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S&P downgrade meaningless, says economist

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Wednesday, August 10, 2011



My my take on the whole Standard & Poor's downgrade is that the S&P action was essentially a non-action.  There is no new information out there that they revealed, they simply gave their opinion about the chance of a U.S. default which is slightly higher now that Washington has revealed a new and higher level of disfunction. The S&P statement was a political statement, not an economic one. 

So why have markets crashed? It has everything to do with the global economic malaise and new threat of recession, especially coming from the Euro zone but also created by the debt ceiling deal's new spending cuts.  Cutting government spending in the midst of a recession cuts aggregate demand right at the moment the economy can least afford it.  I think investors are now very jittery as both Europe and the U.S. are on similar trajectories - stumbling economies and new austerity measures.  The future does not look good at the moment.

I think the evidence in support of this comes from the fact that as investors were shedding equities, they were gobbling up U.S. Treasuries, driving the 10-year T-Bill yield to a new yearly low.  This is the very security the S&P just downgraded - which demonstrates just how meaningless the S&P's action was in that sense.

I don't think the timing was entirely coincidental, however, the S&P action was still a shock to a system that is hyper-sensitive right now. 

Finally, I don't think you can take the markets' downturn as any evidence of an impending return to recession and in fact,  I don't think it matters whether we return to slightly negative growth or stay with anemic positive growth: both imply unacceptable levels of long-term high unemployment.

Patrick Emerson is author of the Oregon Economics Blog and an associate professor of economics at Oregon State University.



Bob Brown
0 #1 Spending cuts?Bob Brown 2011-08-10 15:01:56
Were there really spending cuts in this debt ceiling deal? From what I read it was typical government action, agreement to reluctantly CUT the RATE of GROWTH of FUTURE SPENDING.

Note that's there's a big difference between cutting spending (which government virtually never does) and saying, yeah, maybe we could, possibly, if we really have to, perhaps, hold down spending growth in the future, like maybe somewhere near the rate of growth in the economy. But wait, that might be too drastic. Let's go have a drink and talk about it more later ... when and if the problem gets really serious.
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Michael Vaughn
0 #2 Is our future in the wrong hands?Michael Vaughn 2011-08-10 20:55:10
Emerson has succinctly, and deeply, scored the predicament of our economic health: The brainless actions of our elected dimwits (both international and domestic), and those who think they have the wisdom to pass judgment, however ill conceived. This, along with the rich trying to protect their money, spells disaster for the rest of us.
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