As you might have heard—considering the entire political establishment has spent the past seventy-two hours debating it—Standard & Poor’s followed through on its threat to downgrade the federal government’s credit rating.
Standard & Poor’s declared in April that if $4 trillion in savings was not achieved in the debt ceiling deal, it would downgrade the government’s credit rating from AAA status. They did so on Friday, citing not only a deal that achieved “only” $2.1 trillion in savings but also Republican intransigence against raising new revenue and the party’s hostage-taking over the debt ceiling. The agency also downgraded Fannie Mae and Freddie Mac, since they depend on the federal government for support. Another credit rating agency, Moody’s, is threatening downgrade as well.
The downgrade is yet another chapter in the bogus deficit drama that has gripped Washington for the past several months. Once again: interest on our debt is 5.7 percent of total government spending, half of what it was for the past fifty years. Treasury bonds, which are how the government finances its debt, remain highly desirable to investors, and even in the wake of the “downgrade,” maintained their low interest rates.
It’s a deeply silly idea that US Treasury bonds are no longer a safe investment because the solution to a manufactured crisis fell $1.9 million short of an arbitrary goal. As Paul Krugman wrote today, “US solvency depends hardly at all on what happens in the near or even medium term: an extra trillion in debt adds only a fraction of a percent of GDP to future interest costs, so a couple of trillion more or less barely signifies in the long term.” While Standard & Poor’s correctly identified other factors threatening long-term fiscal stability, like inflated healthcare costs and political opposition to new revenue, both were also well-known factors one year ago, and five years before that—but Standard & Poor’s said nothing.
The Standard & Poor’s analysis is all the more silly given the haphazard way in which they calculated the national debt, confusing two different analyses by the Congressional Budget Office and pegging the national debt $2 trillion too high. “This is like an undergrad student mistake,” Robert Pollin, a professor of economics at the University of Massachusetts and co-director of the school’s Political Economy Research Institute, told The Nation.
Nobody is laughing at the report’s collateral damage, however. Stocks continued to plunge Monday morning, in what Forbes called the “Standard & Poor’s stock market crash.” Pollin correctly predicted last week that a downgrade would likely not have an impact on Treasury bonds but could rattle stocks, because investors often “act on the basis of incomplete, or even inaccurate, information” and could “interpret the downgrade as evidence of a rising default risk.”