Yesterday’s big news was the S&P placing US Treasuries on a “negative watch” — they did NOT change the bond rating of AAA, but the negative watch launched off a good deal of breathless reporting and some of the usual opportunistic bull from Republicans. Tommywonk provides an explanation of what this means.
But here is the thing. The S&P hasn’t downgraded Treasuries — it placed these on their negative watch list, like they’ve done with UK debt. Politicians in the UK used their negative watch status to implement an austerity program that has seriously undermined their economy. And let’s get this in right now — the Brits austerity program is a combination of tax hikes and spending cuts and is not as ideologically driven as our own conservatives’ plan. More importantly — the S&P (as well as our media) missed the story. A month or so back Bill Gross from Pimco (proprietor of the world’s largest mutual fund) dumped Treasuries as did many other signature investors. This is the news that the investor (and the more savvy of our political class) pays attention to, which likely means that the markets have already priced in any effects from these traders deciding that there isn’t much money to be made from holding Treasuries right now.
The other thing to remind people of is that the S&P was one of the (many) handmaidens to the crash we are recovering from. These are the same people who rated mortgage securities AAA when they were at junk bond quality — and made those ratings because they got paid handsomely for it. In fact, comments around some of the financial blogs I read note that we could have avoided this S&P business if Tim Geither had just ponied up the obligatory fat envelope. There are major portfolios that make a point of telling its investors that they no longer rely on the S&P for any part of their investment analysis.
The latest action of the S&P certainly puts them well behind the curve in terms of market assessment of Treasuries. But, unfortunately, we don’t have media that is much able to put together much context for this action. And since we have people like Eric Cantor telling everyone with a microphone how this current action means that the government has to cut spending. Which, of course, isn’t true. The deficit has been with us for a very long time. And the GOP when they were in power did nothing but make it worse — Cantor *voted* for all of the tax cuts, the wars, the Medicare Part D and all of the rest of the profligacy of the Bush era. (And how I wish the media would ASK him how he can square voting for all of that spending with his current deficit peacockery.)
So basically we have the GOP using this as more positioning for the debt ceiling vote. Raising the debt ceiling is an indicator to the rest of the world that we intend to pay our bills. Business leaders have already told the GOP that you don’t even want the business community OR the markets to even think that you are capable of playing chicken with this. Which tells me that this is the cleanest winning hand that President may ever get with these people. Make them send you a clean bill to raise the debt limit (while your other commission is working on a deficit reduction plan), because all he (and Democrats everywhere) need to do is just call for a clean bill. The vast army of business lobbyists will push the GOP to do the rest.
I don’t think there is much chance of a default on the debt, and I don’t think that the S&P action will mean all of that much in the scheme of things. Those who need a new crisis will use this as one to advance their agenda, but this won’t mean much else. And the rest of the world will wonder how it is that the richest country on the planet actually lets its politicians decide whether or not they pay their bills.