After the failure of rating agencies to rate securities properly as to risk preceding the subprime meltdown (bundled securities rated AAA with near worthless underlying loans), don't know what to make of S&P's downgrade of U.S. debt from AAA to AA+ Friday evening.
Is it a beginning? Read on.:
The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge," the company said in a statement.
It appears that the American public did some of their own analysis, underscored this week by the headline, "Disapproval Rate for Congress at Record 82 Percent After Debt Talks."
The AA+ rating, by definition, still implies good credit-worthiness. Moody's and Fitch still hold U.S. debt as AAA.
Regardless, with a new 16 trillion "credit card" limit, fiscal challenges remain.
Here's why. Simply put, the bigger the debt, the bigger the interest rate risk exposure to service the debt. The U.S. debt downgrade potentially has higher borrowing cost implications for consumers, businesses and the U.S. government, which impacts economic growth. It remains to be seen how the markets will adjust to the S&P downgrade, whether a shift upwards in rates in the Treasury yield curve occurs -- whether our creditors will demand higher rates.
For now, matters "across the pond" in the eurozone appear worse. European money markets seized up this week, with Italy and Spain in sharp focus. The ECB announced intentions to buy back debt of Italy and Spain. This, after the European Union has already bailed out Greece, Ireland and Portugal.
Seems to me sovereign debt default issues will be with us for some time, based on the absolute levels of debt relative to GDPs within developed nations and the question of how to now grow the economies going forward to sustain the debt and meet obligations. Some astute investors note that there are two ways to default on debt -- an actual default or through devaluation of the currency. It's no secret to any of us, that the dollar has suffered devaluation in the last decade. Just this last Thursday, the Swiss Franc hit another high against the dollar (another marker for the week).
If we keep raising the debt ceiling (to avoid actual default), then we're monetizing debt (financing government spending) to meet our obligations. Unless, of course, we can grow the economy to keep up with the pace of deficit spending. But, here's the deal.
This week's debt ceiling increase (which may turn out to be yet another temporary fix) came in at 2.1-2.4 trillion to a jaw-dropping 16 trillion. We've raised U.S. debt ceilings before. What makes this one uncomfortable is that it puts the U.S. that much closer to the 100 percent threshold of debt to GDP, and that's a drag on the economy. Historically, this "shaves about one percentage point off GDP, which was just 1.3 percent for the second quarter and 0.4 percents for the first quarter."
With the weight of big debt, the "heavy lifting" to grow the economy, to create jobs, becomes all the more arduous.
As if back-to-back days of U.S. stock market declines weren't enough this week (culminating in a 500 point Dow plunge on Thursday), the jobs picture remains murky. This week, the unemployment rate showed a slight improvement to 9.1 percent from 9.2 percent. But, if one looks beyond to the increase -- in the discouraged no longer searching -- the unemployment picture looks dismal.
What's this all saying?
We can't expect quick fixes to problems formed over decades. Tempting as they may be, within an age of instantaneity. I keep coming back to structural changes needed.
Note that the financial crisis (and the most recent explosion in debt it created) came on the heels of already multi-decade long trends that chiseled away at jobs -- conglomeration, globalization and technological automation. Running an economy, in part, on financial bubbles, particularly in the last decade, masked the underlying reality of the job market.
Yes, we need growth and jobs. How do we do this within the economy we've created over decades? Where on the horizon is the sustainable revenue bedrock, the growth that will move us forward?
Amidst the brouhaha, the numbers, let's not forget the very human.
Is there a point at which debt and debt service crowds out life and living?
Or, is life about growing and working to achieve happiness, fulfillment and harmony as a society?