Nothing To See Here?

The two main credit-reporting agencies are raising warning flags on the credit rating of the United States government.  The reaction from the markets, though, is a mild shrug.

The warnings issued Thursday echoed prior statements by the companies, however, and financial markets largely ignored them.

“My traders are shrugging it off as stuff we’ve heard before,” said Tom Di Galoma, head of interest-rate trading at Guggenheim Partners in New York.

If the credit score of the U.S. government were to actually decline, the result could be a disastrous spiral of the same type that consumed Greece last year.  Decreased purchase prices for U.S. bonds would mean that the government would receive less revenue per bond purchase and pay more interest when the bond matured.  In simple terms, borrowing would become both less effective and more expensive.  That would necessitate more borrowing to cover the increased cost of earlier borrowing (government debt is “rolled over” periodically). What it boils down to is a vicious cycle towards a remarkably rapid collapse of the country’s fiscal structure.

The main reason for apathy in the face of such a threat appears to be mere faith in American exceptionalism.

“The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar” to fund its deficits, Carol Sirou, head of S&P France, said at a conference in Paris on Thursday.

So basically, financial analysts believe that the dollar will remain stable because, you know, it’s the dollar.

That’s weak sauce, especially since they are betting the entire U.S. economy on it.

The bottom line is that the canaries in the coal mine are starting to drop dead, one by one.  The United States government needs to get serious about reigning in spending and, yes, raising revenue as well.  The proclamations of some calling for more spending, more stimulus, and absolute prohibitions on spending cuts in both the defense budget and the huge entitlement programs that dominate the U.S. budgetary picture aren’t dealing with reality.

And the clock is ticking.



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