Bond ratings as a political hostage, with Biblical analogies people seem to like so much

If I hear one more person refer to US default as another Y2K, I am going to hit them on the earhole. Where are people getting this? FoxNews?

Defaults and downgraded bond ratings have happened before, and it costs people real money.

US bonds, right now, are in good shape and have been for a really long time. Our currency is solid, even though it does fluctuate. Those two things have economic benefits, big benefits, for the US.

No, with a debt default or bond rating downgrade, the sun will not crash into the earth, rivers will not fill up with blood, and our crops will not get devoured by locusts.

Although we do not have experience with the US missing a payment and getting a bond rating downgrade, we do have experience with it in other, arguably analogous places. Like Canada, or California, for that matter. They weren’t swallowed by whales as a result.

But I pay more points on a mortgage than I would if I lived in a state with a better bond rating than California. Why? Because part of the risk of loaning me money for an asset concerns the jurisdictions in which I live. Some of the risk is me, some of the risk is my context. So yeah, there are financial consequences–a lot of them–of letting your governments go to pot, even if you don’t get covered in boils.

With this all this posturing, the US is sending a message, and that is: we’re willing to let our bond rating be a political hostage. That means people in power here are either a) completely incapable of understanding fiscal policy and b) utterly careless about the consequences for international banking that US political instability–because that’s what this is—is having on Europe’s structural debt problems. IOW, the US is sending a loud signal to the rest of the world that our political squabbles can’t be managed well enough to provide stability even when we are perfectly capable of paying our bills, and we are willing to do that when other leading economic zones are in a real crisis.

None of this rannygazoo is good fiscal policy over the long-term. It adds more fuel to the fire for those who have argued against the US dollar meriting status as a reserve currency.

The last thing you want, if you are worried about the size of your outstanding debt, is for people to raise the interest on the debt you already have.

Not deriving a long-term plan for the deficit is bad for long-term bond ratings, too, just as missing a debt payment would be now. It’s one of the complexities of the situation. Failing to get serious about the long-term burdens of entitlement programs is a major, long-term issue–but so is failure to meet existing obligations.

If the Republicans don’t play their cards right, IOW, they could force a bunch of painful cuts, and the value of those cuts in deficit reduction could be completely offset (or eclipsed) by the higher costs of borrowing because the cost of borrowing goes up.

Banks and money market funds are already sitting on cash. That means trade isn’t happening. That means this hairpulling has already cost us money and economic activity and growth.

So how about we stop using bond ratings as a political hostage? I would sleep better.