The Broader Market

by Jordan Eizenga

News outlets are reporting that government officials expect Standard and Poors - a major credit rating agency - to downgrade the United States sovereign credit rating. S&P’s decision to downgrade the United States is being reported by  ABC News’ Jake Tapper as follows:

Officials reasons given will be the political confusion surrounding the process of raising the debt ceiling, and lack of confidence that the political system will be able to agree to more deficit reduction. A source says Republicans saying that they refuse to accept any tax increases as part of a larger deal will be part of the reason cited.

If these reports are accurate, the credit rating agencies are just acknowledging what everyone else should know by now: the federal government, particularly Congress, is not functioning in any way that should give us confidence that it will respond to pressing problems. And clearly, Republican refusal to allow tax increases to help balance the budget is making things a lot worse.

All this aside, the giant bond market rally that we have been having lately is unlikely to go away. Investors spooked by negative economic news of late appear to be parking money in the only global safe harbor asset - Treasury bonds. For this reason, the downgrade probably will not have much of an effect on interest rates in the United States, though it could cause further sell-offs in the equity markets.

Nonetheless, it is clear that Republican obstinacy and general Congressional dysfunction are causing people to lose confidence in the United States’ ability to make sound and tough decisions to get its economy moving forward again.