Standard & Poor's downgrade of U.S. government debt from AAA to AA-plus is not likely to have a major impact on interest rates because global investors have no better alternative than to continue to invest in dollars.
There simply in not the volume of yen available to investors outside Japan, and the future of the euro is far more uncertain than that of the dollar. In fact, it is the threat to European economies that is having the greatest negative impact on investors, not the S&P downgrade.
China has been quick to predict the demise of the dollar, but it is sure to continue to buy dollars so that it can maintain its undervalued yuan, which gives it an unfair advantage in international trade.
That means U.S. treasuries, which are as safe as most any other AAA-rated bonds issued by other nations, are still a good investment and not deserving of a lower rating, at least not for the foreseeable future.
However, the downgrade, deserved or not, is hardly good news for the U.S. economy, which remains weak and faces large and continuing increases in its national debt.
S&P warned that it would lower its rating on U.S. treasuries if Congress and the White House were unable to agree to a debt reduction in the neighborhood of $4 trillion over the next decade.
By agreeing only to about $1 trillion now and $1.2 trillion to $1.5 trillion by a bipartisan committee later, the debt-reduction goal fell short of
What the downgrade does communicate is a concern that the federal government does not yet have a viable policy that will reduce debt as the economy recovers and that the nation cannot continue to spend so much more than it takes in, even after the economy rebounds.
It would have helped if President Barack Obama had come forth with a forceful, realistic plan to revive the economy and significantly reduce deficit spending as the economy improves. Instead, he sought to place blame on the tea party, European financial woes, the Japanese earthquake and the competence of S&P.
Certainly, there is blame to share among all of the above. But the huge increase in federal spending, an ineffective stimulus policy, poorly devised banking reforms and a lack of direction from the White House also contributed to a flagging economy.
While the economy is weak, we do not expect nor advocate immediate debt-reduction with massive spending cuts or higher taxes. But we do expect better leadership from the president along with more pragmatism and bipartisan cooperation in Congress.
Only then will confidence among investors, businesses and consumers begin to improve, which is what the economy needs for a healthy recovery.