Just as the Y2K threat was overstated but nevertheless had unexpected, adverse intermediate term consequences, I doubt this chicanery will be cost free to the public at large. But the debt overhang that ideologues have used to whip the public into a funk is profoundly deflationary unless addressed head on, via writedowns and bankruptcies offset by fiscal stimulus. Deflation means that high quality bonds are the place to be, as the market action of last week confirmed, so Treasuries benefit from the very condition that S&P depicts as a disaster.
Thus the best outcome would be if the bond and currency markets shrug off the S&P action, which would reveal that the much feared downgrade was a paper tiger. But even if the marker response is underwhelming, it is hard to imagine that Obama will not take a political toll for his colossal miscalculation. It was he who stoked the debt ceiling phony crisis to implement a neoliberal agenda, who refused to reverse course and threaten to circumvent the debt limits when the process had clearly spun out of his control.
So even if S&P fails to land a body blow in the markets, its ploy has garnered press that seems certain to taint the Administration, and thus confirms the power of its reckless conduct. Thus the cost is not likely to show up in bond yields, but in something far more fundamental: in yet more destruction of the foundations of our society for short-term, selfish ends.
I am not planning on burying people in this story today, but it is the top story just about everywhere this morning. CNN is doing a one hour special on it this evening, I happened to catch on my morning run.
I think knowledgeable people understand that the downgrade may not have a huge impact on interest rates or yields, particularly if Moody’s and Fitch hold fast. But the problem is that the downgrade happened at all and S&P’s rationale for the downgrade. Grownups are getting mighty tired of kids rassling in the back seat as the vehicle careers down the road. S&P just screeched to the berm, stopped the car and told the kids to cut it out this instant.
RE: “Will S&P Downgrade Be Another Y2K Scare?”
Well . . . only during the time prior to the “debt ceiling deal” during which we were unceasingly assured that a downgrade would occur if they didn’t come to a deal Right Away and also during which we were unceasingly assured that such a downgrade would mean The End of the World As We Know It.
Now . . . not so much.