Last night, Standard & Poor's, one of three agencies that rate the debt of governments and companies, announced that it would reduce the United States' credit rating to AA+, one notch below the top rating of AAA. Moody's and Fitch have no plan to follow suit, but even if they don't, this will be the first time in history that the U.S. credit rating has been downgraded.
The Washington Post blames spending for the downgrade, but this has nothing to do with the government's policies or its ability to pay. Our debt is measured in dollars, which means we can simply print the money if need be. With our $14 trillion economy -- and current low levels of taxation -- we are more than able to pay our debts for the next ten years and beyond.
The question isn't whether the United States can pay its debts. Rather, its whether we have the political will to do so. In the past, this wasn't a concern -- both Democrats and Republicans were committed to the full faith and credit of the United States. But after last week's budget brinksmanship, when the GOP nearly forced the government into default over its opposition to tax increases, S&P believes that times have changed, and U.S. debt is riskier than it once was.
Of course, recent events have also called Standard & Poor's credibility into question -- over the last decade, along with other credit-ratings agencies, S&P gave top marks to the worthless mortgage securities that later collapsed, taking the global economy with them. Still, it's hard to contest S&P's core assessment: "The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed."
The economic effects of this are unclear. As Dylan Matthews points out at Ezra Klein's blog, there are thousands of bonds that rely on federal government payments that could also be downgraded as a result of this decision. The same goes for state bonds in Virginia and Maryland, whose economies are tied strongly to Washington, D.C. Worse, because a variety of financial products are pegged to Treasury bonds -- everything from car loans and credit cards to mortgages and student loans -- borrowing costs could go up as a result of higher U.S. interest rates. This would essentially act as negative stimulus, sending a huge shock to the economy and in the worst-case scenario, plunging us into a double-dip recession.
On the other hand, as Matthew Yglesias notes, if you look at S&P's definition of the AA+ rating, it says, "An obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong." Given the United States' overwhelming place in the global economy -- and the safey of AA+ rated debt -- it's possible for investors to ignore the downgrade and hold on to U.S government bonds as if nothing happened. In which case, America's economy emerges unscathed from the wreckage of its political system.
Either way, we have entered uncharted territory. If economic ruin does come, we have a culprit: the Republican Party.
