If you think that this morning's stock-market plunge is a validation of S&P's rating downgrade for U.S. debt, you don't understand the purpose of the ratings
Just a quick recap of the first morning of stock trading after S&P downgraded the rating of U.S. debt from AAA to AA-Plus. Here are the numbers from this morning's open to noon:
Dow 11,120.42 -324.19 -2.83%
Nasdaq 2,438 -94.54 -3.73%
S&P 500 1,157 -42.79 -3.57%
Bonds & Currencies
10 Year Yield 2.38% -0.17
Stocks down, bond rates down, cats & dogs living together, MASS HYSTERIA! Total validation for the S&P downgrade and the national debt as our #1 problem, right?
The decline in the rate on 10-year treasury bonds means that money is flowing into U.S. debt, not out. When more money tries to buy something the price -- in this case the interest rate -- goes down. S&P's rating was for U.S. Treasury bonds, not for stocks. Investors are actually moving their money out of stocks and into U.S. debt.
Why? Because what the smart money fears is not a U.S. debt default. The smart money fears the absolute sluggishness of a stagnant economy. Our nation's problem is not debt at 2.38%. Our problem is high unemployment and a lack of growth.
And from what I have heard out of Washington and on the news, both today and over the past few months, there are an awful lot of politicians and commentators who either have never studied history and basic macroeconomics, or who have chosen to ignore history and basic economics in favor of shilling for their pet policies.
So here's tip #1 for you today.
If you hear a politician or commentator saying today that the stock-market plunge validates the view that our economy's problem is our national debt, that person is either ignorant or lying to you. Either way, you should ask yourself if he or she really has your best interests or the nation's best interests at heart.