S&P downgrades U.S. credit rating

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It has never happened before. One of the three major credit rating agencies, S&P, has downgraded the United States’ credit rating from AAA to AA+. The impact on the economy is unclear until the first few days of next week when the markets open again, at the earliest. However, symbolically this is a huge deal. The U.S. has always been considered the safest bet on earth. Oddly enough, with Europe in even worse shape, even a downgraded U.S. is probably still the safest bet on earth (Canada isn’t big enough to be counted here).

The White House and Treasury immediately said that S&P made a $2 trillion math error in their judgment. It turns out that this is true. Yet, S&P refused to change their mind on the downgrade. This may have to do with the fact that they already told a bunch investors and companies that they are downgrading the U.S.’ credit rating. The S&P specifically pointed to the Republicans in Congress as a major factor in their decision. They even said that the U.S. should have repealed the Bush tax cuts on the richest Americans back to the Clinton era rates. This change is worth almost $1 trillion and would be a more balanced way of reducing the debt.

Some are criticizing S&P for making this decision more about politics than economics. It looks like there may be truth to that view. Some are also saying that S&P should not suggest specific policies to address the fiscal situation of a sovereign nation. This is definitely true. However, even though they are wrong for mentioning what the U.S. should do policy wise, the fact is that they are right about those tax cuts. The U.S. needs to increase the income tax on the richest 2% by those few per cent back to the Clinton rates. It is the right thing to do. Unfortunately, the Republican Party is unlikely to allow that to happen.

Hopefully this downgrade won’t have a major impact on the U.S. economy as many have feared not long ago. It is the last thing the U.S. and the world needs.