Mark Thoma: The S&P’s Negative Outlook for US Debt
Mark Thoma:
The S&P’s Negative Outlook for US Debt - CBS MoneyWatch.com: Today, Standard & Poors downgraded the US credit outlook to negative. As the WSJ reports, “Standard & Poor’s Ratings Services Inc. cut its outlook on the U.S. to negative, increasing the likelihood of a potential downgrade from its triple-A rating, as the path from large budget deficits and rising government debt remains unclear.”...
[T]he fear that political gridlock will prevent a solution to the debt problem. However, the sentiment “no big deal” seems correct to me. I am worried about the particulars of the solution to the long-run debt problem — who will end up paying most of the cost of closing the budget gap — but one way or the other the political process will deal with this problem. Also, it’s important to remember that the US debt is a promise to pay dollars, and we can print as many dollars as we want. That could be inflationary, and the inflation can undermine the real value of those bond payments and cause other problems, but that is not technically a default. In any case, the Japanese experience described above (here too) is worth remembering. Even after the downgrade of its debt, and all the worries about its ability to pay it off, borrowing costs for the Japanese government remain very low. Given that the biggest risk from fear of the debt is rising interest rates, that is reassuring.
