NAFCU Services Blog

Aug 11, 2011 by David Frankil

Just When You Thought It Was Safe To Go Back In The Water - Will The Downgrade Have A Lasting Effect?

I tend to be an optimist, and thought (hoped) that once the debt ceiling deal was finalized, the nation would refocus and we could get back to the business of economic recovery.

It is usually the Federal Reserve that is accused of taking the punch bowl away just when the party gets rolling, but this year Standard & Poor’s stepped in to be the “bad cop” by downgrading their U.S. Government long-term AAA debt rating to AA+ for the first time since granting it in 1917.  This last week has brought back painful memories of 2008, with all-too-familiar volatility in the equity markets and plunges in the value of retail investor portfolios and 401(k)s.

But what will the long-term effect be?

Dave Goerz, SVP and Chief Investment Officer for HighMark Capital (the Adviser which manages our National Investment Fund for Credit Unions) has posted an excellent commentary that puts the recent debt rating downgrade into historical context and outlines some of the steps that can be taken to address the deficit and political concerns that prompted the downgrade.

Dave’s perspective reminds me that economics is, at its core, a behavioral science, and that some of the drivers prompting the downgrade as well as some of the effects it will have are not based solely on the fundamentals.

While emphasizing the fact that soaring deficits need to be brought under control, Dave points out a few interesting tidbits that make you wonder where this downgrade came from –

  • The U.S. remains within the range of debt/GDP ratios of other AAA rated countries
  • If S&P believes that the United States should be downgraded, then the United Kingdom, France and Austria must also be at risk, although he sees no indication of similar concern for now
  • Nor does it seem appropriate that U.S. Government debt should be rated on par with other AA rated countries like Belgium, Japan, Italy, Spain, Qatar, and Slovenia.

The entire commentary is available for you to read and download, but first I will leave you with one phrase from his conclusion that will stay with me –

Someone has to pay.  Future generations have no vote, but the consequences to them are now visible. 

Post written by Dave Frankil, President, NAFCU Services Corporation

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