America gets downgraded

Standard & Poor's cuts the US credit rating from AAA for the first time in history on political bickering and budget largess.

By Anthony Mirhaydari Aug 5, 2011 8:59PM

We knew it was coming. But it was still a shock. Late Friday night, credit analysts at Standard & Poor's downgraded the U.S. sovereign debt rating to AA+ and warned that a cut to AA is possible within the next two years. The cut means that instead of ranking with most of the world's strongest economies -- those of Austria, Norway, Germany, Australia and others -- we now join AA credit risks including China, Bermuda, Kuwait, Slovenia, Spain and Qatar.

 

The problem was the debacle that was the debt ceiling debate. As part of the deal, analysts at Standard & Poor's were looking for $4 trillion in cuts over 10 years. Congress gave them a little more than half of that through gimmickry, untested "committees" and a political sideshow that didn't exactly instill confidence.

 

After S&P analysts took such a specific public position on the budget debate, I didn't see how they could walk away from their threats now. Not after the bugling of the rating agencies during the housing bust. Not after their poor performance heading into the eurozone crisis. And while competitors Moody's and Fitch reaffirmed their AAA ratings this week, S&P did the inevitable: It called us out. 

 

Post continues below.

The S&P team cited a "contentious" political process and a fiscal consolidation plan that "falls short" as the primary reasons for the downgrade.

 

In their words: "More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011."

 

More from MSN Money

The problem, which has been the focus of my recent commentary, is that politicians are simply making a mess of things at a time of extreme economic fragility. I said this earlier Friday in response to the harrowing market losses seen over the past few days:

 

The sell-off that started with the realization that politicians, harboring a toxic mix of immense naivete and undeserved self-assuredness, were willing to toy with the very foundations of the global financial system: U.S. Treasury bonds. These are the "risk-free" assets by which all other securities are judged, the oxygen that sustains the world of high finance.
This has shaken confidence and fueled a mini-financial panic not unlike what happened in fall 2008 when the Bush administration's first bank bailout proposal was defeated in the House of Representatives and Lehman Bros. was allowed to fail.
With the economy just trying to recover from a painful one-two punch of Japanese supply chain disruptions and an energy price spike, the political games in Washington, D.C., and the nervous "what if" debt default scenarios were too much. Whatever positive momentum we had in June and early July faded.

It's not just about tackling the debt problem. It's about doing it in a way that doesn't sink the economy. That was the focus of a blog post from July 29 ("Is the Tea Party ruining the economy -- again?") in which I outlined a three-step solution:

 

It took a long time to get us into this mess, and it's going to take a long time to get out. The first priority is ending the debt crisis before we have a repeat of the 2008 nightmare. The time for compromise is now. Second, we need a credible medium-term fiscal consolidation plan. Third, we need to look at ways to get the economy and the jobs market back on track. I suggested two ideas a few weeks ago.
And the thing is, the extreme position of the Tea Party -- massive spending cuts now with no tax reform -- is out of touch with where most Americans are, based on recent polling. This crisis isn't necessary. And the people don't want it.

Now, after one of the worst runs in stock market history, traders will spend an entire weekend reviewing and considering the implications of Friday's historic credit downgrade. They won't be good. And that sets the stage for another difficult day for stocks when the market reopens on Monday.

 

My newsletter subscribers have been well positioned for the market chaos with targeted short positions and are up 4.5% for the month vs. a 7.2% loss for the S&P 500. Highlights include short positions in Saks (SKS) and CarMax (KMX), which have been posted to my Edge Letter sample portfolio to track recommendations for my MSN Money readers in real time.

 

Disclosure: Anthony has recommended KMX and SKS short to his newsletter subscribers.

 

Check out Anthony's new investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

VIDEO ON MSN MONEY

178Comments
Aug 5, 2011 9:28PM
avatar

Don't forget to thank the rest of the buffoons up on Capitol Hill. They all share the blame in this mess. They need to quit acting like a bunch of kindergarteners and put on their big boy/girl pants. Not one of them gives a rat's **** about what's best for the citizens of this country. All they care about is pissing off the other party. They all disgust me.

Aug 5, 2011 9:48PM
avatar
Aren't these the same guys that were giving AAA ratings to the garbage the banks and wall street were peddling????
Aug 5, 2011 9:45PM
avatar
We are now rated below the UK, Germany, France, Canada. Are you freaking real? There is no other economy in the world that can act as a safe haven or stabilize the rest of the world economies than us. These MORONS at S&P are the same MORONS who gave triple A ratings to the junk bonds that caused the financial crisis. Are you kidding me? These bastards should be in jail along with all the banksters that screwed America.
Aug 5, 2011 9:33PM
avatar

Wasn't it S&P and Moody's that were rating all of those derivatives made up of pieces of junk mortgages AAA?  So what does this rating really mean?  My guess is we should follow the money.  Some people who are very wealthy are going to get wealthier.  And as usual the middle class and the working poor will get screwed as usual.  Could this just be another part of the scheme to continue the 30 year conscious redistributipon of wealth to the very top?  This will help justify the cutting of "entitlement" programs that help the middle class, while not generating income by cutting some of the corporate welfare and not raising taxes on the very wealthy (when will it trickle down?).

 

Follow the money and WAKE UP!  Your pockets are being emptied by the very rich and the corporate overlords.

 

 

Aug 5, 2011 9:49PM
avatar

Good.  Our credit rating goes down, which means it's more expensive for us to borrow.  GOOD!  It should be expensive to borrow, then maybe we'll think twice before jumping into wars that give us little satisfaction and starting social programs we can't afford.  Maybe we'll finally start funding only those things we really need.

 

Let the federal govt go back to fulfilling its constitutional duties and not trying to engineer our society with the tax code and various bailouts.

Aug 5, 2011 10:05PM
avatar
Our government made a spectacle of themselves with their immature bickering and everything still having to be what they wanted or else it won't get done. Thinking nothing of the people who voted to put them in office. I am totally disgusted with our entire government at the moment. They are not for the people they are for themselves. After all if entitlements are cut, it won't affect them. They will always be secure in monthly allotments after they leave office. The US deserves a AA+ rating ONLY because of the debauchery that has been presented these last few weeks!!
Aug 5, 2011 9:52PM
avatar
Surprisingly the rating still is AA+

Aug 5, 2011 9:40PM
avatar
Just what we need, another opportunity for the American Bankers Association to calim they "Never Saw It Coming".
Aug 5, 2011 9:46PM
avatar

The same Standard & Poor's that enabled the Wall Street obscenity by feloniously maintaining high money changer ratings would once again wreak economic ruin upon America? This must not happen. The remedy is to DECENTRALIZE WALL STREET entirely away from NYC. A dozen or so autonomous but interactive locations across the country would wonderfully disrupt Wall Street's criminal collusion, ethnicity and Louis XIV culture.

Aug 6, 2011 7:52AM
Aug 6, 2011 12:16PM
avatar
"There is nothing so demoralizing and destructive to a nation than public debt. It will bring on us more ruin at home than all the enemies from abroad against which the military is charged to protect us."
The real war folks is against those that put us so far in National debt. Such a simple problem could be fixed if it were not for the Pole-Cat (Big Money & Corrupt Government) guarding the Hen-House. Lets get out of the foreign wars and fight the battle we NEED to win here at home.

Aug 6, 2011 12:08PM
avatar

Let me see now. The S&P, that paragon of virtue, that highly respectable institution of estute valuation, that noble watchdog for investor protection, has downgraded the US debt.  I was thinking this was the same institution that rated junk collateralized debt obligations AAA in 2007 and 2008. But alas, I must be confused. Surely they are not one in the same. 

     Please let me tell a brief story. I am fully employed by necessity. However, i retired once after 30 years with another employer and thus had my retirement money to invest. After experiencing some mediocre returns, i took the advice of a friend and talked with his financial advisor about some mortgage bonds that were returning 6 tgo 8 percent. When I asked how they were able to return so much, the advisor explained that the mortgages were combined and resold as packages where investors bought all or part of the package. This still did not compute for me since I could not see how 4% mortgages could pay investors 8%, So I passed on the deal. But they were AAA rated.  I am a dumb coal miner. How come I recognized a con job and the S&P didn't?  

     Like many middle class americans, I went on to lose over 1/3 of my retirement savings in the finacial meltdown that followed. Thanks S&P, with your latest scholarly move you are again playing your part in the demise of the middle class

Aug 5, 2011 9:32PM
avatar

Anyone who voted Republican needs to take a good, long look at things.

All debt ceilings (by either party) have been raised in the past with no fuss.  All the republicans wanted to accomplish was to show how powerful they were.

 

Two big things have caused our problems:

1)  The republicans put two wars on a Chinese credit card and lowered taxes on the rich when logically taxes should go up in wartime.  If you don't pay as you go, it catches up with you.

2)  Overall our richest are getting richer without producing anything...essentially just shuffling paper around...... lawyering, insurance, stocks, loans, commodities, dollars.....you gotta make stuff to make your economy solid and keep folks working.

Aug 6, 2011 2:55PM
avatar

Printing more dollars does not create value.

Taxing the citizens does not mean it will be used to pay down the debt.

Cut the waste, it has gone too far.

 

With all of this going on, lets not forget the soldiers who lost their lives today. God bless them and their families!

Aug 5, 2011 9:45PM
Aug 5, 2011 10:57PM
avatar

Our wonderful government is full of thieving, greedy , self-serving, worthless pieces of garbage who have sold out this country to better themselfs,that is why this country is in bad shape, someday the american people will get to the point, that we can't take  it anymore & revolt, This is our hard earned money that they waist time & time again & we suffer for it. We need to take care of our people, not the whole world, These countries we have spent billions of dollars on would cut our throats in a heartbeat, we get nothing out of these huge expenditures. Get all of these thieves out of office.

Aug 5, 2011 9:41PM
avatar
s&p-frigging morons!!  just follow the money;  me thinks this is a 'business' that needs some more regulation, someones made a looootttt of money on their aaa rating of those derivities.
Aug 5, 2011 10:21PM
avatar
I have read many of your comments below and feel you are all making similar points.  
First to the Tea Party - Let's be real.  You are now the Third active political party in the USA.  Please remove yourself from the Republican party.  If you are not interested in working with the Republicans as you have showed us this past few weeks, then dissolve your coalition majority in the house.
Next, for a brief moment lets forget the global economy and focus on the US economy.  Put Americans to work.  Watch what happens when that happens.
Thirdly, we need to re-think our consumer based economy.  Enough said here.
Fourth.  Hello world, remember us? The USA?  downgrade us?  Well then, how about if the rest of the world just pays us back for all the money we gave you to pick yourself up from WWII?  How about just WWII?  I think that would put us back in the black.  Oh, and don't forget the Marshal plan remember that?  The program that fed Europe and help put Europe back on it's feet after the war?
Fifth - Our Government - perhaps it is time we seek term limits on all elected positions in the House and the Senate?  Something to think about.  
Sixth - "The business of America is business", well not trying to go socialist or anything but how about this phrase - The business of America is business that makes America Strong.
Buy American, made in America, by Americans.
Just a thought.  
BTW, I buy made in the USA, the North America, it helps reduce fuel consumption too.
Lets roll folks.
Aug 6, 2011 4:47AM
avatar

I wonder if Joe Walsh (tea party mouth piece) and Michelle Bachman (tea part nightmare and presidential wanna be)  will be on the morning talks shows about how this downgrading business is a hoax perpetuated by the Obama Administration. since they were absolutely certain that nothing would if the debt ceiling did not get raised

 

Let's see how fast John Boehner can back peddle on his receiving 98% of everything he wanted.

 

the only thing the republicans worried about when they took office is cutting social programs, getting rid of unions and workers rights, and telling women what they can and can not do with their bodies. when they ran in 2010 they ran on a platform of creating jobs and they had the audacity to vote down jobs bills presented in the house. they have pledged their lives away to the people who are pulling their strings, while taking a bite out of the US at the same time.

 

democrats are on the hook as well they were so busy trying to compromise just to get anything done instead of being decisive and making decisions that would have helped the economy and moved us forward when they had the chance. If president Obama gives me one more speech about how this is bad but everything will be ok I am going to scream. We are all adults do not sugar coat the situation it makes you look incompetent and America knows that you are not even if they will not admit it. Just be the leader we elected you to be

 

now we have grid lock, stale mate and a bunch of crying about who is to blame will they ever understand that you can cut and cut and cut until there is no more and just like the drought in Texas when the well is dry it is dry. people are broke they need to work so find major ways to change trade agreements, close loopholes, reform social programs, increase taxes and most of all do what you were elected to do

 

 

we the people are left with a hard choice to make

which idiot party will be the lesser of the two evils going forward. they are really not giving us much to work with

Aug 6, 2011 11:40AM
avatar
The problem is not republican or democrat, presidential, etc...its what the politcal process has become, many. Those who did get elected, did so by mastering  the process versus being elected on qualifications. American citizens are too blame for being apethetic for last 20 years and permitting this fiasco (making $$ in the 90's was great...who had time for politics). Its become clear we elected persons that are missing the type of  personality or qualifications for the big picture...they may be trying, probably did a good job on a local level, but the current senate & reps have demonstrated their not the answer at the national level. We need the qualified citizenry with actual expertise to leave the private sector and humbly serve in government at least till they turn things around. 
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

MARKET UPDATE

NAMELASTCHANGE% CHANGE
There’s a problem getting this information right now. Please try again later.
NAMELASTCHANGE% CHANGE
There’s a problem getting this information right now. Please try again later.
Market index data delayed by 15 minutes

[BRIEFING.COM] The stock market ended the holiday-shortened week on a mixed note as the Dow Jones Industrial Average shed 0.1%, while the S&P 500 added 0.1% with seven sectors posting gains.

Equity indices faced an uphill climb from the opening bell after disappointing quarterly results from Google (GOOG 536.10, -20.44) and IBM (IBM 190.04, -6.36) weighed on the early sentiment. Google reported earnings $0.15 below the Capital IQ consensus estimate on revenue of $15.42 ... More


Currencies

NAMELASTCHANGE% CHANGE
There’s a problem getting this information right now. Please try again later.