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Eric,

I said the same thing yesterday when I heard the news. McArdler is
correct that we cannot predict when the market may move against US but
it will be a move against political process more than the debt which
is enormous.

Michael
On Apr 19, 2011, at 11:11 AM, Eric Schwerin wrote:

> Of course, no one is mentioning that S&P (and Moody's and others)
> got it all wrong when they rated CDOs as AAA. Can't imagine they
> are the most reliable judge.
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> Eric D. Schwerin
> Rosemont Seneca Partners, LLC
> 1010 Wisconsin Ave., NW
> Suite 705
> Washington, DC 20007
> (202) 333-1880
> eschwerin@rosemontseneca.com
> P Consider the environment before printing this email.
>
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> On Apr 19, 2011, at 11:07 AM, Michael Andrews wrote:
>
>> S&P: US Needs to Get Its Act Together on the Debt
>> APR 18 2011, 3:54 PM ET218
>>
>> So S&P has changed the outlook for US credit from "stable" to
>> "negative". Some commentators seem to have confused this with a
>> ratings downgrade, which it isn't--the US AAA rating is still very
>> much intact. Rather, Standard & Poor's are saying that the
>> probability of a downgrade in the future has gone up. I think the
>> WSJsums it up pretty well:
>>
>> The S&P analysis didn't offer any new insight into the nation's
>> fiscal plight or partisan differences about how to solve it, but
>> served as a reminder that investors may not always be as patient as
>> they have been about U.S. deficits.
>>
>> The U.S. debt now stands at $14.2 trillion and is expected to
>> balloon in part because of rising costs for health care, retirement
>> and other so-called entitlement programs, and the interest costs on
>> existing debt. S&P said that even if a short-term deal is reached
>> to contain deficits, any agreement could later be undone by
>> politicians.
>>
>> Administration officials, who were first alerted to the report on
>> Friday, questioned its conclusions but said it validated their
>> efforts to broker a bipartisan deal to address the debt.
>>
>> Fundamentally, what both sides seem to have trouble grasping is
>> that the important thing is not to solve all our problems right
>> now, but to convince markets that we have the will and the
>> fortitude to solve them at some point in the future. Right now
>> markets are willing to cut us a lot of slack because they figure
>> that we'll get it together eventually--just as we've always done
>> before. The problems start not when our debts become totally
>> unsustainable and congressmen start getting into fistfights on the
>> House floor--but when markets stop believing that we'll find some
>> way to solve our budget problems short of inflation or default.
>> And "trouble" consists not of some massive capital flight, but of
>> rising interest rates.
>>
>> This is why I am so steadfastly unconvinced by people who point to
>> our low interest rates as evidence that the market thinks it's safe
>> to borrow. When higher real interest rates come, they will not be
>> a timely signal of problems ahead unless we change course--they
>> will be the problem. The term structure of US debt is pretty
>> short, with an average maturity of under five years, and
>> Republicans are complaining that we've been issuing too much short-
>> term debt lately. If interest rates climb significantly, our
>> interest expense will start putting a lot of pressure on an already
>> weak fiscal position. Arguing that we're fine because interest
>> rates are low is like arguing that the Titanic must be safe because
>> it hasn't run into an iceberg yet.
>>
>> Of course, this warning applies equally to the people who think
>> that demagoguing the debt ceiling is a fine way to force Congress
>> to fix things (on their terms). Shutting down the government, or
>> mucking around with the debt ceiling, doesn't help avert a crisis:
>> it is the crisis. Or rather, it risks triggering precisely the
>> crisis of confidence that we want to avoid. If interest rates go
>> up too sharply, our interest rate expense will widen the gap
>> between revenue and spending. To my mind, this makes both large
>> tax hikes, and sizable spending cuts, more likely, not less so.
>> Unless you're the sort of ideologue who would happily spend more
>> money on interest as long as it means higher taxes or less
>> spending, this is madness.
>>
>> The US debt problems are large, and they will be painful to solve.
>> But they are not intractably large or painful. It is our bitter,
>> partisan politics--and our own willingness to compromise, or even
>> face reality--that is putting us at the most risk.
>