Saturday, August 6, 2011

The US is downgraded.

Well the big news is that S&P has downgraded US Government debt.  In true form for Standard and Poors, the rating agency made a $2 trillion math error which was quickly pointed out to them by the White House.  Still they proceeded with the downgrade.  Ironically, S&P played a big part in getting us in this sorry mess because of their worthless ratings of mortgage backed securities.

The truth is, as several commentators have pointed out, that the debt should be downgraded, not because the US doesn't have the money to pay its bills but because there has emerged a political willingness to use default as a bargaining chip.  The reason the debt has been downgraded is largely because the tea party crowd refused to increase the debt ceiling (something that was done frequently and without fuss in prior administrations).  Their action has shown the markets that default is now a possibility.  It's hard to know what the costs will be in terms of higher interest rates, but what is clear is that this is not what the US economy needed right now.