In high school, a friend of mine once borrowed $100. That was a decent amount of money for a 14-year-old to lend out but, since he was a friend in need, I figured why not. Problem was, he never felt it was important to pay me back. He trivialized my requests -- even though he had the money he just didn't feel like paying back. It became a power issue for him and the power disappeared immediately when I finally got my money back.
Pundits are now busy trying to figure out the implications of the S&P's decision to lower the U.S. credit rating. Will it cause interest rates to rise? Will it push us closer to another recession? Was the lowering justified?
Credit ratings agencies are influenced by economics and politics, producing judgments of credit worthiness that are occasionally accurate and often maligned from the rear-view mirror or AAA+ companies that declare bankruptcy. Companies and countries can lobby the credit rating agencies, trying to prove to them that they are more worthy than they are. The Treasury is arguing that the downgrade was based on flawed calculations, off by $2 Trillion. As it turns out, the credit rating agency doesn't care about it being off by $2 Trillion... and why should it? The medium and long term projections of the economy that are used by the Congressional Budget Office (CBO) are little more than educated guesswork anyway (anyone remember the massive budget bonuses from the end of the Cold War?).
The S&P certainly included in its judgement the fact that the U.S. has one of the lowest tax rates of any OECD country and cannot be long term economically viable without raising revenue and lowering expenses. In addition to the data on projected revenue and expenses, the S&P weighs the political climate. In this case, they are sending a clear message to the politicians who decided to threaten to not pay U.S. obligations with the political games associated with the debt ceiling. Note to Washington: When you brag that you may or may not fulfill your obligations, the next person in line gets to hear that as well.
The S&P is doing something that the adults in Washington should have done a long time ago, noticed that you can't keep cutting your tax revenue while raising your expenses and simultaneously threaten that you won't pay off obligations... and still be considered AAA+ creditworthy. There are a lot of descriptions for countries and companies that operate without regard to any reality of finances but AAA+ creditworthy is not one of them.
So what is the interpretation of this credit rating cut? Short term, few people really know and many people think it will have little impact. Long term, its another sign that the U.S. is allowing itself to self-destruct piece by piece, year by year with political games being played while real Americans suffer.
This credit rating shift will certainly prompt a series of finger pointing exercises -- from those who manufactured the debt ceiling crisis to those who allowed the crisis to occur in the first place. In the end, it is America that loses in these games of manufactured political and economic brinksmenship, as the S & P just reminded us all.
As for that friend, after seeing how cavalier he was about paying me back, I dropped his credit rating all the way down to zero and, to this day, he can't even borrow a pen from me. Let's hope that, in the long term, creditors doesn't adopt this same attitude towards the U.S.
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