Let me count the ways in which S&P's announcement should be deemed irrelevant, as noted by a host of other writers yesterday:
1. It's impossible to imagine how the US could ever default on its debt, since all of its debt is in dollars and the US can create as many dollars as necessary:
Yves Smith: The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.
2. The ratings agencies have a proven track record of incompetence, at best:
L. Randall Wray: A decade ago Moody’s downgraded Japan to Aaa3, generating a sharp reaction from the government. The raters back-tracked and said they were not rating ability to pay, but rather the prospects for inflation and currency depreciation. After 10 more years of running deficits, Japan’s debt-to-gross-domestic-product ratio is 200 percent, it borrows at nearly zero interest rates, it makes every payment that comes due, its yen remains strong and deflation reigns.
3. Or corruption, at worst:
Barry Ritholtz: If ever there was an organization more corrupt, incompetent, and less capable of issuing an intelligent analysis on debt than S&P, I am unaware of them. Why do I write this? A huge part of the reason the US is in its awful financial position is due to the fine work of S&P... the “negative outlook” of US debt has come about because the inability of Standard & Poor’s to have performed their jobs rating mortgage backed securities. Ultimately, this enabled the entire crisis, financial collapse, enormous budget deficit and now political over the debt ceiling. Of course there is a negative future outlook. Its in large part the work product of S&P and Moody’s.
4. The ratings agencies have access to no information that is not public already. Hence their announcement adds nothing other than the opinion of a few analysts, and should be treated the same way as a warning by analysts at any other Wall Street firm:
Ryan Avent: This is "news" in the sense that S&P said something and lots and lots of news organisations have opted to write about it. But is it news? No, it isn't. Neither the American fiscal position or its political dysfunction will come as a surprise to anyone who's been paying attention. S&P has not struck out boldly in fretting about American borrowing; that's practically the national pasttime.
5. The US budget outlook is not actually a cause for concern right now, at least not for several years. As a long-term matter, yes, the US has a significant imbalance between revenues and spending. But the current frenzied anxiety over the US budget deficit is primarily the result of the recession, which makes deficit projections look much worse that they are likely to be in the medium term. It's myopic to think that large deficits today, or the difficulties politicians have had in reaching a budget agreement in Washington this year, mean that large deficits and budget stalemates are now perpetual.
6. And last but not least: What is a "ratings outlook", anyway? I know that it's meant to convey their assessment that at some point in the future they will foresee the possibility of default by the US government (stifle laugh here). But how exactly is that different from foreseeing the possibility of default right now?
Okay, now that I've gotten that out of my system I think I'm now ready to consign this news to the trash-heap of intellectual irrelevance, where it belongs.