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Daniel Dowd

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From Doomsaying to Damage Control

Posted: 08/08/11 03:09 PM ET

For the first time in U.S. history, our nation's credit rating was downgraded from AAA to AA+. An arbitrary metric to most of us, but an important measurement none the less. Simply put, the outlook of our federal economy no longer enjoys a "stable" rating and instead is now considered "negative." For a few months now, we have been warned that this was a real possibility without fundamental reforms of future government spending. After much political hot air and little in action or compromise, we are now reaping what our elected officials' partisanship has sowed.

Scrambling to downplay this historically significant event, Washington and Wall Street claimed the downgrade was a mistake. A grievous "math error" by S&P to the tune of $2 trillion, a number they arrived at by changing our projected debt increase from 5% a year to 2.5% over the next 10 years. A desperate attempt, albeit a bold one, to ward away the fear and gravity of this situation. These accounting discrepancies were quickly shrugged off by any analysts worth their salt as political damage control, reinforced through repetition by mainstream media. Unfortunately, hard facts are hard to spin.

Over the next few days these disparate assessments will be reconciled and economic predictions will likely dominate the 24-hour news cycle. Look for lots of "what this means for you at home" and high-tech, financial forecasting models which will all amount to anyone's best guess. The truth is no one can really know what a negative economic outlook for a historically dominant superpower means, because we are in uncharted waters.

Unfortunately, the focus is likely to be the U.S. credit ranking in comparison to other countries. Australia and Austria are AAA stable so they trump us, but Japan and Taiwan are AA- (negative and stable respectively) so we still trump them. We're tied with Belgium at AA+ negative so that cancels out. No one is asking the real question of what this means long-term for the global economy as a whole. Is this the first major indicator of many that the constant of "infinite growth potential" that all modern economies (capitalist or socialist) are built upon may not be so constant after all?

Just as low-interest home loans may be a thing of the past, so might the potential for growth and the ability to borrow in massive sums of AAA-rated nations. Of course, short of a full-on global financial collapse, ratings systems like S&P will continue to exist and use the same scale that is currently in place. What is likely to change is what a AAA or B- means in terms of relative stability of investment and our fundamental concept of borrowing power.

These questions and more will not enter the political discourse anytime soon. The same politicians that warned and threatened each other and their constituents during the debt ceiling negotiations will now likely be moving into spin mode as the 2012 election season approaches. Unfortunately for us no one person or party is to blame. Another case of not listening, incompetence and weakness of will has left both parties and the citizens losers once again. Unable to point a finger across the aisle, the same doomsayers that led us down this road are moving to damage control.

 

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