Downgrading the S&P’s Downgrade of the Downgraded U. S. Credit; Financially and Fiscally Irrelevant; Politically a Bombshell

The Gods of Irony Strike Again

On Friday a major credit rating agency downgraded the credit of the United States government from AAA to AA+.  This is the first time the U.S. credit has been rated below a Triple A status.

In terms of the ability of the United States government to borrow, the downgrade means little.  Interest rates are not expected to be effected, and access to credit markets for the U.S. will remain the same.  Lenders have flocked to the U. S. bond market, believing U. S. debt to be the safest and most liquid in the world, and that should not change.

One questionable point is that the downgrade came after the U.S. decided to cut spending and reduce its future deficits.  If the U. S. is such a bad credit risk after the deficit agreement, what was it before?  Questions like this will not have an answer, because S&P is clearly acting in a way related to U. S. politics, not U. S. finances.  In fact, the major reason given for the downgrade is the U.S. displayed governmental dysfunction in the debt ceiling debacle.

“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.



While the downgrade will have little financial impact, the political impact will be huge.  The Republicans have been handed another weapon in their fight against Mr. Obama, and the irony is that the governmental dysfunction that is the cause of the downgrade is the result of their unwillingness to cooperate in the governing system. 

If one rated the ability to compromise on a scale of 1 to 10, Mr. Obama would be a 12, Republicans a minus 3.  So in the end we hve Republicans creating governmental chaos leading to a credit rating downgrade which then helps Republicans in trying to defeat Mr. Obama in 2012. 

The Gods of Irony are a tough bunch.

The S&P Downgrade Impact on the
 Political Prospects for Democrats

The reason why the downgrade is so politically devastating is that it reduces a complex subject to a simple concept.  Americans are highly intelligent voters, but have little time to master the technicalities of fiscal policy and taxes.  Things like “tax expenditures”, “yield curves”, and the like have little meaning to the average voter not because the average voter cannot understand them, but because the average voter is too consumed with trying to make a decent living and survive the political assaults on the economy to have the time to study these things.

A ratings downgrade, though, that is something everyone understands without having to think about it.




"He kept us out of war"
Until he didn't

 






Republicans will be able to campaign on the slogan, “Mr. Obama’s fiscal mismanagement caused the U. S. to lose its triple A rating”.  That is something voters can easily comprehend and identify with. 



He had a secret plan to end the
Vietnam War - So secret even he
didn't know it.



Non complex concepts have been winning slogans for a long time in American politics.  Woodrow Wilson’s re-election theme, “he kept us out of war”.  Franklin Roosevelt campaigned on getting a balanced budget, as did Ronald Reagan.  Other successful candidates like Nixon in 1968 (Secret plan to win the war) and both George W. (Compassinate Conservatism) and George H. W. Bush (Read my lips, no new taxes) had dominant, simple single theme campaigns. 

Expect to see the S&P downgrade dominate the Republican commercials in 2012.  The Democrats' response will be something like "it was Bush's fault", or "S&P is not a good agency", or "we're no worse than anybody else" etc.  Well they really don’t have a good response, do they.  But they better start thinking of one.