It is a political statement. As the Gr.Grandfather comment said, our debts are denominated in dollars, and can be paid off instantly, simply by printing the money. The only reason we can't is because the interest rates on treasuries would go asymptotic if we did that, because investing in bonds denominated in a currency that has a history of doing that would be a risky thing to say the least.
If the reason for the S&P downgrade was based on the debt, it would be purely political, because along with US treasuries, every security denominated in dollars would have to be equally downgraded simultaneously to make economic sense. They understand this, so this is not the reason they gave - they graded the US on its willingness to pay its debts. I think that's a vast overestimation of the power of unpopular spoiler Republicans (edit: and anti-Chinese xenophobia), but a case can be made.
But, even with the fiscal shape of the US now, investors are buying treasuries with interest rates at historic lows, because if you're not investing in US treasuries, what are you going to invest in? The property bubble was largely a response to super low treasury rates, and since it has burst, there has been a massive run-up in precious metals as a way to store savings and get a rate that beats inflation. Investors (the only people that have to be answered to in questions of government debt) make their evaluation of US debt available in real time, and the evaluation is excellent, no matter what any individual investors/pundits say with their mouths.
The worst outcome of more money printing is that those interest rates start to rise, making the dollar less valuable with respect to other currencies, which will make imported products more expensive for domestic consumers, and make our exports cheaper abroad, stimulating a rise in domestic manufacturing and employment. If in addition, that newly printed money was used to make investments in infrastructure, or simply handed to people with low to negative savings who will immediately spend it, the domestic inflationary effect would be captured by a rise in domestic wages. To the degree that all of this happens is the degree to which the massive trade deficits we've been running since Reagan decline or reverse, and the national debt (the combination of domestic public and private debt) is an accumulation of those deficits.
(And I would point out that I can't emphasize this point enough: If we do nothing to Social Security, it will be able to pay exactly as it has until 2035, and if no fixes have been made until then, 80% of what it has been paying until the earth plunges into the sun. This 80% will go further than the 100% being paid now due to the productivity gains between now and then, unless our response to the underutilized economy of this demand crisis is to make cuts that further underutilize the economy.)
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edit: that's what I get for not RTFA before commenting. I gave S&P a benefit of the doubt that it didn't deserve, and most of this was actually said by the treasury except for the "weak dollar is good and SS is fine" stuff. Well, a weakened dollar is good and SS is fine:)
> if you're not investing in US treasuries, what are you going to invest in?
You could fund my mortgage. I pay 7% floating in a currency with a pretty good record of late. My property could halve in value and you would still get your money back, and I can fund the the loan from my current income.
I also can't just decide to not pay you without you being able to foreclose.
If the reason for the S&P downgrade was based on the debt, it would be purely political, because along with US treasuries, every security denominated in dollars would have to be equally downgraded simultaneously to make economic sense. They understand this, so this is not the reason they gave - they graded the US on its willingness to pay its debts. I think that's a vast overestimation of the power of unpopular spoiler Republicans (edit: and anti-Chinese xenophobia), but a case can be made.
But, even with the fiscal shape of the US now, investors are buying treasuries with interest rates at historic lows, because if you're not investing in US treasuries, what are you going to invest in? The property bubble was largely a response to super low treasury rates, and since it has burst, there has been a massive run-up in precious metals as a way to store savings and get a rate that beats inflation. Investors (the only people that have to be answered to in questions of government debt) make their evaluation of US debt available in real time, and the evaluation is excellent, no matter what any individual investors/pundits say with their mouths.
The worst outcome of more money printing is that those interest rates start to rise, making the dollar less valuable with respect to other currencies, which will make imported products more expensive for domestic consumers, and make our exports cheaper abroad, stimulating a rise in domestic manufacturing and employment. If in addition, that newly printed money was used to make investments in infrastructure, or simply handed to people with low to negative savings who will immediately spend it, the domestic inflationary effect would be captured by a rise in domestic wages. To the degree that all of this happens is the degree to which the massive trade deficits we've been running since Reagan decline or reverse, and the national debt (the combination of domestic public and private debt) is an accumulation of those deficits.
(And I would point out that I can't emphasize this point enough: If we do nothing to Social Security, it will be able to pay exactly as it has until 2035, and if no fixes have been made until then, 80% of what it has been paying until the earth plunges into the sun. This 80% will go further than the 100% being paid now due to the productivity gains between now and then, unless our response to the underutilized economy of this demand crisis is to make cuts that further underutilize the economy.)
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edit: that's what I get for not RTFA before commenting. I gave S&P a benefit of the doubt that it didn't deserve, and most of this was actually said by the treasury except for the "weak dollar is good and SS is fine" stuff. Well, a weakened dollar is good and SS is fine:)