This morning, after returning from the farmer's market on my bicycle, I was shocked to open my paper-paper and find this news:
How I failed to become aware of this yesterday fairly boggles the mind. I had the radio on on the way home, and web-browsers open all day. I guess it was announced later? Or NPR didn't find it a fit subject of commentary?
Anyway, this is one eventuality that I never heard anyone discuss during the media charade around the debt ceiling. I heard lots of discussion about the horrors that await us in the form of a credit downgrade if we didn't raise the debt ceiling, but nary a mention of the possibility that we would be stricken with the same fate if we did.
It seems pretty obvious in retrospect. Can the United States, as a matter of fact, make good on all the promises its made? Absolutely not, and everyone who's been paying the slightest attention knows it. That the S&P should come out and say it was only a matter of time, and perhaps the biggest surprise is that it's taken this long. It's appalling the way people let political allegiance distract them from the facts of their environment.
Here's a thought: to whatever extent this actually changes investors' behavior (you could argue that the downgrade's been priced into the market for a long time), it should have the effect of making some private debt more comparable to US sovereign debt. Thus, investors should be more willing to substitute private debt for sovereign debt which means lending money to companies rather than governments. What effect does this have? Money that would otherwise be locked up in government projects will instead be allocated to private projects, which are inevitably more productive.
On the other hand, the government always has the power monetize the debt, something that I think its under-appreciated in its insidiousness.
Added: is that picture cropped that way on purpose?