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Standard & Poors is being absolutely shredded this morning for downgrading the USA’s debt.That S&P is evil and incompetent and irresponsible and moronic, in fact, seems to be one thing that both political parties and the rest of the country can agree on right now.
And much of this criticism is completely valid, starting with this one:
The US need NEVER default on its debt, because it can just print money to pay it off.
S&P now rates four companies higher than the USA (Microsoft, Automatic Data Processing, Johnson & Johnson, and Exxon-Mobil). This is preposterous. The USA has something none of those companies have: A money-printing press. Anytime the US needs to make a debt payment, it can just print money and make it. None of those companies can do that. None of those companies will ever be able to do that. So the idea that a corporation should be rated more highly than the USA seems ridiculous.
(Yes, if the USA just prints money to pay off its debts, eventually it will destroy the value of that money, thus decimating its bondholders. But if the USA destroys the value of the money with which it pays its own bondholders, it will also destroy the value of the money with which all US companies pay their bondholders, so there’s no way any of those companies should be rated higher than the USA. Whether the USA would choose to default rather than destroy its currency, however, is another question, one that is especially relevant given the current crew in Washington.)
And then there’s the obvious fact that S&P’s “toughness” on this decision is clearly a response to its disastrous failure a few years ago, when it rated junk housing bonds AAA, missed the Lehman Brothers bankruptcy, and blew just about every other call it was asked to make.
And then there’s the fact that the S&P’s original downgrade decision was based on a mathematical error–and that, when this error was pointed out to them, they changed their logic and downgraded anyway.
And so on.
But there’s one thing that S&P should not be criticised for:
Pointing out that the USA’s federal budget outlook has gone from sustainable to unsustainable in the past decade and that the USA’s government appears to be unable or unwilling to face this fact and deal with it.
There is no way the USA can fix its finances without a reasonable increase in taxes. There is no way the USA can fix its finances without significant spending cuts. And there is no way the US should be slashing spending OR radically increasing taxes right now, with the job market as weak as it is.
But the US government seems unwilling or unable to face any of those facts. Instead, it is locked in an ideological war with positions so entrenched that, last week, the government almost allowed the country to default rather than come to agreement about future budget plans.
Yes: Last week, the US government almost caused the country to voluntarily default, just because leaders were unable to agree about future budget plans.
So maybe S&P is right that the USA could default, even though this default would be completely unnecessary (thanks to the printing press, the US could always pay its debts if it wanted to). Maybe S&P has noticed what everyone else in the country appears to be conveniently forgetting in the mass-umbrage about the downgrade: Our government is so dysfunctional and irresponsible that it might cause us to default even though we don’t have to.
That, combined with an enormous deterioration in the country’s finances and budget outlook over the past 10 years, certainly seems deserving of a downgrade.
So all those howling about S&P’s outrageous decision this morning might want to start spreading the blame…
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