unseriousness about getting government spending under control.

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