Word on the street seems to be it will have little to no effect, especially because the other ratings agencies did not downgrade us. For several reasons I expect the S&P decision to have virtually no effect:
- The markets have known what was going on with our debt issues for a long, long time. The idea that one ratings agency lowering our rating is suddenly going to force the U.S. to give higher interest rates on our treasuries is highly unlikely. Note that even as recently as Friday treasuries were still very, very, very popular investments and they have essentially been operating at 0% yield for some time now. [The Treasury has a few different products, but the ones held by large institutional investors have mostly been yielding near 0% for some time now.]
We actually have a situation in which treasuries yield 0% yet investors are still desperate to put more money into them. That to me suggests we’re in a period of such grave investor fear of equities markets that S&P’s downgrade just won’t mean very much. The Dow dropped 500 points on Thursday, people are fucking scared and in a true panic right now, there are some people who have already converted their entire 401ks to bonds because they are afraid they are getting ready to see another “wipe out” ala 2008. [Note that unless these people are near retirement, that is a very poor decision, to move all your investments to the bonds market.]
- If S&P had downgraded any other country, it might have had an impact. They’ve downgraded the U.S. and it looks like the result may be that S&P is going to lose major credibility as a ratings agency. The Obama Administration has pointed out that S&P made a $2 trillion miscalculation when making their decision, they confirmed this but said they stood by their downgrade. The response from the administration was “take the validity of a rating made with such a large miscalculation as you will.” Essentially that does make S&P seem less credible, their only job is to crunch numbers and do analysis, and they can’t even get that right? With the world watching? Then other countries like France have already come out and basically said they ascribe no validity to S&P’s downgrade.
This is a mixed bag, on some levels I think the U.S. needs a stronger kick in the pants, but in reality I think this debt downgrade will have virtually no impact and may actually cause S&P to take a big credibility hit.
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Because of the above admitted mistake by S&P, the Obama Administration has, in my opinion, successfully frame S&P’s decision as a political move and not an economic move. I don’t necessarily agree with that personally, but I think issuing an analysis with such flawed numbers and then basically saying the error didn’t impact their decision will indeed make it look like S&P had essentially decided they wanted to downgrade U.S. debt regardless. It does not appear that the world economy is willing to accept S&P giving itself power to essentially “push” the U.S. government in certain directions by threatening to downgrade our credit rating.
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When the subprime mortgage crisis hit, it massively undermined the ratings of all the major agencies. I think that given the failure of the agencies to rate extremely risky investments properly has made the ratings agencies much less important than they once were.
In reality if you look at most AAA countries they are not genuinely better investments than U.S. Treasury Securities. Liechtenstein? That is a country with like 40,000 people in it, as you can see from other small countries that have had financial problems pretty much one government official in the country behaving in a corrupt manner could result in Liechtenstein going bankrupt. It’s like the difference between buying a corporate bond from General Electric, in a down year, versus loaning money to a small tech start up that has actually been turning solid profits for some years now, but is mostly unknown. Those little tech start ups can disappear in an instant, and history has shown the same thing can happen to the economies of tiny countries.
The U.S. has serious long term troubles that our $2.1t deficit reduction has not adequately addressed. However if you compare our securities to pretty much any other large safe haven investment I’m just not sure where else you would put your money. Another thing about countries like Liechtenstein or even Canada, is that they just aren’t big enough to have enough securities out there to serve the same function that U.S. securities currently serve, nor would smaller countries like that want to be responsible for so much of the world finance’s reserves. With the current European debt crisis still firmly under way, European paper isn’t any more attractive and it may even be less attractive.
As an American I’m deeply worried about our long term debt problem. In the immediate term I’m more concerned about our jobs problem, we still are not producing enough new jobs to keep up with the growth of our population. I’m less concerned about the American equities market, and think the big downward moves recently are not based on reality. Most of the Fortune 500 companies have actually had great earnings for both Q1 and Q2 this year, this is a genuine situation in which share price moves are not accurately reflecting what is going on with these companies. Most of the Fortune 500 has rising profits and are actually hiring new people, so I don’t think the current fear about equities is as valid as it should be. If you’re looking to invest in the equities market right now, I do think income investments (dividend paying companies) is probably the way to go, because you make money off those regardless of market valuation ups and downs.
For safer investments, I genuinely do not know where else I’d be putting money other than treasuries. I’ve personally got some money in municipal bonds, a few Canadian income trusts and etc but that is just to achieve a higher return, if you’re just looking for absolute security I think it is still very hard to find any other debt instrument safer than a treasury.
