Just got word from Standard & Poors. I’ve been downgraded. So have you. The firm has blamed bickering politicians in Washington for forcing it to lower the rating on U.S. Treasury bonds to AA —U-S-A-A! U-S-A-A!— from the highest, triple A ranking, but in neighborhoods all over America, people are getting along just fine. And there’s no chance, zero, that the U.S. is not going to pay back its creditors. But S&P is unmoved by logic. Like the U.S. Treasury, I have never missed a debt payment, but that doesn’t matter, either. If the Treasury has to pay a higher interest rate for borrowing than I do, too, and then some, since at $14.5 trillion owed, give or take, the Treasury is a bigger customer. Presumably, rates on Treasuries will have to rise to attract investors who might otherwise opt for the bonds of more surefire countries, such as Luxembourg. Or the Isle of Man. Every day we’ll come up a little shorter because we’re rated AA. We’re now on par with Spain, and without as good a soccer team. Or tapas. At the credit buffet, Denmark and Finland get to go ahead of us. Humiliating.
In market math, U.S. Treasuries are considered risk free, so if you buy any other asset, which by extension is not riskless, you as an investor need to be compensated for the higher risk with a higher rate of return over what treasuries can offer. That’s the risk premium. So investors who were holding other asset classes, namely stocks, had to reprice that risk. And they did, initially, by making stocks cheaper—this is, selling them. But the market is a complicated animal. Investors rushed into Treasuries—which they still considered the safest place to put their money—despite S&P’s contention that Treasuries were now riskier. The market was saying that S&P was wrong—after all, there’s ample precedent. The downgrade comes from the very same firm that stamped AAA, “Sure Thing,” “Can’t Miss” on mortgage bonds called CDOs that turned out to be garbage and would lose much of their value, undermine our economy and contribute to the global financial meltdown. Triple play! Based on its record, S&P’s opinion should be worthless.
Instead, I’m the one who’s worth less following the market gyrations that have ensued.
So what else could possibly happen in the new world created by S&P? It didn’t take long to find out. At my local dry cleaners, I brought in 10 shirts to be laundered but the owner said she could only clean 8 of them. Downgrade, you know. “No starch,” I said. “No kidding,” she retorted. “That’s only for AAA shirts.” I told her I bought one of the shirts in France, an inexplicably AAA-rated country. (Is S&P using cuisine as a ratings criterion?) She was unmoved.
I walked to the subway to get to work, but discovered the line I usually travel on, the R, had been downgraded earlier by S&P to a Q, which wouldn’t take me to the station near my office. “Where will all this stop,” I screamed in frustration. “Times Square,” somebody said. “Pipe down.” I couldn’t even contemplate what this would be like on my next reporting trip. How could S&P possibly downgrade air travel— from purgatory to hell? Could this mean that every flight will be the middle seat on one of American Air’s (AA, natch) New York to Dallas legs?
By the evening, I felt the need for a libation at a neighborhood establishment to help calm jittery nerves after glancing at my 401k statement. I perused the single malt whiskeys on offer behind the bar. “I’ll have the 12- year old Oban,” I said, remembering the peaty taste of that distilled beverage from a long ago visit to western Scotland, part of the AAA-rated United Kingdom, a nation that is presently on fire. The barman gave me the downgrade stare—S&P had just been there celebrating another achievement— and poured a beer. The age of lower expectations had arrived.