As George noted earlier, Standard and Poors put US debt on a watch list earlier today, saying that the battle over the deficit appears to be protracted. I was busy most of the day, but caught this news item wherein the US is now getting lessons on fiscal discipline from the Swedes. The teacher of these lessons is the finance minister of the ruling Moderate Party. "When we need to learn about fiscal discipline from Swedish moderates," I thought, ... and then got called to another meeting and set that aside.
I came home tonight, fired up the laptop and found that Austan Goolsbee, head of Obama's Council of Economic Advisers, thinks S&P is wrong (as opposed to Congress, as George's post noted.)
In an interview with CNBC, Austan Goolsbee, chairman of the Council of Economic Advisers, characterized the S&P move as a "political judgement."
"What the S&P is doing is making a political judgement and it's one we don't agree with, and it appeared to me that Moody's and some others don't agree with that judgement," Goolsbee said.
The U.S. Treasury also voiced disagreement with the S&P revision.
"...We believe S&P's negative outlook underestimates the ability of America's leaders to come together to address the difficult fiscal challenges facing the nation," Treasury Assistant Secretary Mary Miller said in a statement.
Now it is true that the S&P is making a political judgment. The warning has little to do with our ability to pay off the debt -- a country that can print the reserve currency of the world at the snap of its fingers does not have a solvency problem in the short run. The resulting inflation will be unpleasant, but much of that will be exported elsewhere to the world. The real economic danger is losing that reserve currency status, and right now, to paraphrase a famous man, the dollar is the worst reserve currency in the world ... except for all the others. I do not see that shift away from a dollar world trade system happening suddenly.
Still, it's a bit odd that Goolsbee would decide to challenge the report rather than say something pleasing and bland, such as "We agree with the rating agency that long-run deficit control is of the utmost importance for the next two years, and we will work with Republicans to create a plan that balances the budget in a way that supports the growth of the economy while protecting [insert laundry list of transfer recipients here.]" Wouldn't have raised an eyebrow. And the effect on markets would probably be short-lived. A similar warning on UK debt in 2009 moved interest rates up 50 basis points (0.5%) overnight but that effect disappeared within a few weeks. And that was without the UK doing anything -- it was a year before David Cameron and George Osborne.
So the real risk we face is that Congressional Republicans and the Obama White House will get themselves in such a battle over the debt limit, the 2012 and 2013 budgets that some disruption in paying the debt will occur. For those of us who have worried the Republicans have been too weak in its arguments for spending restraint, the S&P outlook should make us happier -- they foresee a big struggle ahead. The next thing to watch for is for negative outlooks from the other two agencies, Fitch and Moody's, who so far do not show any signs of changing the T-bond's AAA rating. Without them, this will be barely a one-week story.