Cross-posted at The Street Light.
Absurd news today from S&P’s credit rating analysts, who have apparently been drinking liberally from the Deficit Crisis Kool-Aid:
NEW YORK (MarketWatch) — Standard & Poor’s cut its ratings outlook on the U.S. to negative from stable on Monday, lighting a fire under Washington’s deficit-reduction debate and sending stock markets sharply lower.
The rating agency effectively gave Washington a two-year deadline to enact meaningful change, just days after House Budget Committee Chairman Paul Ryan and President Barack Obama each outlined their plans for slashing debt. S&P nonetheless kept its highest rating, AAA, on the U.S.
US debt is still rated as AAA, which effectively means that S&P’s rating analysts believe there is a zero percent chance of the US government not making payments on its debt. However, this new “ratings outlook” indicates that they now believe that there’s a reasonable chance that some time within the next two years they will change their mind, and start to believe that there’s a chance — albeit a remote one — of the US government defaulting on its debts.
For perspective, the following chart shows the OECD’s forecast for the burden of debt payments in the US and the world’s other largest developed economies. Net interest payments both this year and next year will be lower than any other major OECD country with the exception of Japan.
Update: NYT offers six more reactions here. (h/t Rebecca)
Ah, but no doubt S&P is worried about what will happen to that debt burden beyond 2012. After all, there are alarming predictions that the currently large budget deficits will continue to be unduly large after 2012, even as the economy recovers.
But deficit projections are notoriously slow to catch up with the business cycle. When the economy is doing well and deficits are small, forecasters tend to look in the rearview mirror and make very rosy projections into the future. And when the economy is doing poorly and deficits are large, forecasters also tend to project doom and gloom going forward.
So let me put up this reminder about how bad, and backward-looking, medium-term deficit forecasts can be. It shows the US government budget balance as forecast by the CBO in 1993 and 1995, and compares those forecasts with what actually happened.
I don’t want to argue that the US has no long-term deficit problems. It does. And steps will need to be taken — when the economy is in good shape — to bring revenues more in line with spending. But the current fear-mongering over the US’s budget deficit is just that: fear-mongering. And today S&P played a shameful role in it.