The day after Congress passed, and the President signed, a budget deal authorizing an additional $2.4 trillion in U.S. Treasury debt, China’s Dagong Global Credit Rating Company lowered its rating on Treasury debt to A from A+. Here at home, both Moody’s and Fitch affirmed their AAA ratings, but warned that more was left to be done in stabilizing the federal budget. No kidding! S&P, which has taken the toughest line, has yet to opine, but a downgrade would be consistent with the criteria that this ratings agency laid out a couple of weeks ago. I’d be surprised if S&P didn’t lower its rating to AA+, but before doing so, it may wait to see if the bicameral deficit reduction committee doesn’t pull some sort of fiscal rabbit out of its hat.
Neither financial markets nor most commentators displayed any enthusiasm over the debt deal. Monday morning’s “relief rally” didn’t last through mid-morning coffee. I suspect that the equity market losses we’ve seen since Monday have less to do with the actual legislation—which gave everyone something to dislike—than realization of the fact that a better deal just wasn’t possible at this point. It’s taken us decades to accumulate our $14.29 trillion in debt, and one act of Congress is not going to erase the layers of entitlements, subsidies and commitments that produced that total.
The other jolt of reality that hit markets this week is the ongoing weakness in the U.S. economy. Not only did we learn that growth in the first half of 2011 was slower than we’d thought, but forward indicators of economic activity—for example, the ISM survey—chilled expectations for second-half growth. The budget situation has implications for the economy as well. If any of us thought that our favorite brand of fiscal stimulus—tax cuts or increased government spending—was going to be on tap, the ongoing debate makes it clear that we’d better not hold our breath.
There’s a danger of taking an overly pessimistic view, however. Amongst all the negativity, I also see some positive indicators, such as higher auto production in July, recent increases in commercial and industrial lending, and the continuation of strong quarterly profits. Therefore, I think this is an appropriate time to remind ourselves that the U.S. remains the largest economy in the world, as well as the fourth-largest exporter of goods and services, the fifth-largest producer of petroleum, the second-largest producer of natural gas, and that the dollar is still the world’s only reserve currency. Even 40 years from now, the U.S. is expected to be the third-largest country in the world, with one of the youngest median ages among large countries. We’ve proven resilient before, and I believe we will again. They can downgrade our debt, but we can still upgrade our future.