Yves Smith—Will S&P Downgrade Be Another Y2K Scare?

Posted by Kendall Harmon

Just as the Y2K threat was overstated but nevertheless had unexpected, adverse intermediate term consequences, I doubt this chicanery will be cost free to the public at large. But the debt overhang that ideologues have used to whip the public into a funk is profoundly deflationary unless addressed head on, via writedowns and bankruptcies offset by fiscal stimulus. Deflation means that high quality bonds are the place to be, as the market action of last week confirmed, so Treasuries benefit from the very condition that S&P depicts as a disaster.

Thus the best outcome would be if the bond and currency markets shrug off the S&P action, which would reveal that the much feared downgrade was a paper tiger. But even if the marker response is underwhelming, it is hard to imagine that Obama will not take a political toll for his colossal miscalculation. It was he who stoked the debt ceiling phony crisis to implement a neoliberal agenda, who refused to reverse course and threaten to circumvent the debt limits when the process had clearly spun out of his control.

So even if S&P fails to land a body blow in the markets, its ploy has garnered press that seems certain to taint the Administration, and thus confirms the power of its reckless conduct. Thus the cost is not likely to show up in bond yields, but in something far more fundamental: in yet more destruction of the foundations of our society for short-term, selfish ends.

Read it all.

Filed under: * Culture-WatchGlobalization* Economics, PoliticsEconomyCorporations/Corporate LifeCredit MarketsCurrency MarketsThe Banking System/SectorThe U.S. GovernmentBudgetThe National DeficitForeign RelationsPolitics in GeneralHouse of RepresentativesOffice of the PresidentPresident Barack ObamaSenate

3 Comments Posted August 6, 2011 at 10:28 am

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