STANDARD & POOR’S CRITICIZED

Less than a week after Standard & Poor’s criticized Washington’s political tone with a one notch downgrade in the U.S. credit rating, the critical tables seem to be turning against Standard & Poor’s.

Democratic and Republican leaders in Washington, as well as investors, have surprisingly united in a collective stance against S&P’s ratings verdict.  Now some analysts are beginning to question S&P’s competence, credibility, and even their motives.

S&P said it lowered America’s rating because it didn’t believe the U.S. Treasury could repay its debts in the future.  But since that kiss of death, Wall Street and foreign markets have nosedived, while investors have flocked to U.S. Treasury bonds, making the chances of a default more remote than ever.  Which begs the question:  If the U.S. is truly at risk of a credit catastrophe, why are investors the last to know it and reacting otherwise?

Despite S&P’s analysis, the fact is the United States will never fail to pay its debts. According to Dean Baker of the Liberal Center for Economic and Policy Research: “The debt is issued in dollars. That means it is payable in dollars. The U.S. government prints dollars. This means that if for some reason the government was unable to tax or borrow to raise the money to pay its debt then it could always print it. This may carry a risk of inflation, but S&P is not in the business of making inflation predictions, they are in the business of assessing the likelihood that debt will be repaid.”

Investors’ positive reaction to the downgrade, along with the nearly $2 trillion dollar error S&P made when calculating the U.S. deficit over the next decade, have surely not helped their credibility. Said Treasury Secretary Tim Geithner: “They’ve shown a stunning lack of knowledge about basic U.S. fiscal budget math.” 

Could it be possible the S&P rating is actually creating an unexpected bit of unity in the political halls of Washington?