A quick point that should be obvious, but which is worth reiterating in the wake up yesterday’s S&P downgrade of the US debt outlook.
We’ve seen a lot of people say things like: Well, if the US loses its AAA rating, then interest payments on the debt will rise.
This is wrong. The AAA-rating is not the basis for US low borrowing costs. A belief in the supreme credit-worthiness in the US is why the US has low borrowing costs. There’s a big difference between the two statements.
Just the fact that US rates fell after yesterday’s downgrade should tell you that the bond market doesn’t take its cues from S&P and that ratings are rates do not move hand in hand. The fact that Japan hasn’t had its AAA-rating in ages, and yet enjoys historically low borrowing costs should tell you the same thing.
Granted, downgrades have coincided frequently with higher rates in Europe. All this means is that different markets are idiosyncratic. In itself it doesn’t prove anything.
Again: Cheap US credit is based on the market, not what a ratings agency says. If the ratings agencies ceased to exist tomorrow, nothing would change.