April 18, 2011

S&P forecast reveals the political game of chicken

Garett Jones

Senior Research Fellow

Credit agency S&P lowered the outlook for the United States long-term credit rating and while the most likely scenario is that the we’ll muddle along like Japan and pay off our bond holders, the forecast serves as a warning for politicians.

The big risk is that politicians care more about their political base than paying off the debt.  You can only promise high spending and low taxes for so long before bond holders start believing it.

S&P’s announcement is the credit agency’s way of saying that it’s noticing that political posturing may really matter for people who lend money to the United States. 

Democrats and Republicans are playing a game of chicken, with the stances they’ve taken on what they refuse to cut.  If both sides swerve early, bond holders will see this as good news.  Waiting to the last minute will make bond holders nervous, because they’ll think it could happen again, and then again, until maybe there’s a crash.