It’s official. US Treasury debt is now AA+ instead of AAA. The US Treasury is saying S&P made an error in its math.
What will the effect be? Hard to know. There are some types of investments that require the fund manager to invest some or all of their money in only AAA rated bonds. That will force them to sell their bonds. In theory, that would lower the price of bonds, and increase the interest rates.
Kind of by definition, an entity that is rated AAA can’t be holding a portfolio of bonds that aren’t rated AAA, so there may be a cascade of ratings downgrades through banks, insurance companies, mutual funds, etc….
This is about 2 years overdue, and it won’t be pain free for S&P, but it had to be done. Hopefully Moody’s and Fitch and the others will join – there is some safety in numbers.
What the world says about the downgrade (It’s the middle of the night in Asia when the news was announced)
Obama & Company: Your analysis is flawed
[Translation: We know where you live – do you love your children?]
PIMCO (large bond holder): “The minute you start downgrading away from AAA, you take small steps toward credit risk and that is something any country would like to avoid”
Wells-Fargo (bank): “We expect some further pressure on the US dollar, but a sharp sell-off is in our view unlikely”
New Yorker Magazine: You can’t trust the rating agencies
Motley Fool: “Maybe all this means is AA+ is the ‘new’ AAA”
Having read their entire opinion now, the summary is: “It’s George Bush’s fault”. Republicans and those tea party terrorists aren’t going to raise taxes. Waaah.
There is no mention about the out of control spending, the fact that Congress did not pass a budget for the current year and looks unlikely to for the coming year. S&P is playing the “We’ll cut over the next 10 years” game.
This report is nowhere harsh enough, and places 0% of the blame on Tim Geithner or the President. It almost reads like Tim Geithner wrote it.
An individual doesn’t get a “high credit score” by not borrowing money, paying their bills and living at a standard of living less than they could afford if they piled on debt. The people who pay S&P for these reports make money from trading debt. The last thing they want is for the US to stop making more.
Ronald Reagan warned us about the mugger-cum-murderer and hit man that inflation is, and I believe we are poised now to watch it in action. I have great fear of it, and I have loathing and contempt for its aiders and abettors. May God damn them. Reagan also reminded us that, “The problem is not that people are taxed too little, the problem is that government spends too much.”
Warren Buffett puts this in perspective: Since the US Treasury owes no money that is not in US Dollars, and the US Treasury can print all the dollars it wants, there is no problem.