Getting a Bad Grade From Grownups

Standard and Poors has downgraded U.S. debt to AA+ from AAA. Moody held pat. Some investment houses limit their debt holdings to triple A; they will not sell their treasuries, they will rewrite their charter and requirements. Some retail people will panic and sell but otherwise there will be no financial repercussions. But there will be emotional and political repercussions. America has never , ever, been graded as anything less than AAA; people will feel bad and there will be political posturing.

In some respects the event is fascinating. S&P never downgraded any company's debt leading up to the meltdown of 2008. Not one troubled bank , investment house or insurer was negatively reviewed. Nor did Enron, a company that was composed entirely of press releases and fraud, receive a downgrade right up to bankruptcy. But this was not an economic downgrade, it was a political one. S&P told the government what they were going to do: If the government did not cut the deficit by four trillion dollars, they would downgrade them. It essence they stated, "While you are the largest, most liquid, most vibrant economy in the world and have your own printing press, we are unsure you have the leadership to manage your financial problems." This is a huge political rebuke. This and this alone is the big deal.

And, of course, the fact that they had to delay their announcement for five hours because they had made a two trillion dollar math error.