The Standard and Poor downgrade

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The Standard and Poor downgrade is crashing financial markets everywhere—and might be prompting people to seek an objective store of value.

Why Standard and Poor did the downgrade

On Friday evening, at 8:00 pm EDT, Standard and Poor’s Sovereign Rating Committee changed the “grade” of US Treasury paper from AAA to AA+. It is the first downgrade since Standard and Poor first awarded the AAA rating in 1917.

Why the company waited until after all markets in securities (stocks, bonds, etc.) and commodities (including gold and silver) had stopped, no one even wants to speculate. Standard and Poor did explain the downgrade itself. Since then, many editorialists and commenters have taken the remarks out of context. Here is a direct quote from the report:

We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.

In short: Standard and Poor did not say that the downgrade came only because a few Representatives in Congress refused to let the government raise tax rates. They said that Congress did three things that prompted the downgrade:

  1. They couldn’t agree on how to spend less on “entitlements.”
  2. They couldn’t agree on whether or how to raise revenue. (On that subject: raising income taxes is no good when so many people don’t even have an income to tax!)
  3. They wouldn’t agree to cut the deficit by the $4 trillion that Standard and Poor warned Congress that they must agree to.

The spin

Too many commentators have missed this point. At least one said that the White House could have used this report to heap more blame on the Tea Party movement. “All I said was, raise taxes just a little, just a little, they won’t feel it!” the man now holding office as President could have said. So says the theory. (With apologies to Ayn Rand.)

That is exactly what some in the United States Senate, and even some in the White House, have said. “Tea Party downgrade!” screamed Senator John Kerry (D-MA). White House man David Axelrod said the same.

But the official White House line is different. They started out blaming Standard and Poor for making the downgrade for political reasons. And they are still doing it today.

How the markets reacted

The National Debt Clock - the real reason for the Standard and Poor downgrade

The National Debt Clock shows the total national debt and each citizen and lawful resident's share of it. Photo: Hampton Roads Partnership, CC BY 2.0

Last week, investors panicked, sold off stocks and commodities, and bought US Treasury instruments. Today they are selling off stocks again, as was predictable. The action began on the Tel Aviv stock exchange yesterday. And this time, they are not buying US Treasuries. Those are no longer the “quality” investments they once were. They are buying gold and, to a lesser extent, silver.

To make matters worse, Standard and Poor have at last made more downgrades. The two government mortgage holding companies, Fannie Mae and Freddie Mac, now are also down from AAA to AA+. The reason: as goes the government, so go the government-assisted enterprises that they are. And now all twelve Federal Home Loan Banks have the lower AA+ credit rating.

What happens now?

Yesterday, Speaker of the House John Boehner (R-OH) flatly said that Treasury Secretary Tim Geithner should resign. Geithner refused. Today, the man now holding office as President refused to fire him.

Barack H. Obama also made a speech, at about 1:15 pm EDT, denying any long-term meaning for the downgrade:

No matter what some agency may say, we’ve always been and always will be a triple-A country.

The markets clearly don’t believe him.

His opponents can believe this much: he is at war with them. His advisers said so over the weekend, and he just said so two hours ago at the time of this writing.

The ordinary person would do well to get out of debt. The only reason that investors have not yet dumped US Treasury paper wholesale is that European central bank paper is less reliable. That will be small comfort when the Prime Lending Rate starts to rise. Every other interest rate depends on it. That includes credit-card finance charges and interest on adjustable-rate mortgages, new mortgages of all kinds, and car loans. (Existing fixed-rate mortgage, car loan, and most car lease interest rates will not change.)

The New Jersey Tea Party Caucus had no immediate comment, either on the downgrade or on Senator Kerry’s, Mr. Axelrod’s, and other men’s remarks. They promised a press release within hours.

Featured image: gold coins from a pirate’s treasure.