Deficits do matter

US/S&P: Standard & Poor’s has taken its share of flak in recent years. But at least the credit rating firm isn’t too shy to state the much-needed obvious on America’s debt situation. S&P’s shift on Monday to a negative outlook on Uncle Sam’s AAA credit shouldn’t come as any surprise. But it should act as a reality check.

S&P doubts that President Barack Obama and congressional Democrats and Republicans are capable of reaching a meaningful agreement to rein in deficits, which the rating firm reckons could push the nation’s debt load above 90 per cent of GDP by 2013. And the fact is that even if they do reach agreement, there’s nothing to stop lawmakers from reversing course in the future. Markets, which should be well acquainted with Uncle Sam’s ugly fiscal situation, took the news on the chin. Stocks initially fell around 2 per cent while the yield on the 30-year Treasury bond spiked as much as 0.11 percentage point.

However brief, there’s a chance such a jolt could help refocus many investors’ myopic obsession with short-term performance on somewhat more distant but still real challenges. Austan Goolsbee, a White House economic adviser, called S&P’s decision a political judgment.

But the heart of the rating firm’s reasoning is that without decisive action, the United States will soon look measurably sicker in financial terms than other AAA-rated sovereigns and it will be increasingly difficult to justify its top rating.

Unfortunately, the Federal Reserve’s current ultra-low interest rates make doomsday scenarios seem abstract, even to supposedly rational market players. That’s even more the case inside the Beltway, where budget dogma on both sides of the aisle still persists in place of the pragmatic assessment of both revenue and expenditure — and the communication to voters of the hard realities — that should be under way.

S&P and other rating firms would hate to cut America’s rating. That would fracture the bedrock on which the debt world has rested for decades. But S&P is right to up the ante. Any US lawmakers living in DC’s spendthrift past should perhaps heed the lyrics of “Once Upon A Time”, the song one participant reported hearing while waiting for the firm’s conference call: “How we always laughed, as though tomorrow wasn’t there.”