So S&P has changed the outlook for US credit from "stable" to "negative". Some commentators seem to have confused this with a ratings downgrade, which it isn't--the US AAA rating is still very much intact. Rather, Standard & Poor's are saying that the probability of a downgrade in the future has gone up. I think the WSJ sums it up pretty well:
The S&P analysis didn't offer any new insight into the nation's fiscal plight or partisan differences about how to solve it, but served as a reminder that investors may not always be as patient as they have been about U.S. deficits.
The U.S. debt now stands at $14.2 trillion and is expected to balloon in part because of rising costs for health care, retirement and other so-called entitlement programs, and the interest costs on existing debt. S&P said that even if a short-term deal is reached to contain deficits, any agreement could later be undone by politicians.
Administration officials, who were first alerted to the report on Friday, questioned its conclusions but said it validated their efforts to broker a bipartisan deal to address the debt.
Fundamentally, what both sides seem to have trouble grasping is that the important thing is not to solve all our problems right now, but to convince markets that we have the will and the fortitude to solve them at some point in the future. Right now markets are willing to cut us a lot of slack because they figure that we'll get it together eventually--just as we've always done before. The problems start not when our debts become totally unsustainable and congressmen start getting into fistfights on the House floor--but when markets stop believing that we'll find some way to solve our budget problems short of inflation or default. And "trouble" consists not of some massive capital flight, but of rising interest rates.
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