The subject of my column today is completely different from my plan for today. I will get back on my track tomorrow, hopefully, but one never knows, as anything can rise out of the deep, dark, blue and that thing can roil the water dramatically. Today, the news that the ratings arm of Standard & Poor’s (S&P) suggested a future downgrade to the AAA rating of the U.S. is that thing. Mind you, the S&P did not actually downgrade the current U.S. rating; it simply said,
Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable.
S&P is of course referring to the budget battle in Washington D.C. More specifically, S&P is responding to the inability of the “parties” involved to rise of above political rancor and ideological firmness to address our short- and long-term fiscal issues. Drilling deeper, it is likely S&P is sending a message to those who would risk “the good faith and credit” of the U.S., to those who think the U.S. debt ceiling and the U.S budget are political tools. Keep in mind, S&P has as much to lose as anyone if our elected pols do not start acting in the country’s best interest.
While investors viewed last week’s budget brinksmanship as a minor event, they are beginning to grow concerned that many lawmakers and ordinary Americans, fail to grasp the implications of even suggesting the United States would default on its debt obligations. What is a political football to Congress could end up flattening the economy and hurting consumers by lowering the nation’s pristine credit rating and sending interest rates sharply higher.
The above outlook suggests nothing good will come from anyone even threatening not to raise the debt ceiling. The market does not react well to uncertainty, and in this case, uncertainty that could lead to economic collapse. Witness the impulsive, knee-jerk response to the S&P news today. An overreaction, one might say, but, in reality, it is what we have to look forward to as the politicians in Washington put their interests above the best interests of the U.S.
Anything that threatens to derail or delay the process of raising the debt ceiling is a red flag for markets. The longer it takes and the deeper the divide in Washington, the more markets will worry that the United States, the world’s largest debtor nation, will default on its debt obligations with economy-rattling consequences.
Ideological politics and the economic interests of the U.S. are like fire and gasoline – keep them separate or risk explosions. Currently, some of our elected pols think the threat of moving the can closer will get them what they want. This game of chicken is more suited to high school boys in 55 Chevys. Nevertheless, we are watching our pols move the gas can closer to the fire … Keep a close eye on this, as you just might need to get out of the room quickly.
Trade in the day – Invest in your life …
