The country was a-shock, aghast, and agog this month, with the S&P “downgrade” of the US and its capability to discharge its debts – i.e., pay its creditors.
WOW! First time in history!
How could they do that??? It’s unconscionable! It’s un-American! And it’s untrue that there is any probability that the U.S. can’t honor (pay) its debts.
S&P is supposed to be looking at risk – risk of non–payment - so how could they possibly have reached the conclusion that there is any risk of non-payment of U. S. Government-owed debt? Did they make a multi-billion dollar error in their computations, as the White House and the Treasury Dept. hastily (and loudly) trumpeted?[1] There is little risk that we might ever be unable to pay our debts was the message. And that may well be (probably is, at least forseeably) true.
So! How could S&P possibly reach its conclusion?
Could it be because we told them so?
Years ago, in the sixties when I was a young lawyer in a very small firm, a prospective client came in to see us. They were a manufacturer/packager of ointment for use in eyes. Some weeks before our meeting, they had visited the Food and Drug Administration, and advised them of an industry-wide issue that was inherent in the then-prevalent packaging for the ointment. As I recall, they claimed that the extrusion of the ointment into its aluminum dispenser tubes resulted in microscopic elements of the metal being introduced into the ointment.
When they returned to their offices they found an FDA order to remove their product from the market until that issue was resolved. They called the FDA in high dudgeon, noting that the problem was inherent in products industry wide. The FDA reply was that “We don’t know that the problem is in all products, but we do know that your product includes metallic contaminants because you told us so.”
The same principle would seem to apply to the S&P downgrade: For months, a significant number of our elected senators and representatives vowed to oppose any increase in the debt limit; if that rhetoric had been borne out in practice, our country would have been unable, legally, to borrow funds sufficient to meet current debts, although we may still have had the fiscal capability to discharge those obligations. There was no immediate fiscal reason to default on our debt, merely a political and legal one.
After the issue was narrowly resolved, one prominent political leader bragged about how happy he was with the close result. “Am I happy?” he said. “I got 98% of what I wanted from the negotiation!”[2] Moreover, he crowed, the anti-spending crowd now has a proven template to impose future debt limit expansions.[3]
So how did S&P conclude that there is an increased risk in lending to the United States? To me it seems obvious. We told S&P, and the world, that, while we might have the fiscal resources to make required payments, it is entirely possible - and, some might argue, probable - that our political leadership may refuse to permit that to be done. “They told us they probably wouldn’t pay." That, in and of itself, increases the risk that lenders and prospective lenders must consider.
Would you lend money to someone who that tells you upfront, “Thanks, but I ain’t never gonna pay it back?”
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1. Maddow: RT @CNBC: Source: S&P Acknowledged Computational Error - S&P Either Revising Rational Or Deciding Against Downgrade by The Rachel Maddow Show on Friday, August 5, 2011 at 4:32pm.
2. The Moderate Voice - Robert Stein - Aug 2, 2011, . . . from where we are as John Boehner crows, “When you look at this final agreement that we came to with the White House, I got 98 percent of what I wanted...."
3. Steve Benen, “Political Animal Blog” 8/2/11: Leading Republicans have already made their intentions clear. Consider what Senate Minority Leader Mitch McConnell (R-Ky.) told Fox News about the deal:
[I]n the near future - maybe in the distant future — no president is going to be able to get the debt ceiling increased without a re-ignition of the of the same discussion. . . . I expect the next president, whoever that is, is going to be asking us to raise the debt ceiling again in 2013, so we’ll be doing it all over.”McConnell made a similar comment on the Senate floor, boasting about how policymakers have established an “entire new template” for raising the debt ceiling in the future. On ABC over the weekend, uber-activist Grover Norquist echoed the same line.