The difference between S&P and a 4 year old

Lots of people are upset that Standard & Poors (S&P) just announced they are downgrading the US federal governments credit rating from AAA to AA+. Politicians are claiming S&P got it wrong and made errors. According to S&P, it is not as certain that the US will pay its’ debts as it used to be. Why are people upset about this? Imagine for a moment that 3 weeks ago you were talking with a 4 year old and he told you that he didn’t think the federal government was going to pay its’ debts… would you have been upset? Of course not. Who cares what this 4 year old child thinks and says?… he doesn’t influence your investment policy. This is not a rhetorical question, it deserves consideration.

Are we upset because we believe S&P speaks the truth? Assuming we want to know the truth that makes no sense. Are we upset because many others will listen to S&P and that will lead to financial problems? Well then we are upset with those who listen to S&P. There are only two possibilities: S&P is right or they are wrong. If you believe S&P is right then should be be happy to be in the know. If you believe S&P is wrong then you are free to lend the federal government as much money as you like, and they’re happy to take it. The simple truth is that the financial situation of the federal government did not change one iota as a result of S&P’s announcement. They had the same amount of debt and income before the announcement as after. The realm of possible things that the federal government can do is the same now as it was before the announcement. What are we afraid of? S&P is merely an entity that provides their opinion, we are free to follow it or ignore it, just like the advice from the 4 year old child.

I believe we are afraid that S&P is right. I believe we know it intuitively. I’m not lending any money to the federal government, I believe they are a bad risk. Frankly, I believe they are criminals violating laws that have not yet been written.

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