U.S. Bond Market
I agree with Standard & Poor's (S&P) downgrade of the U.S.'s credit rating. It was motivated by the fact that Congress and the Obama Administration had been unable to come up with a budget or fiscal plan that would stabilize the nation's medium-term debt dynamics. Furthermore, they cited serious problems with U.S. monetary and fiscal policy, which they felt left the United States very vulnerable in a time of high-volatility in the global financial markets (Paletta & Phillips, 2011). In other words, S&P was looking at the federal government's failure to come together and address the serious financial problems facing the nation and anticipating that this failure would lead to some type of gridlock. In hindsight, the nation has experienced exactly that type of predicted financial gridlock. The country is in significant debt and one party is opposed to raising taxes on those who can most afford the tax increase, even with offered cuts in spending. Even if all spending were eliminated, the debt will not be resolved without an increase in revenue, and there is tremendous opposition to any efforts to increase revenue. S&P was absolutely correct that...
Furthermore, it was correct in predicting that the government would not work together to develop a more comprehensive plan.
However, I also do not disagree with the decisions by those major agencies that retained the U.S.'s AAA rating. Country credit ratings are not like individual credit ratings, where credit just reflects the ability to pay a debt. Instead, a number of other factors can play into a company's credit rating, such as international goodwill towards the country and the role that the country plays in foreign economies. The United States plays a huge role in foreign economies, not only through global business practices, but through direct financial aid to those countries. In many ways, the U.S. economy has become too big to fail in some significant ways; it may experience recessions, but the global impact of widespread default by the U.S. On its debts would be so tremendous that it is highly unlikely that would ever occur.
Furthermore, U.S. investors have not responded to the downgrade in the negative fashion that one might expect. People…
