The Lessons of History and Fiscal Responsibility?

“The political process will outperform S&P’s expectations … The fact is when the issues are important, history shows that both sides can come together and get things done.”

So says White House Press Secretary Jay Carney, in response to Standard & Poor’s announcement yesterday that it has changed its outlook for US sovereign debt from stable to negative, thereby raising the odds that it will downgrade US debt within the next two years. When someone cites the lessons of history, I usually check my wallet.

While S&P’s warning could provide additional leverage for those who are serious about pursuing fiscal responsibility, one wonders: will the electoral calendar intervene?  There is an interesting debate on this issue at the New York Times.

Perhaps Pileus readers would like to add their contributions here?

4 thoughts on “The Lessons of History and Fiscal Responsibility?

  1. It’s safe to ignore the rating agencies on the issue of US sovereign credit risk. There’s no such thing.

    Recall that in November 1998, the day after the Japanese Government announced a large-scale fiscal stimulus to its ailing economy, Moody’s made the first of a series of downgradings of the Japanese Government’s yen-denominated bonds, by taking the Aaa (triple A) rating away. By December 2001, they further downgraded Japanese sovereign debt to Aa3 from Aa2. Then on May 31, 2002, they cut Japan’s long-term credit rating by a further two grades to A2, or below that given to Botswana, Chile and Hungary. What happened to Japan and the bond market? Nothing. The bond dealers simply ignored the idiots from Moody’s.


    The markets don’t appear to have paid any attention to S&P’s announcement, suggesting that the risk was already priced in. 10 year T-Bills currently have very low yields, so I don’t think that there is any appreciable risk of the US defaulting, short of Bachmann getting elected President.

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