The hot news of the night comes from S&P, which has warned that there’s a 50% chance that the US will lose its AAA rating over the next 90 days.Obviously the debt ceiling fight as a lot to do with this, but there’s more! It seems S&P specifically wants to see $4 trillion in deficit reductions, and if this debt deal doesn’t produce that, then the US might still lose its AAA.
There’s virtually no chance of a $4 trillion deficit reduction without severe cuts to spending or tax hikes, either of which could be very negative to the economy.
So elected officials have to choose: Let the US lose its AAA rating, or take steps that will basically guarantee the recovery is killed, which, for what it’s worth could make deficit reductions even harder to achieve.
Lovely: The ratings agencies were key enablers to the boom, and now their role in killing the recovery is set in motion.
The only question is: Can the government destroy the ratings agencies first.
By the way: We’d be remiss not to point out that Richard Koo anticipated all of this, pointing out how little the ratings agencies understand about sovereign debt. Another feather in his cap.