Would a Credit Downgrade Matter?
Comment of the Day

July 28 2011

Commentary by David Fuller

Would a Credit Downgrade Matter?

This is certainly a topical column by David Wessel for The Wall Street Journal. Here is the opening:
A prediction, widely shared in Washington and on Wall Street: One month from now, Congress will have lifted the federal debt ceiling, the U.S. government will be paying its bills, the president will have signed a convoluted deficit-reduction law that defers decisions on benefits and taxes-and the U.S. will have lost its AAA credit rating.

A downgrade of the U.S. to AA by Standard & Poor's-putting the U.S. in the company of Slovenia, among others-is not good. Full stop.

But how much will it really matter?

Is S&P's opinion akin to sports columnists writing about the World Series? (Entertaining, but what really matters is what's happening on the field.) Will a downgrade finally trigger the much-predicted plunge in markets and spike in bond-market interest rates? (If so, that would be economically devastating.) Or will the loss of AAA status be a near-term non-event, but become a date highlighted in history-textbook timelines tracking America's slow decline? (In other words, a downgrade reflects the disturbing underlying economic and political woes rather than worsening them.)

The markets, we have been warned for weeks, are about to crash at any moment. ("Investors refuse to panic," read one headline.) A default surely would provoke a market drop. But if that is averted, will markets plunge because S&P points out the obvious: U.S. politicians can't agree on a fix for the nation's long-term finances?

David Fuller's view The unprecedented event of a credit rating downgrade for the US government could only be bad news, psychologically and probably financially. It would also become a footnote on historic graphs for bonds, US stock market indices, the USD and gold.

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