The potential downgrade of the UK’s sovereign debt rating may actually be lucky for us if it wakes us up to the fact that big, modern countries with heavy debt spending will get dinged.
For one day at least, the news forced a government official to address the question.
Speaking to Bloomberg, Tim Geithner promised the US wouldn’t let its debt go further out of hand:
Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.
“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 per cent of gross domestic product, from a projected 12.9 per cent this year.
Note that Obama did make some similar comments last week, about how the expanding deficit was tantamount to mortgaging our children’s future, and that we could see spiraling interest rates if foreigners became hesitant to fund our profligacy.
But unless the government is actually willing to make deep hard cuts, there’s not much hope in cutting the deficit significantly. Right now the strategy is about hoovering up quarters that fell beneath the couch cushions (tax cheats, etc.)
Oh, and as for those weakening Treasuries. Geithner says not to worry:
Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”
Yes, in normal times that would usually be the interpretation.
Meanwhile, Felix Salmon has some sane comments on the US AAA rating, and why you shouldn’t lose much sleep over it either way:
But let’s get some perspective here. The Dow and the S&P 500 closed down 1.5% and 1.9% respectively, which by recent standards is a perfectly normal move, well within the range of what you’d expect on any given day. What’s more, S&P putting the UK on watch for a possible downgrade is a decision prompted by economic fundamentals. Any such move with the US, by contrast, would be entirely political, and in any event would say much more about S&P than it did about Treasuries.
The most important thing to remember here, however, is that ratings agencies don’t matter any more. They lost their credibility when structured finance blew up, and the number of people buying Treasuries because S&P says that they’re triple-A rated is exactly zero.
There are lots of triple-A rated securities; people buy Treasuries because they’re liquid.