Friday, Standard & Poor’s downgraded the rating on the United States of America from AAA to AA+. Regardless of how you spin this or what you believe in the reputation of S&P’s ratings in light of their performance during the housing bubble with their ratings on the derivatives, the fact is that the markets depend on the ratings for investment decisions and it will matter. Let’s not dance around that fact.
But that is all for the media and politicians to argue about. We’re going to examine this in a slightly more pedestrian way.
It seems like the GOP loves to talk about the US economy in terms of a household. To keep in step with that metaphor, let’s peek in on the secret tapes of a family meeting that just adjourned at one of my neighbors down the street.
Dad: Ok, is everyone here? Mom, kids? The mortgage loan officer and credit card card companies? ….. do you want more tea?
Mom: Can we just get on with this meeting? I have a blog to write….
Dad: Ok, ok. As you know, 42% of our budget is dedicated to the mortgage. Since we’re cutting spending, we’re going to quit paying that. We might just send in the interest payment but we’re gonna have to crunch those numbers. And we’re going to further devalue the collateral value of our house by not repairing that gaping hole in the roof or patch the driveway. We’re probably not going to pay the credit cards, though.
And we’re spending far too much in food, so we’re cutting way back on everything….
Kids: But daaaaaaddddddd….
Dad: Hey, we have to cut the spending. The malnutrition that will set in may affect your ability to learn in school and I may get weak and fall down on the assembly line, but we have to cut that spending.
We’re also cutting off our medical insurance so if anyone catches anything, you’re just gonna have to ride out the symptoms. If it kills you, well, you just should have had stronger genes. Cable and telephone is going, to…
Mom: But what about emergencies? We’ll have no way to know if a tornado is coming or have 911 to call…
Dad: That is all in God’s hand now. If God wants us to survive a natural disaster, His hand will move us out of harm’s way.
And the mortgage officer goes back to the bank and immediately draws up papers to call in the mortgage and the credit card companies cut the credit limit and raises the interest rate on the existing balances and any future spending.
Are we surprised that Standard & Poor’s lowered our credit rating in light of the people who claim to be the most responsible members of Congress were publicly debating whether or not the United States should pay its bills? That the GOP front-runner for the presidency publicly claimed to support default as a viable action? That the president who has been widely regarded as being able to win re-election in 2012 is now being reported by the media as having a plummeting approval rating and this challenger could win?
If you were a creditor of the United States, would you sit by and wait to see what happens?
Yeah, me neither.