The Silver Lining in the U.S. Debt Downgrade

What’s Really Going On

So let me take you through a very simple analysis, followed by a very simple analogy. Here’s how I see it, and how I believe history will see it, stripped of all artifice and needless complication. When S&P lowered the rating on U.S. debt, it was the final nail in the coffin of denial about what’s really going on in the United States economy and in the world. In explaining why the cut was made, S&P pointed out, however vaguely or discreetly, that political gridlock in the United States was a factor. It reiterated something it had alluded to in earlier releases, which was that the cuts agreed to in the debt compromise were not sufficient to solve the long-term problem—a problem that cannot be solved except by severe budget cuts and, dare I say it, significant revenue increases principally in the form of tax rate hikes for the rich, or the elimination of the now infamous Bush tax cuts, which were set to expire by their own terms at the end of last year but were extended to the end of 2012. Thus what S&P really said, much more loudly, persuasively and officially than it had ever been said before was—ENOUGH ALREADY!

Let’s go one more step. What precipitated this crisis—if there is one—was the adamant position of conservative Republicans that they wouldn’t agree to any increase in the debt ceiling unless budget cuts were substantial and tax increases were off the table. Taking seriously the proposition that the debt ceiling might not be increased, President Obama acquiesced (either in frustration or with a greater purpose in mind) and gave them what they wanted. As Speaker John Boehner put it, “I got 98% of what I wanted.” Indeed the President, in my view an intelligent, well-meaning and good man, never looked more hapless than he did in a television speech that he made during the trading day on Monday. He blamed the Republicans and tried to reassure America that we are in better shape than S&P would have us believe. The platitudes didn’t work but the disruptive nature of the blame game, international frustration and fear escalated, and the market went straight down during Obama’s speech, then to the bottom shortly thereafter. Meanwhile, as the Obama Administration was working feverishly to raise our collective spirit, Republican presidential hopefuls were whirling around the political bonfire screaming that we were being cluelessly led to financial slaughter by the first American leader to preside over an AA-plus nation. It didn’t work for them, either.

As the week progressed, the market reacted in a classic see-saw of volatility that shaved trillions of dollars of equity value from its April high. Many pundits have opined that these wild trading gyrations and the rush into Treasuries and gold had more to do with fear and uncertainty over bank stability in Europe than the show put on in Washington and S&P’s reaction to it. I concur. That said, I believe that bad theater and mordant politics mightily contributes to a loss of confidence in government and I agree with John F. Kennedy’s assessment that the appearance of reality is oftentimes more important than reality. As much as I agree with so many of the things that have been said about these goings-on, and the terrible costs of the past ten days, I do believe that most people are missing the silver lining, and the true meaning of all this.

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