August 06, 2011 07:54 AM UTC

S&P Downgrades the United States; Is Colorado Next?

•  
• by: George Oscar Bluth Jr.

(Pols just HAD to post a thread about stock markets recovering, didn’t they? Now look what you did!   – promoted by ProgressiveCowgirl)

Tonight’s downgrade of the debt of the United States by Standard & Poor’s will be spun furiously by the White House, Congress, and shills all over the land.

Indeed, it has already begun as the Treasury has alleged that S&P’s analysts initially justified their downgrade based on a very faulty analysis of the budgetary baseline from which the recent debt deal makes trillion-dollar cuts.

Over on the teevee and twitterbox, the incensed disembodied heads of the leftmedia are wasting no time in playing the predictable, time-honored political tradition of Shoot the Messenger. After all, the credit rating agencies were exposed during the financial crisis as having the same endemic moral hazard problems as the megabanks and wouldyoureallytrustanythingtheysayafterTHAT?

The interested reader should recognize this line of argument as an attempt to poison the well. Either the United States government is a AAA credit or it is not. We all just witnessed a vocal, know-nothing minority of one of the houses of Congress cause the government to come within hours of a technical default; there is something truly rotten in the system for this to have ever come to pass in the first place.

It is clear now that there is a distinction, an undeniable value judgment about the efficacy of American politics compared to, say, Britain or Germany. There is now no country with a president at its head of government and an unblemished credit rating; this is surely not a coincidence and is yet more evidence that modern parliamentary systems outperform governments with a firewall between the legislative and the executive.

The most interesting question of the night is: So what? S&P’s downgrade did not reveal any new information about the fiscal condition of the United States. Rating agencies can be said to be relatively knowledgeable about the creditworthiness of local governments but it is untrue at the level of any sizeable sovereign, and certainly one with the credit strength to issue debt in its own currency.

If the S&Pers are truly concerned that a day may come when the Treasury starts writing bad checks, they also need to downgrade every counterparty of the United States, including local governments and firms of all sizes if they are to retain internal consistency in their ratings.

The local governments most impacted would be governments in and around the Columbian leviathan, where literally millions of taxpayers earn a living from the federales in one way or another and all of the other taxpayers provide their goods and services.

Apart from the DMV (a/k/a metropolitan Washington)  where the economy always steamrolls ahead despite (and because of) everything else going on in the world, in what state is federal employment and contracting most concentrated?

I have heard that by many measures it is our fair Colorado. I wouldn’t be surprised if local governments up and down the Front Range find themselves with a negative credit outlook or even a downgrade, particularly El Paso and Jefferson counties and the cities of Lakewood and Colorado Springs.

However, by the transitive properties of mathematics, the “so what?” question must also be asked of any local government getting whacked, including those in Colorado. We don’t know anything we didn’t know earlier this week on account of S&P’s rating action.

Without a market reaction that is unmistakably linked to the downgrade, this whole episode may just demonstrate that sovereign credit ratings reflect information that is already priced into markets, rendering them completely redundant.

Cross-posted at The Daily Dickpunch  

 Loading ...