"At least the warning builds outside pressure that U.S. lawmakers urgently need. The administration and Congress are increasingly irreconcilable - a bad sign for the upcoming budget negotiations. And this when it’s high time to agree on a moderate mix of tax increases and spending cuts. Not only to lower the budget deficit, but in particular to reassure increasingly nervous investors."
The signal is a dramatic one:
Standard & Poor’s is the first major credit rating agency to threaten to
downgrade America's credit. It’s not the first warning shot - the precarious
financial situation on recent weeks had already spurred the International
Monetary Fund as well as large investors like the investment management firm
PIMCO to sound the alarm. But this warning has shaken markets the most. And
that’s good.
At least the warning builds outside pressure that U.S. lawmakers urgently need. The
administration and Congress are increasingly irreconcilable - a bad sign for the
upcoming budget negotiations. And this when it’s high time to agree on a
moderate mix of tax increases and spending cuts. Not only to lower the budget
deficit, but in particular to reassure increasingly nervous investors. Above
all, U.S. policymakers must demonstrate that they are capable of taking action.
No one seriously expects that they'll come up with a miracle cure for America's
high debt burden.
Without such a political
signal, the nervousness on U.S. markets would at some point have become a
problem. If investors begin demanding higher yields from U.S. Treasury Bonds because
they are no longer convinced that America will forever maintain its premium
payment record, then the cost of credit will rise. With this comes the threat
of a downward spiral: higher borrowing costs would negate savings efforts and nervousness
would grow, which in turn would drive up credit costs. And once nervousness infects
the markets - as demonstrated by the European debt crisis - they tend respond in an exaggerated fashion.
Posted by WORLDMEETS.US
VIDEO: Standard &
Poor's seeks to force solution to U.S.
The U.S. is still a long way
from that situation. Investors are counting on the fact that this country, which
is most relevant to the system, will not become insolvent just like that. And
they're betting that the U.S. Federal Reserve and China - as the leading
holders of U.S. Treasuries - will do whatever it takes to prevent their
devaluation.
The FED finds itself in a
dilemma. If it continues to purchase government bonds on such a lavish scale, even
as the economy is gaining strength, then it might at some point drive up
inflation and thus the yields on U.S. bonds - with the usual consequences. Investors
shouldn’t expect Standard & Poor's to warn them in advance of the
deteriorating situation in the U.S. As the agency has demonstrated once again, it
doesn’t react until the disturbing facts have long been clearly lain out on the
table.
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