February 27, 2021

How the S.&P. Downgrade Will Affect the Country

“I think this is already baked in the cake,” said Garett Jones, an economist at the Mercatus Center at George Mason University, suggesting that investors and bond traders had already accounted for a downgrade. “It’s not a disaster. It’s just that we’re a little bit riskier, a little bit crazier than people thought a month or two ago.”

However, with the United States economy on such fragile footing and growth remaining elusive, and with Europe desperately trying to contain its debt crisis, anything that undermines already low confidence levels could create a ripple effect and further stall the recovery.

“It’s a very emotional and volatile environment,” said Kenneth S. Rogoff, a professor of economics at Harvard University and author, with Carmen M. Reinhart, of “This Time Is Different,” a history of financial crises. “An event like this can sometimes trigger a reaction far in excess of what you might expect.”

In practical terms, investors will first focus on what happens when global markets open Monday morning, particularly in trading of Treasuries. Standard Poor’s announced its downgrade after the markets had closed on Friday. Analysts said that since Moody’s and Fitch, the two other ratings agencies, have so far kept the United States at AAA, the S. P. downgrade left Treasuries near the top of a short list of assets attractive to investors anxious about Europe’s debt crisis.

“People are going to look for a safe place to hide,” said Ward McCarthy, the chief financial economist at Jefferies, a securities and investment banking firm. “And there aren’t many places. There’s gold and Treasuries.”

Although the debt downgrade itself is somewhat abstract, even those who don’t pay much attention to economic news will hear of it on cable news programs and late-night comedy shows. And S. P.’s judgment mainly reflects the anxieties many Americans are already feeling as a result of the nation’s debt troubles.

“For a household, the concern is, am I going to keep my job and what are my future tax burdens?” said Glenn Hubbard, the Columbia Business School dean who led the Council of Economic Advisers under President George W. Bush. “If Washington is having a very difficult time getting its fiscal house in order, as a household, I either expect radical spending cuts that will affect me or radical tax increases that are going to affect me,” Mr. Hubbard said. “It doesn’t mean I won’t buy bread, but it might mean putting off purchases” like washing machines, furniture or other large items.

The United States stock market will be a crucial barometer when Wall Street opens on Monday morning, and some analysts expect it could actually rally after the big losses last week — down 7.1 percent in just five days. “This may be one of those sell-the-rumor-and-buy-the-news relief rallies,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

The stock market, though, does not have the safe haven protection of Treasuries, and is more a gauge of the broader economic outlook. With up to 70 percent of the economy driven by consumer buying, anything that could cause a further downshift in confidence is worrying.

“People may not know the exact details of what’s going on, but when they hear that the U.S. is close to default, even though it may be for all practical purposes a short default, they get scared,” said Raghuram G. Rajan, professor of economics at the University of Chicago. “If people think the full faith and credit of the U.S. isn’t what it was thought to be, they think that something has changed. It does erode confidence a little bit.”

For those worried that the downgrade could cause mutual funds, banks or money market funds to withdraw from Treasuries, there was little evidence of that over the weekend. The downgrade of long-term Treasuries does not affect the short-term federal debt widely held by money market mutual funds.

Mr. Rajan said that downgrade of debt in a smaller emerging economy would most likely immediately bring jumps in interest rates that would affect companies, home buyers and car purchases. But the strength of Treasuries, which tend to determine mortgage rates, would keep rates low for now, he said.

Louise Story contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=6770d9f024a2f47e717870b8e40c2dcc

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