S&P, Standard and Poors, has downgraded the US Credit rating from AAA, the highest rating possible, to AA+, the second highest. Before the debt ceiling was raised there were many threats by the credit rating agencies, including Standard and Poors, that the US's credit might be in jeopardy. They also warned that a raising of the debt ceiling alone would not assure the security of the AAA rating the US enjoyed. A serious attempt at tackling the long term debt of the country was what the agencies demanded.
What most reporters, politicians, and the laymen did not consider, but on the whole understand, is how the political climate and stalemate in Washington D.C. influence the economy, the debt, and the ability to avoid the iceberg that we are hastily hurtling towards. Presently the US Congressional approval rating is at 14%, according to a CNN poll. This lack of confidence in the ability of our leaders to propose the necessary solutions, and truly the willingness of the special interests and the people to allow it. It is this quagmire that Standard & Poors reacted to; the inability of our political system to implement meaningful change. \
While there is no doubt that the other major factor to this equation is the actual debt that we as a nation possess; Time and time again S&P went out of it's way to highlight the inability of congress to act. S&P uses five main factors to determine a country's credit worthiness. These are
- The Political Climate
- The Real Economy
- The Fiscal Situation (Revenue v Expenditures)
- External Situations
- Monetary Policy
Standard & Poors relied heavily on the political climate of Washington DC when making this decision. It is extremely evident by their statement released jointly with their credit downgrade of the United States' credit. Below is an excerpt from the actual release downgrading the US's credit.
"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 statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our
view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability."
Some key elements of this statement are that it is political brinkmanship, including holding the debt ceiling and the budget hostage, as well as the political third rail for the GOP, tax increases, and the very minor changes to Medicare and other entitlement programs. As S&P points out, "most other independent observers regard..." these measures .."as key to long-term fiscal sustainability.
Another measure continually brought up as a way to ensure America's solvency is the Bush tax cuts and the need for them to expire.
"Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act."
What S&P is stating is that because the GOP refuses to raise taxes, that they now believe that there will not be enough support to let the Bush tax cuts expire. This in turn, as S&P states in the section below will raise $93 billion that could go towards lowering the debt.This goes back to the main thesis of this entire argument that Standard & Poors is making on why they lowered the US's credit rating; the government is broken and is unable to turn the wheel to avoid the iceberg at 12 o'clock.
It truly can be summarized in one concise line, “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.”