Buttonwood reports that:
S&P has said that
We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer 'AAA' sovereigns. ...
The US has better growth prospects than most European nations and has the "exorbitant privilege" of issuing debt in the world's reserve currency, which keeps the cost down. But it resembles one of those Greek myths when the hero's power is accompanied by a curse; in this case, a political system that is not designed for serious deficit-cutting (the point made by S&P). The world's dominant power tends to think its financial strength will never drain away. But Spain, having absorbed all that gold and silver from Latin America, still defaulted on its debts in the 16th century; Louis XIV, the sun king whom other monarchs dreamed of emulating, set France on the road to financial ruin; and Britain started the 20th century with a huge empire and piles of overseas assets but was rationing food in peacetime by the late 1940s.
US federal spending as a percent of GDP has fluctuated around 20% for the last 40 years.
I figure that's probably a reasonable figure. It's time to cap spending at 20% of GDP and raise revenues to match that figure, before we go the way of Greece, because unlike the weak countries of the EU, we don't have Germany to bail us out.
Part of the problem is that the left just doesn't seem to get it. TPMDC, for example, opines that:
The White House -- and the bulk of mainstream economists -- have warned that a failure to increase the debt limit would lead to an economic catastrophe.
Of course, that's either uninformed or disingenuous. S&P's warning is focused on getting spending under long term control--"We believe there is a material risk that US policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013"--not the short term debt ceiling issue.
Having said all that, the market reaction to the S&P announcement has been modest. Free Exchange reports and opines that:
This is "news" in the sense that S&P said something and lots and lots of news organisations have opted to write about it. But is it news? No, it isn't. Neither the American fiscal position or its political dysfunction will come as a surprise to anyone who's been paying attention. S&P has not struck out boldly in fretting about American borrowing; that's practically the national pasttime.
And so I'm a little sceptical of the ubiquitous headlines asserting that the Dow's morning tumble, of near 2%, is a result of the S&P information. Writers are going a little crazy over something that's not, actually, news. Time's Rana Foroohar, for instance, says, "Is this the first domino in the next global financial crisis? It's possible." I uttered the same thing a moment ago after pouring myself another cup of coffee, and it was equally true.
I look at the markets today, and I see that equities were off around the world; Asia and Europe were down well before the S&P news came out. I see that yields on peripheral European debt are skyrocketing while American yields are mostly down for the day. I see that the euro is down sharply today, and the dollar is up against the euro, against sterling, and against the Canadian and Australian dollars. Now it's possible that markets saw the S&P announcement and concluded that American austerity and opted to shed risk, paradoxically increasing the appetite for American debt. Or maybe traders woke up grumpy. My read of markets is that they're mostly worried about Europe.
This is, of course, exactly what would expect in efficient capital markets. The fundamentals of the US financial system and its feckless political system are all well known and have long since been priced into the markets. Only new information--such as the political system suddenly becoming even more feckless, if such a thing is possible--should affect prices.
As such, however, Krugman is dead wrong to imply that the lack of market reaction to the S&P story refutes the need for prompt spending cuts.
