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It’s hard to believe that it’s been just over a week since the US lost its status as a AAA nation.Probably because so much has happened in the news, and in markets since Friday, August 5, it seems like ages ago.
That the downgrade contributed to the violent market spasms we saw this week seems like a safe guess, though from a long-term viewpoint, it’s anyone’s guess.
As we wrote on the Monday following the downgrade, the real tragedy would arise from the fact that the downgrade would continue to concentrate the minds in Washington on spending cuts, rather than on the more urgent task of economy-growing (which, we’re sad to say, aren’t the same thing).
That seems born out by the events of the past week. Right after we wrote that post, Obama came out and gave a disastrous speech, about the “super-committee” and so forth, while offering up some warmed-over comment about how Warren Buffett still believes in American debt. He even brought up the idea of the wealthy paying their fair-share, a decidedly debt-ceiling-era talking point. The markets proceeded to puke right after that speech.
It was all debt and deficit talk for the rest of the week, even as the yields only drove lower (confirming that our big concerns are blatantly mis-placed.).
Meanwhile, despite the fact that the GOP Default Caucus was basically the culprit for the downgrade, the deficit is only growing as a political issue for the party.
Unfortunately, the downgrade also seems to have boxed The White House in from a policy standpoint. A NYT article on the economic debates happening within the administration shows an unwillingness to even try swinging for the fences. On the one side, you have Bill Daly pushing for more Free Trade deals (supposedly in an attempt to win over moderates) and Gene Sperling arguing for more tax incentives for businesses.
As Calculated Risk puts it: “It sounds like the debate is between doing nothing and doing very little.”
We had hoped that the end of the debt ceiling fight would put deficit reduction on the back burner. Post-downgrade, that doesn’t seem likely to be the case.