Monday, August 8, 2011

Don’t shoot the messenger

This weekend I heard a lot of criticism leveled at Standard & Poor’s—undeserved, in my view—because they lowered the U.S. sovereign credit rating to AA+ from AAA over debt and budget concerns. Readers may remember that, back in April, S&P lowered its outlook on U.S. sovereign credit from “stable” to “negative”—the agency’s latest action was the much-anticipated sound of the other shoe dropping.

"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default."

Alan Greenspan
Former Federal Reserve Chairman
on NBC’s Meet the Press

Other rating agencies notably decided to leave the U.S. rating at “AAA.”

There seems little doubt that the United States will, any time soon, be unable to meet their financial obligations, unless, of course, it chooses not to do so. By that I mean Congress could for whatever reason refuse to higher the U.S. debt ceiling and make it illegal for the  U.S. government to borrow enough to pay some of its bills. Willful default, so to speak.

Sen. John McCain appearing on Meet the Press yesterday said people should not “shoot the messenger,” referring to Standard & Poor’s. And I agree with the senator, though, I cannot agree with his conclusion that the downgrade is a result of President Barack Obama’s failed leadership—Republicans are not blameless in this fiasco.

Nor do I take comfort or reassurance from former Federal Reserve Chairman Alan Greenspan’s comment on NBC’s Meet the Press that the United States can pay any debt it has because “we can always print money to do that.”

Mr. Greenspan’s comment is almost as scary as speculation by some members of Congress that a default on the part of the U.S. wouldn’t be that big of a deal. One argument goes like this: it wasn’t that big of a deal in Argentina, so it wouldn’t be that big of a deal in the U.S.

As to Mr. Greenspan’s comment: after Zimbabwe-like inflation—when the U.S. prints money to pay its sovereign debt—devastates the U.S. dollar, bond-holders won’t be able to buy anything with their bonds when they come due. So just who does he think will be lined up to buy new ones? As to speculation from the pro-default group: are they crazy, or just stupid?

American politicians spent months bickering over the debt ceiling and scaring the international investment community half to death. Then, because they come to some tepid, minimal eleventh-hour agreement, everyone is, apparently, supposed to go about their business as though nothing has happened. That’ll happen.

The U.S. Congress and President Barack Obama, in effect, threatened their bondholders with default. How irresponsible was that? So, who of them can reasonably complain when one credit agency suggests caution to those who are contemplating future purchases of U.S. Treasury Bills?



© Russell G. Campbell, 2011.
All rights reserved.
The views I express on this blog are my own and do not necessarily represent the views or positions of political parties, institutions or organizations with which I am associated.

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