I've seen many things written about the S&P debt downgrade now to form an opinion. That opinion is that democracy doesn't work because most people are too stupid to vote for things that affect me. Thus, I'm an anarchist. Okay, bitching aside, let's think about the downgrade and what it means.
A debt rating is a (not the) measure of the probability that an entity will default on its debt. Default means missing an interest payment at least, and can end up with the entity declaring bankruptcy in extreme cases. Now, as I teach my students, it is technically impossible for the U.S. government to be forced into default because the U.S. government prints U.S. dollars, and issues bonds denominated in U.S. dollars. In fact, because dollars are zero-maturity debt securities, or zero-discount bearer bonds, the only difference between a bond and a dollar is the time to maturity.
So what does the downgrade mean if it doesn't mean that the U.S. government is closer to being forced into default? It means that it is closer to a strategic, or voluntary, default. Strategic default can take two forms: monetizing the debt by printing enough money to pay off the debt (see Weimar Republic post-WWI); or it can repudiate the debt, and essentially say "Chuck you Farley, we aren't paying the money we owe!" Each method has costs and benefits, which I will not analyze now. Maybe later.
What I want to talk about is the reaction to the S&P downgrade. Apparently the SEC is investigating S&P for evidence of insider trading, even though no abnormal trades were detected.I've seen many pieces arguing that the S&P downgrade itself is a problem for the future. Treasury has argued with them that they made a math error: it was actually a difference of opinion regarding the growth rate of government spending. So people are pitching a fit because S&P has said publicly what most of us already know: government spends too much.
This is how children behave when Daddy takes away the credit card. But Daddy hasn't done that yet. More like Mommy has come in, said "if you keep spending like this, Daddy will take away the credit card." And the kids have a tantrum and complain about how mean Mommy is. All this amounts to killing the messenger and failing to get control of the real problem. The discussion that needs to be had is: what should government do? The steady growth of government control over the centuries, especially during the 20th, have brought us to this point. Europeans might want a big government, but do Americans? Some do, which brings me back to the first paragraph.