I have no doubt that the deficits we are running are a long term problem, and they may well justify a ratings downgrade down the line that is fact-based, and necessitated by the circumstances (although I certainly hope that we avoid such a downgrade in the future). But not all ratings downgrades are alike, and even given the parlous fiscal condition of the United States, it is possible to institute a ratings downgrade for all of the wrong reasons.
TWO months ago, Standard & Poor’s downgraded the bond rating of the United States government. So far, at least, the move has done wonders for investors in the very bonds that the rating agency disparaged.
The rating downgrade, along with continued turmoil in European markets and fears that the United States might be entering a new recession, caused a flight to safety among investors. And, notwithstanding the agency’s opinion, money flooded into Treasuries and the demand for American dollars grew.
Since then, Treasury bonds have been one of the few investments that have produced good profits. As can be seen from the accompanying charts, an investor in long-term Treasuries would have earned a double-digit return, counting the small interest earned and the larger capital gains from rising prices. Shorter-term Treasuries have also rallied, although by smaller amounts.
When S.& P. cut the United States’ rating from AAA to a still-high AA+, it went out of its way to praise France, which retains a AAA rating. Investors in long-term French bonds have not done badly over the period, with a gain of nearly 4 percent, measured in euros, since the S.& P. move. Unfortunately, however, the weakness of the euro has more than offset that return.
Again, at some point in time, a ratings downgrade may be justifiable and defensible if we don’t get our fiscal house in order. But until S&P changes the way that it does business, there is no reason whatsoever to take it seriously anymore.