Alexander Hamilton must have rolled over in his grave on Friday when Standard & Poor’s downgraded the credit rating of the U.S., the very thing Hamilton worked to turn from below junk to AAA before there were bond ratings.
As the first U.S. Secretary of the Treasury, Hamilton was involved in the first grand deal surrounding U.S. debt and the assumption of debt from the states, creating the U.S. Treasury market that became the international standard it still is today. In order to get that deal done, Hamilton had to agree to move the capitol of the U.S. from New York to a site on the Potomac River. Of course, today that is Washington, DC, the site of the dysfunctional debt ceiling debate that prompted S&P to downgrade their rating of U.S. Treasury debt.
In a commentary from June 3 titled “Too Big to Fail” I warned of the dangers of making the debt ceiling a bargaining chip. Now that the bill has passed and been signed by the president, it is time for the man-made crisis to end and a market revaluation to cause the next one. Get ready for a run on “I hate Mondays buttons.”
I don’t like this debt deal. I am not surprised that S&P does not like it, or for that matter the markets. There is still too much uncertainty, economic and political. The markets don’t like uncertainty and this Congress-made crisis and response have created more, not less uncertainty. Yes, S&P made a political decision. You can’t make an informed economic decision without taking into consideration the political landscape as well. S&P did just that, right or wrong in their analysis.
The U.S. still has every ability to pay its bills, including the interest on its debt.
Of course, S&P is just one voice in the cacophony of voices that is the market. However, they are an important one, their recent sub-prime reputation problems not withstanding. This is the one big debt issue they don’t want to miss or get wrong, even if it meant Wall Street rumbled and Alexander Hamilton rolled over in his grave.