I have not been following the political ins and outs of the debt ceiling debate, but I did run across the following. I am not endorsing it, but if anyone has good reason to believe it is false, I would like to hear the response:
Keeping America’s gold-plated credit rating may take both a deal to raise the debt ceiling (which will happen) and a meaningful deficit reduction plan of around $4 trillion (which is not happening). Moody’s says it wants a ”deficit trajectory that leads to stabilization and then decline in the ratios of federal government to GDP and debt to revenue beginning within the next few years.” And here is Standard & Poor’s in a report released last night:
“If a debt ceiling agreement does not include a plan that seems likely to us to credibly stabilize the U.S.’ medium-term debt dynamics but the result of the debt ceiling negotiations leads us to believe that such a plan could be negotiated within a few months, all other things unchanged, we expect to affirm both the long- and short-term ratings and assign a negative outlook, If such an agreement is reached, but we do not believe that it likely will stabilize the U.S.’ debt dynamics, we, again all other things unchanged, would expect to lower the long-term ‘AAA rating, affirm the ‘A-1+’ short-term rating, and assign a negative outlook on the long-term rating.”
There is much more at the link. And so what is the view of the “gun up the fiscal policy stimulus” people? Is it:
1. This is simply a lie and they will stick at AAA for the foreseeable future. It is a strategic and pre-emptive move from the ratings agencies but they don’t mean it.
2. The U.S. government, and all those municipalities, can do just fine with a downgrade.
3. A downgrade is coming anyway, so we might as well do the correct Keynesian fiscal policy, because with austerity we’ll get an even worse downgrade over time, due to falling output and employment.
I genuinely wish to know. I seem to be reading claims which rule out #2. Is the Keynesian response a mix of #1 and #3? If so, how come I don’t see the Keynesian advocates putting that on the table up front?
No, it’s not the bond market vigilantes, it is the credit rating agency vigilantes.