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Doomsayers Wrong on Last Year’s Debt Downgrade

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It appears the smart guys ain’t so smart. As the anniversary of Standard & Poor’s downgrade of the U.S. government’s credit rating nears, predictions last August of an unprecedented financial crisis accompanied by fire and brimstone to have been wrong.

Bloomberg helpfully takes a look back at who said what, and red faces and uncomfortable coughs abound.

The news service begins with Republican presidential candidate Mitt Romney, who described it as a “meltdown” reminiscent of the economic crises of Jimmy Carter’s presidency. He warned of higher long-term interest rates and damage to foreign investors’ confidence in the U.S.

“U.S. House Budget Committee Chairman Paul Ryan said the government’s loss of its AAA rating would raise the cost of mortgages and car loans,” Bloomberg reports. “Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said over time the standing of the dollar and U.S. financial markets would erode and credit costs rise ‘for virtually all American borrowers.’”

As it happens, almost a year later, mortgage rates have dropped to record lows, the government’s borrowing costs have eased, the dollar and the benchmark S&P stock index are up, and global investors’ enthusiasm for Treasury debt has strengthened, the news service notes.

“The U.S. Treasury is still the widest, deepest and most actively traded in the world,” Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City, told Bloomberg. “That becomes all the more important when you have signs of weakening global economic growth and continued problems in Europe.”

Even in a slow recovery, the report continues, the U.S. has unparalleled assets in the global market, including the size and resilience of its economy and the dollar’s standing as the world’s reserve currency. Low Treasury yields show that most investors believe the U.S. government will meet its obligations, no matter how dysfunctional the political climate becomes in Washington.

As Warren Buffett said at the time when shrugging off the downgrade: “In Omaha, the U.S. is still triple-A. In fact, if there were a quadruple-A rating, I’d give the U.S. that.”

Still, Bloomberg concludes, there is broad agreement that the U.S. must address the long-term fiscal imbalances that have driven public debt up to 68% of gross domestic product.

“Ryan and other pessimists contend the country is benefiting from temporary forces such as a flight of capital from Europe’s sovereign debt crisis and the Federal Reserve’s ‘Operation Twist’ program to buy long-term debt,” it reported.

“They warn that the window financial markets have provided could close at some unpredictable time if the budget issues aren’t resolved. Standing in the way of a resolution is a widening partisan divide in Washington.”


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