Experts: Don’t Focus on Downgrade, Focus on Debt

Monday, 08 Aug 2011 12:58 PM

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Stock markets are taking a beating on news that Standard and Poor's has stripped the U.S. of its AAA rating, the first downgrade in the nation’s history, while bond markets are largely shrugging off the bad news.
 
Although Moody’s has affirmed its U.S. rating for now, no one is sure whether other ratings agencies will eventually follow S&P’s lead, and whether nervous investors will continue ditching U.S. equities.
 
Bottom line, though, is that government borrowing and spending — which got the country in trouble in the first place — needs fixing.
 
The Dow Jones Industrial Average was down by over 300 points in midday trading Monday, the first session since the announcement by Standard and Poor's hit the news wires on Friday evening.
 
Treasury bonds rallied as investors flocked to the liquid safe haven of government debt — the very item that was downgraded.
 
Gold, a popular hedge against volatility in currency markets, soared to over $1,700 an ounce; it’s been as high as $1,717.40 on today’s spot market.
 
Add to that, concerns that serious debt problems in Europe will spread from smaller economies like Greece to larger ones like Spain and Italy are fueling fears in an already embattled global economy and marketplace.
 
So, now what?
 
Some market watchers say get ready: the end of the world is not around the corner, but the problems won't go away without some serious and painful belt-tightening by naturally profligate government officials.
 
"The American people need to know that nothing is going to change without some pain for them," says Kenneth Langone, CEO of Invemed Associates, according to CNBC. "We're going to pay our debt, but who is going to get screwed in the long run? The poor guy that's living on fixed income because inflation will take its toll."
 
Other financial heavyweights expressed detached interest in the downgrade.
 
"I’m kind of amused by the fact that a year or so ago Standard & Poor’s Ratings was the gang that couldn’t shoot straight, a joke, and now they’re the last word. Interestingly enough, Moody’s hasn’t said a word…We’re focused on very short-term things here, too much noise and not enough perspective," Jack Bogle, founder of Vanguard, told CNBC.
 
Critics say Standard and Poor's missed the point in that when it downgrades a rating, which is basically saying the entity in question carries an increased chance of default. That arguably can't happen to the U.S., which doesn't owe debt in other currencies, meaning it can print money to pay its bills even if doing so fuels inflationary pressure.
 
Moody's, meanwhile, says it may also eventually downgrade the U.S. if it doesn't get its financial affairs in order.
 
Moody's put the U.S. on review for downgrade in July, although it did say it was sticking with a AAA rating on August 2, when U.S. Congress passed a measure cutting the fiscal deficit and raising the government's $14.3 trillion debt ceiling. Still, Moody's is keeping a close eye on the U.S.
 
"If the process for further deficit reduction that is included in the budget control act produces results that are not really credible, that combined with the economic performance could potentially cause an early move on the rating," Moody's analyst Steven Hess tells Reuters in an interview.
 


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