Growls

Did you ever think that U.S. debt would be downgraded in your lifetime? Here’s the background according to Damian Paletta of the Wall Street Journal today:

“A stark warning from a credit-rating firm about the U.S. government's fiscal problems stoked concern on Wall Street and in Washington on Monday, pushing global stock markets lower and intensifying political divisions about the best way to tackle the country's growing deficits.

“While S&P didn't change its triple-A bond rating for the U.S. government, the move was enough to send the Dow Jones Industrial Average tumbling almost 250 points at one point Monday.

“S&P questioned whether the White House and Republicans would be able to reach an agreement before the 2012 presidential elections on a plan to rein in deficits. This year's shortfall is projected to be about $1.5 trillion, roughly 10% of the country's gross domestic product.”

In a Reuters story posted at Investor’s Business Daily today, the news organization noted that Treasury bond prices rose on the S&P warnings about U.S. debt, adding:

“While S&P affirmed its AAA sovereign credit rating on the United States, it said very large U.S. budget deficits, rising government indebtedness, and the lack of a clear path to addressing these issues, signaled there was at least a one-in-three likelihood that it could lower its long-term rating on the U.S. within two years.” (emphasis added)

Peter Schiff, blogging at Forbes this afternoon, questions the action by S&P, saying: “The only thing more ridiculous than S&P’s too-little, too-late semi-downgrade of U.S. sovereign debt was the market’s severe reaction to the announcement.” He went on  to write:

“In its analysis of U.S. solvency, S&P typically factors in the government’s ability to print its way out of any fiscal jam. As a result, it applies a very different set of criteria in its analysis of investment risk than it would for a private company, or even a government whose currency has no reserve status. But the agency completely fails to consider how reckless printing will impact the value of the dollar itself. It can assure investors that they will be repaid, but the agency doesn’t spare a thought about what if anything our creditors may be able to buy with their dollars.”

Great news on the day that taxpayers must file their 2010 federal tax returns. Not!

UPDATE (4/18/11): Reuters also reported, "The Obama administration moved swiftly on Monday to downplay ratings agency S&P's downgrade of its U.S. credit outlook, calling the decision a political judgment that should not be taken too seriously." They added:

The timing of S&P's announcement was unwelcome for the White House, coming just as President Barack Obama tried to regain the initiative on the deficit debate in Washington.

Last week Obama laid out his plan to reduce the budget deficit by $4 trillion over 12 years, trying to give markets confidence that he was serious about tackling U.S. fiscal woes.

Standard & Poor's downgraded the outlook for the United States to negative, saying it believes there is a risk U.S. policymakers would not reach agreement on how to address the country's long-term fiscal pressures by 2013.