The S&P downgrade

I'm not an economist but I am capable of rational thought. So here is my take on the decision by S&P to downgrade America's credit rating from AAA to AA+.

The only part of the decision that appears to make any sense at all is their assertion that the political decision making in the US is broken. They are correct in this as the "debate" over raising the debt limit showed. I placed debate in quotes because it doesn't rise to the level of an adult debate on issues. Mitch McConnell has gone so far as to signal that all future attempts to the raise the debt ceiling will be met with the same intransigence. Since the next occurrence will be in 2013, they do have a point that there is a chance the US may not meet its obligations.

At the same time, I find it very hard to believe that anyone thinking of investing in US Treasuries even cares what any rating agency says. Does anyone really think that the Finance Minister of China or Japan, or the Fund Managers at Goldman Sachs consult with S&P before making a decision? I can understand that an investor in India might consult with S&P before deciding to buy municipal bonds issued by Podunk, Arkansas since no one knows all about every bond. But US treasuries are hardly an obscure instrument.

But the story goes back further than that. One of the major reasons for the current recession is that none of the rating agencies were even close to getting the ratings on all of the Credit Default Swaps correct. So the question that arises is why would anyone care what they have to say about anything, since they appear to have a pretty poor record of being accurate.

The US has no problem attracting investment. If investors were at all worried, then interest on US treasuries would be higher than they are.

And let's not forget that they even got their basic mathematics wrong and had to have their mistake pointed out to them by the US Treasury.

So I consider this to be a tempest in a teacup and will ultimately hurt S&P more than the US.

And here is Paul Krugman's take on this.