S&P Downgrade Of US Government Debt Was A Mistake

by Mike Holman

The big news this weekend in investing circles was the announcement that Standard & Poor has lowered the US Government Debt rating from AAA to AA+. This is the first time in 70 years that US debt hasn’t been rated triple-A. The other two major rating agencies Fitch and Moody’s kept their rating at AAA.

The United States has some economic problems, but there is no danger of it defaulting on its debt.  Even if the recent “debt ceiling” debacle hadn’t been resolved, it is extremely unlikely that any interest payments on U.S. debt would have been missed.

The reasons why U.S. debt is safe is because they still have the largest economy in the world and they have plenty of capacity to raise taxes. Not only is the U.S. not broke, they aren’t anywhere near close to being broke.

Part of the reason given for the downgrade was that recent debt ceiling agreement will not reduce the deficit enough over the next decade to satisfy S&P. The problem with this logic is that S&P is extrapolating current events fairly far in the future and concluding that things won’t get better. The U.S. might not be going in the right direction in terms of finances, but there is plenty of time for the American government to turn things around, especially if they can raise taxes. Can the Americans get to the point where their debt ratings should be downgraded?  Absolutely – but they just aren’t there yet.

Will the markets crash on Monday because of the downgrade?

I’m hoping so – only because I’m looking to make some equity purchases and lower prices would please me greatly.  However, I doubt the downgrade will affect the market significantly.  The reality is that whatever is good or bad about the U.S. government’s finances will be the same on Monday as it was on Friday.  The downgrade won’t change very much. In theory, it’s possible that government borrowing rates will increase, but that is not certain.  If U.S. treasuries remain as a “safe haven”, borrowing costs will not increase at all. The reality is that there aren’t many other “safe haven” options for large investors.

On the other hand, the stock markets have been trending down lately (especially on Thursday), so perhaps the downgrade will set off a stampede for the exits.

I’m predicting a flat U.S. stock market on Monday.  Please note that I’ve assigned a probability of 51% success for that prediction.  :)

What’s your prediction for the Monday stock trading session? 






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