Krugman Says S&P Downgrade of U.S. 'No Big Deal'

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by: Market Blog

By David Berman

Not everyone is cowering after Standard & Poor’s cut its outlook on the U.S. credit rating to "negative" and warned that an outright cut could come within two years. Indeed, there is some pushing back, and not just from voices within the U.S. Treasury.

Paul Krugman, writing in the New York Times, noted that the S&P report at least put the blame largely on political deadlock. But, he argues that what happens to U.S. spending this year or next is irrelevant: "The point should be that the U.S. is perfectly capable both of running large deficits now and getting its fiscal house in order over time; but not if the parties cannot agree on any kind of solution."

Meanwhile, he pointed out that the bond market largely ignored S&P’s downgrading of Japan in 2002. Despite some brief pops in the yield on the 10-year bond when traders believed that the central bank would respond with rate hikes, the yield is now more or less where it was nine years ago.

"So, no big deal," Mr. Krugman concludes.

Barry Ritholtz at The Big Picture is more blunt: "Who cares?" he said. "It's not that I disagree with their assessment – I do not – but I pay it little heed. It was much more important to me as an investor that Pimco’s Bill Gross was out of Treasuries a month ago (and indeed, is short) than what S&P says. That was all any bond investor needed to know – no ratings agency necessary."