I must admit, I'd never thought the S&P downgrade would happen this soon. Indeed, I never thought it would happen at all. My image was of a coming inflationary depression in which the regime and its connected entities would announce to its citizens something to the effect, “Move along. Nothing to see here. All is well” The unemployment rate, credit ratings, GDP statistics would each be cooked to give a veneer of prosperity, while bank runs would became mundane, EBT cards would be traded on a derivative markets, and formerly middle-class Americans would begin living in self-storage units.
Nevertheless, as a friend quipped on Friday, “Today, America's first Black president just got 'red-lined!'”
Below are some interconnected thoughts on this next chapter in America's economic collapse.
1) Commentators are grasping for narratives to explain the recent plunges in the Dow Jones and (quasi ironically) S&P indices, but these lines of causality are operative only in their minds.
If investors were really taking Standard and Poor's words seriously—i.e. that Washington can't cut spending and thus will either default on and or inflate away its bills—then the stock market would not have crashed; investors would have, instead, fled those double-A Treasuries.
In reality, the world hurled itself, lemming-like, into the “safe haven” of the asset that just got downgraded.
2) As Robert Prechter has noted, financial commentators often like to find “causes” for market downturns in the headlines of the world papers; in reality, they are, misunderstanding a purely market event and forcefully connecting it with an external happening that was, at the very most, a catalyst.
Take, for instance, your typical liberal-centrist HuffPost commentator. They warned that if the debt ceiling were not raised, economic chaos would ensue. When the debt ceiling was raised, and chaos ensued anyway, they could only retreat into self-righteous nationalism and blame—how dare the S&P diss America! We've only begun to reap our Diversity dividends!
Now imagine if the Tea Party had won the day and scuttled the debt-ceiling deal. When the Dow plunged, the HuffPost Establishmentarians who are now questioning S&P's sanity would be praising the organization for its perspicacity and blaming Middle American conservatives for everything.
3) One of the main reasons why I was so surprised by the downgrade is not because Washington doesn't deserve it, but because S&P is almost as much a state enterprise as Fannie Mae: all three major credit rating agencies are regulated and licenced by the SEC and can't be expected to be particularly “independent.” Without question, one of their central motivations for awarding now-infamous AAA ratings to bundled subprime mortgages in the 2000s was that they recognized that financing “The Ownership Society” was a national priority and they'd better play along.
One must consider the possibility that the Fed and government wanted some kind of downgrade in order to spur capital to leave the bond market and either flow into the stock market or get spent. (Such a scheme has obviously failed in the short run, but it's ultimate implications might be quite different.) A year ago, a Fed governor was suggesting that the Fed raise interest rates in order to give investors the feeling that inflation was around the corner, and that they should start spending their money more quickly as opposed to locking it up in Treasuries.
4) Following the inflationary '70s, the U.S. Treasury has experienced a truly miraculous 30-year run of rising bond prices and falling yields. Though it might seem strange to think about it in this way, this bull-market has culminated in the crash of 2008 and the subsequent depression—as U.S. sovereign interest rates fell and capital was invested in completely unproductive government debt.
When this trend turns around, watch out.