Are we arriving at the main event?

As part of a survey response used in this online article this summer, I wrote “…Disturbingly, we are beginning to look like a society that cannot predictably execute the routines of governing – and that does not engender faith in our economy. As long as ours seems to be in marginally better shape than others, we get by. Should we reach a point where that is no longer the case, the absence of commitment to do the work of government will be less of an embarrassing sideshow and more of an alarming main event. Budgeting is a foundational aspect of government, regardless of how minimal a state you prefer.”  If policymakers on both sides fail to find a way to work together, enough to raise the debt ceiling, we will indeed be at the main event.  The Wall Street Journal discusses why the debt ceiling is of greater concern to investors than the shutdown.  The Economist provides a perspective from across the pond.  So does the Financial Times with an update on the market response and how banks are preparing for the possibility of a default.

Rating agency Standard & Poors’ press release (10/2/2013) summarizes their estimate of the impact of the ongoing shutdown on the economy and points out the potential impact of the lack of federally-produced economic data on the Fed’s decision-making and their own ability to analyze the situation.  Their July 10 2013 analysis of US sovereign creditworthiness makes very useful reading – I commend it to you even though we have not gotten to the part of the class that deals with debt and ratings.  S&P report that their rating takes into account the risk that political ability to make progress on “fiscal consolidation” (i.e., reducing the structural imbalance between Federal spending and revenues, whether by expenditure policy changes, tax policy changes, or a combination) will continue to be limited due to Washington gridlock in a divided government:

The stable outlook indicates our view that some of the downside risks to our ‘AA+’ rating on the U.S. have receded to the point that the likelihood that we will lower the rating in the near term is less than one in three. We do not see material risks to our favorable view of the flexibility and efficacy of U.S. monetary policy. We believe the U.S. economic performance will match or exceed its peers’ in the coming years. We forecast that the external position of the U.S. on a flow basis will not deteriorate.

However, that is certainly not the same as saying that the government could default on its debt with impunity due to this gridlock; the next paragraph of the Outlook section continues:  

We believe that our current ‘AA+’ rating already factors in a lesser ability of U.S. elected officials to react swiftly and effectively to public finance pressures over the longer term in comparison with officials of some more highly rated sovereigns and we expect repeated divisive debates over raising the debt ceiling. We expect these debates, however, to conclude without provoking a sharp discontinuous cut in current expenditure or in debt service. [emphasis added] We see some risks that the recent improved fiscal performance, due in part to cyclical and to one-off factors, could lead to complacency. A deliberate relaxation of fiscal policy without countervailing measures to address the nation’s longer-term fiscal challenges could place renewed downward pressure on the rating.

At the end of the rating report you can see the rating history – S&P downgraded the unsolicited US sovereign debt rating in summer 2011 in response to the last episode of debt ceiling brinkmanship and ongoing inability to work productively on fiscal consolidation.

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