Bizarre Reaction to S&P Downgrade of US Debt
On Tuesday Standard & Poor’s (S&P) the nation’s best known bond rating service changed its “long term outlook” for US government debt from “stable” to “negative.” The rating itself remains at S&P’s highest, AAA. The outlook change signals S&P’s belief that a rating downgrade may be necessary within a couple of years.
The chart tracks the debt as a percentage of GDP since it’s previous peak at the end of World War II when it was even higher than today. 
War spending and debt was a temporary condition. When the war ended the government cut spending by 68% in three years. Today’s monstrous debt results from funding permanent programs to keep promises by politicians of the past six decades. It is not a temporary condition that can be resolved quickly and relatively painlessly. Spending must be cut and millions of individuals, farmers and companies will receive less from the government than they are accustomed to receiving or expect to receive in the future.
Response from the political-media establishment to S&P’s downgrade was bizarre. Some commentators called S&P a tool of the corporate elite trying to harm “working people.” That’s just silly. US Treasury bonds are traded by the Billions of dollars worth every day on open markets all over the world. Their interest rates fluctuate second by second, around the clock. When “the market” meaning a consensus of investors believes the risks have become too great for the current low interest rates those rates will rise, with or without advice from S&P.
S&P had no choice but to do something. Their credibility would be in doubt if they didn’t react to what every investor on the planet knows, that the US Government is coming dangerously close to piling up more debt than it can service.
Ezra Klein of the Washington Post claims the downgrade in S&P’s long term outlook was a response to “political gridlock” over the looming debt ceiling vote, even though S&P didn’t mention the debt ceiling in it’s downgrade announcement. Klein blames Republicans who demand spending cut commitments in exchange for their votes to raise the debt ceiling. But less spending is the only way to prevent the debt from growing to high enough, with risk of default great enough to drive away investors.
Other commentators claimed this warning means the Republicans and Tea Party activists and advocates like Liberty Works are wrong to oppose tax increases. Yet S&P’s announcement included this:
Standard & Poor takes no position on the mix of spending and revenue measures the Congress and the Administration might conclude are appropriate.
As we reported here and here there is simply no way to raise enough tax revenue to solve this problem
