The downgrade by S&P is a statement on one thing and one thing only. We are very close to being a banana-republic that can't function properly.
Ezra Klein: Standard & Poor’s has been wrong before. But they’re right now.:
The Economist magazine warned 3 weeks out from the deadline that the Republicans were needlessly playing a dangerous game.“The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges,” they explained in the statement accompanying Friday’s decision. After Republicans in Congress spent three months weighing whether or not to default on our debt and Senate Minority Leader Mitch McConnell said that paying our bills would never again be a foregone conclusion, can anyone really argue with that? After every Republican presidential candidate save Jon Huntsman either remained silent on, or flatly opposed, the deal to raise the debt ceiling, can anyone really say that U.S. debt is completely riskless? That there’s no chance of a political miscalculation, and if there is such a chance, that they can perfectly predict the outcome of the ensuing chaos?In Washington, it’s almost trite to say that the political system is broken. It’s been clear for some time that things really are different, that norms and procedures that once kept fractious congresses functioning have eroded with terrifying speed. If anything, S&P is, as usual, noticing the deterioration too late. But that doesn’t mean the deterioration is not real, or that it should be ignored. Too often, the pressure in Washington is from interest groups and activists and political consultants who are, perhaps without meaning to, pushing towards further dysfunction. Those of us in Washington who would like to see the government work have long wondered when the business community and other entities who need a functioning political system would begin exerting a countervailing force. Perhaps it begins now. If not, then this may be the first of many downgrades to come.
Dean Baker comments on the paradox of the economics of a downgrade of U.S. credit rating:
It would have also been worth asking what S&P thinks it means by this downgrade. U.S. government debt is payable in dollars. The U.S. government issues dollars. What does it mean that S&P thinks that at some point the government will not have the dollars needed to pay interest and principle and its outstanding debt. Does S&P think the U.S. government will forget how to print dollars?
Nope. It just thinks our government is so dysfunctional because of the Right-wing of the GOP that we might forget how to govern itself.
In terms of what the markets think about this downgrade what should we look for? Ajay Rajadhyaksha, a managing director at Barclays Capital in New York answered this in recent Businessweek article on the downgrade: “What really matters is whether the markets are willing to ‘downgrade’ the U.S. bond market. As this week’s move showed, U.S. Treasuries remain the flight-to-quality asset of choice.” I think Baker's comments above explain why they aren't concerned.