The political process in the U.S. is a messy business once you delve deeper than Capitol Hill horse trading, party affinity, or the pro-business or pro-consumer view. It isn’t hard to see the influence of colossal amounts of lobbying and campaign money on those who are supposed to represent all of us. Still, there are things that make me wonder.
After all we have seen this last 12 months, with credit downgrades to the sovereign debt of Greece, Ireland and Portugal, among others, it is astounding that there are those who really don’t seem to understand what happens when countries’ debt ratings go negative or are lowered.
That U.S. politicians have not been wiser when it comes to brinksmanship in refusing to raise America’s debt ceiling, risking a lowered credit rating on U.S. sovereign debt is just baffling. We got the smallest taste of the potential impact when, last week, S&P said that it had changed its view of the creditworthiness of the United States to “negative,” even though it had affirmed the actual rating.
Any doubt of the obligation of the United States to repay its debt—the place where the world invests when a flight to quality is necessary—used to be beyond imagination. When I traded these securities, or recommended them to clients, there really was nothing safer. Trillions of dollars in U.S. debt is owned by investors large and small around the world.
What if U.S. Treasury Debt Was Downgraded?
This debt must remain sacrosanct, beyond reproach, for what would be the world’s safe haven in the worst of times if the debt of the United States, backed by the full faith and taxing power of the United States of America should be downgraded—or allowed to default?