The US Defies the Rating Agencies as the Economy Thrives

Despite rating agencies like the S&P cutting the US credit rating from AAA to AA+, the country’s economy is outpacing the 12 nations that currently have the highest rating. Take a look at the indicators – the dollar is at its strongest since 2008, its GDP is growing faster than developed countries, and its deficit is the lowest since 2008. As a result, rating agencies like S&P has changed their read on the nation’s economy from negative to stable. The change effectively means there is less than a one-third chance of a downgrade in the next two years.  “The markets are telling us that we’re due for an acceleration over the next several quarters,” said Carl Riccadonna, a senior U.S. economist in New York at Deutsche Bank Securities Inc.

The S&P and other rating agencies downgrades caused a flight of capital that erased about $6 trillion in value between July 26 and Aug. 12, 2011. Treasury 10-year yields hit the skids at 1.67 percent that September from 2.41 percent on the day of the downgrade.

So what did it? A host of factors, but one component is a reminder never to listen to Op-Ed writers and politicians running for office. When the budget sequestration was first raised – these are the $1.2 trillion in automatic spending cuts that took effect on March 1st– the punditocracy and the blogosphere acted as if the economy would nose dive into a double dip.  After all, if sequestration remains in place, the Pentagon alone will have to trim $50 billion from its budget during 2014 and $500 billion over the next decade. Instead, after four years of budget deficits of more than $1 trillion, spending has been chastened. The government instead has raised tax revenues (mostly due to investors taking profits on investments sooner than they might otherwise have because of fear over a hike in capital gains) and lowered spending meaning the deficit will probably shrink to $378 billion, or 2.1 percent of GDP in 2015, from 7 percent in 2012, according to the CBO.

What all of this has brought back is confidence. Foreign investors and governments are parking their money in dollars again. Its share of global foreign-exchange reserves rose to 62 percent on March 31 from a low of 60 percent in June 2011, according to International Monetary Fund data.