The most obvious answer is that it is simply agreeing with Standard & Poor's, which in its Aug. 5 decision to downgrade U.S. government debt from a AAA rating to AA+ decried Washington's "political brinksmanship" and said that the recent debt deal "falls short" of what is needed to bring U.S. finances under control.Yup, yup. Pretty obvious to me.
Me too but neither of us is elite enough to write for WaPo...
Look at the bond market, which is twice the size of the stock market and was, after all, the main audience for S&P's analysis. If market participants were truly concerned about the inability of the U.S. government to deal with its budget, we should have seen a spike in interest rates as bond investors became more nervous about the continued flood of government debt and the heightened risk that they may not get their money back.
But the Chinese want austerity! And they own 10% of our debt!
But instead, interest rates fell by a significant amount.
An alternative view, most prominently expressed by New York Times columnist Paul Krugman, is that the markets have concluded, given the struggling economy, that budget cuts are precisely the wrong medicine for what ails us.
Spend, baby, spend!
The government should take advantage of the fact that it can essentially borrow for free to finance badly needed infrastructure investments. After all, our airports, roads and bridges are in need of urgent repair, and the extra investment would provide job opportunities and inject money into the economy.
Like a teeny, tiny portion of the Stimulus did.
The reason this argument is falling on deaf ears is that, over the past two years, we've experienced a true citizen's revolt in America against public spending and government debt, embodied most visibly by the tea party movement.
Aha! The usual suspect!
We are thus hamstrung in our ability to deal with the slowing U.S. economy, not because of some deeply flawed strategy, but because public support for a plan based on vigorous government spending has evaporated. Indeed, since last year's midterm elections, we have been contending with a strong and politically influential movement to shrink the size of government.
Shrinking the gubamint can still happen...
Nearly three years after the financial crisis began, a third of residential mortgages in America remain underwater. Since then, about 1 million homes have been foreclosed on every year, and by one estimate, an additional 11 million households -- one out of every five -- could lose their homes unless something is done. A large-scale government program to restructure residential mortgages and help households refinance underwater mortgages would reduce the debt overhang and support consumer demand. Most important, by channeling public money to help individual families, rather than Wall Street, this initiative could alter the political dynamics that currently doom any government efforts to jump-start the economy.
Yea! Some of us underwater didn't borrow ourselves into the hole, we got caught by a crash instead of a dip.
It wouldn't be cheap. But it would be less expensive than another deep recession.
Untangling what the financial markets are saying is rarely easy or straightforward. If the Dow and other major indices continue to zigzag their way down, there is a very real danger that politicians will draw the wrong conclusions -- and begin to push for policies that would only make things worse.