Not to be outdone by Moody’s in the mindless pursuit of mindlessness, Standard & Poor’s announced yesterday that “there is a 50 percent chance it will [downgrade the U.S. credit rating] within three months, if Washington fails to come to an agreement over the nation’s debt.”
As so we have this wholly accurate summary of the rigorous thinking of the rating agencies:
- The world capital market cannot distinguish between a government that literally cannot pay its bills and one that may delay some interest payments for a week or two due to a political dispute over spending and taxation, but almost certainly will not because tax revenues are wholly adequate to cover debt service.
- More broadly: An effort to use the dispute over the debt ceiling to impose fiscal discipline upon the federal government suggests lower credit worthiness, while a “clean” increase in the debt ceiling allowing a $2,400,000,000,000 increase in the national debt suggests higher credit worthiness.
- A huge increase in the national debt will not enhance future incentives to inflate it away, and so such an increase will result in interest rates lower rather than higher.
Any of my undergraduate students receiving a grade of C or higher — every one of them — would do better than this. The press, of course, is equally silly. The Washington Post story actually argues that a credit downgrade under these circumstances will increase the interest rates that the U.S. government would have to pay on its debt, as if the world capital market cares one whit about the opinions of the rating agencies, which in any event always reflect old news.
More generally: The sudden eruption of news about the views of the rating agencies really is quite amusing. I once was walking my dog in a park when a deep thinker sitting on a bench informed me that the earth is both flat and destined to end within a day. As my time is not worthless, I ignored him. In precisely what sense are the blatherings of the rating agencies of greater interest? Someone? Anyone?
— Benjamin Zycher is a senior fellow at the Pacific Research Institute and a visiting scholar at the American Enterprise Institute.