Downgrade of US Credit Rating Is Baseless – ­and Outrageous

Standard & Poor’s has gone ahead with the threatened downgrade of the United States’ credit rating. It’s a strange situation.

On one hand, there is a case to be made that the madness of the right has made America a fundamentally unsound nation. And yes, it is the madness of the right: If not for the extremism of anti-tax Republicans, we would have no trouble reaching an agreement that would ensure long-run solvency.

On the other hand, it’s hard to think of anyone less qualified to pass judgment on America than the rating agencies.

The people who rated subprime-backed securities are now declaring that they are the judges of fiscal policy? Really?

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Just to make it perfect, it turns out that S.&P. got the math wrong by $2 trillion, and after much discussion conceded the point — then went ahead with the downgrade.

More than that, everything I’ve heard about S.&P.’s demands suggests that it’s talking nonsense about the United States’ fiscal situation.

The agency has suggested that the downgrade depended on the size of the agreed upon deficit reduction over the next decade, with $4 trillion apparently the magic number. Yet solvency in the United States depends hardly at all on what happens in the near or even medium term: An extra trillion in debt adds only a fraction of a percent of gross domestic product to future interest costs, so a couple of trillion more or less barely signifies.

What matters is the longer-term prospect, which in turn mainly depends on health care costs.

So what was S.&P. even talking about? Presumably they had some theory that restraint now is an indicator of future trends — but there’s no good reason to believe that theory, and for sure S.&P. has no authority to make that kind of vague political judgment.

In short, S.&P. is just making stuff up — and after the mortgage debacle, they really don’t have that right.

So this is an outrage, not because America is A-OK, but because these people are in no position to pass judgment.

The Downgrade Doom Loop

It’s not the whole story, but something like this threatens to develop:

1. United States debt is downgraded, sparking demands for more ill-advised fiscal austerity.

2. Fears that this austerity will depress the economy send stocks down.

3. Politicians and pundits declare that worries about American solvency are the culprit, even though interest rates have actually plunged.

4. This leads to calls for even more ill-advised austerity, which sends us back to No. 2.

Behold the power of a stupid narrative, which seems impervious to evidence.