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There’s already been a bevy of analysts coming out with their forecasts on what the S&P downgrade means for the economy, what it will do to interest rates, other financial institutions, junk borrowers, and other entities somehow connected to the US government (states, GSEs, etc.).Those who don’t think the rating will have any real impact may still be inclined to think that it will have a negative psychological effect.
But there’s an immediate, real impact: The downgrade keeps the debate in Washington squarely on deficits, which is the wrong thing to be attacking at a time of 9% unemployment, sub-2% GDP, and interest rates below 3%.
There was some hope that after the debt ceiling was lifted that debt and deficits would recede into the background, and Washington could spend the next year or so doing nothing, or if possible cobbling some politically palatable economic stimuli (a continuation of the payroll tax holiday, for example).
But now it’s still all deficits and debt, and which party is going to do the most to fix it, and what can be done right away to avoid getting downgraded to AA, and perhaps eventually regain the AAA, and so on.
That’s the tragedy.
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