There have been three main reactions to S&P’s downgrade of long-term (> 1 year) American paper. Expert financial advisors are saying it mostly won’t matter in the short term. American politicians argue the math, and claim that the downgrade proves their own partisan position is true, whatever that means..
Then there are people like me, who aren’t quite sure what it means. As an investor I’ve been sitting substantially in Canadian cash for a couple of weeks because once we slipped by the original timeline for passage of a sensible debt deal in the US it was clear that the American political process was broken. This is what S&P cited as the primary reason for the downgrade, a fact carefully ignored by President Obama in his response. It’s not about the math. It’s about the partisan dysfunction.
The experts, as readers of Tetlock’s “Expert Political Judgement” will be aware, don’t have a great track record. Prediction is hard, as the saying goes… especially with regard to the future.
But I can’t help noticing a sense of hopefulness about their views. This is the natural human tendency: predict dire consequences before an event occurs, when you’re trying to scare your opponents into submission so you can burn their villages and boink their women; but after the worst has happened claim that it’s not so bad.
Given that Tetlock has shown even the best experts are not all that much better than chance, neither the pre-panic nor the post-passivity are likely to be entirely warranted.
My own feeling is that this is the end of the world, but as Harold Camping knows, that’s not necessarily the end of the world.
“The world” in the former sense is the current American dollar-based hegemony, chronicled in Bonner and Wiggin’s “The Empire of Debt” (which I won’t link to because it’s full of jingoistic nonsense along with some sound economic and political observations.) The world as we know it is fueled by that precious liquid, the “full faith and credit” of the United States of America. It is a secure world, a safe world. A world where a dollar tomorrow is worth more-or-less what a dollar is worth today. A few cents less, sure, but more-or-less, if you squint, the same.
“The world” in the latter sense is the human business of production, consumption and exchange. It won’t, a decade or two from now, be a dollar-denominated world. But it will be a world.
In the short term–the next few days or weeks–the experts are probably right. Markets won’t crash (tune in tomorrow to see if I’m right!) The sun will still rise, David Hume’s gibberish notwithstanding. But tomorrow morning we’re all waking up to a world where the well of liquid green that keeps the world’s economic engine running has been downgraded by an expert assessor. The pumps have hiccuped and the maintenance crew are too busy arguing over whose girlfriend is prettiest to be much bothered about fixing it.
That world is living on borrowed time.