The S&P Credit Downgrade As A Check On Wonderboy's Spending Spree

As I wrote here on my companion business blog late last month, a lot of the flap about Friday's after-hours credit downgrade of the US government by S&P from AAA to AA+ is actually a non-event.


Media coverage would have you believe otherwise. But let's consider several aspects of the downgrade.


Wonderboy's people are calling it a politically-motivated mistake by S&P. They mention and arithmetic error in a pre-release draft in the amount of several trillion dollars. That's nonsense. The US has been increasing its deficits for decades, but never so quickly as in the past 2 1/2 years.

As Kaminsky, and others, have attested, the true risk of US debt has already been 'baked into' rates. In that sense, this is a non-event.

Of course, the Democratic retort is to blame the messenger. Ceaselessly citing the bogus ratings by S&P, and other agencies, of mortgage-backed bonds, Barney Frank, Wonderboy, Treasury and every other Democrat in Washington with an ego has now decided that ratings agencies are not to be trusted in the first place.

Actually, as Doug Dachille has pointed out in the past on CNBC, at least for municipal, state and many other ratings, that's true. It's just that now is an awfully suspect time for the federal government to declare it.

However, in terms of the black eye suffered by Wonderboy's administration by allowing itself to be put in the position of being unable to fulfill S&P's quite public $4T spending cut requirements, it's a real event. It provides the ammunition that the GOP needs to fend off further spending. The continuing sluggish US economy provides the bookend of not justifying large-scale, significant tax increases.



So, as I wrote in that linked post,

"Well, American voters need only look in the mirror for whom to blame. They consciously elected and re-elected generally inept spendthrifts since 1932, then wonder why the country has amassed so much net external debt.



It's time for Americans to wake up to the consequences of their poor political choices for the last eight decades.


And when the rating downgrade happens, the resulting increased funding costs will help put a stop to excessive spending and bad tax policies, only from outside, uncontrollable forces, rather than internal, political ones."
 
For all we know, on a relative basis, global demand may now be lower, at every rate, for US Treasuries. The new constraint on boundless US debt growth is, if it exists, now uncontrollable and external.
 
To me, that's a good thing. Eight decades of inept fiscal policy in Washington has led us to this point. I'm quite content with markets spanking the federal government and putting limits on what the federal officials whom US voters have mistakenly allowed to spend us into the poorhouse can now spend and borrow.