That is why I brought up Japan. Yes, the debt rating is about knowing what the risk is and how much interest to change against it, but there are other factors that affect interest rates and that keep interest rates very low even in the face of a non-perfect rating. In Japan it has to do with the way banks are encouraged to hold lots of government debt. In the US case, there are many reasons, including that there's so much of it that it's incredibly liquid and that the dollar is still very widely used in trade. So yes, while it stands to reason that the US might, eventually, pay higher rates because of this downgrade, I think investor confidence in the US's repayment ability (which the downgrade hasn't changed) and these other factors will play a much larger role. Remember, AA+ isn't junk grade. It doesn't mean S&P thinks we'll default. It just means they think that we're living beyond the means they think reasonable, which everyone knows already.
As it happens, the yields ended up going down, on the basis of unprecedented volatility in the stock market. It doesn't matter. The debt rating has a very straightforward purpose - to know how much interest to charge. The way it worked out this one time is immaterial, and it stands to reason that at some point over the time that the rating is lower, the US will pay higher interest because of it.
The other issue with the volatility is that often the goal of institutions isn't to hold only triple-A investments, but rather to meet a certain minimum average on all their holdings. So while AA+ Treasuries won't (I believe) be sold off so quickly, holding on to them does mean letting go of some riskier assets, which are really what cause economies to grow.
Obviously the Tea Party didn't exist back when we went into Iraq. It was a response to precisely this, to TARP, to all the things that added to the debt that were supported by both Democrats and Republicans. The Tea Party isn't a Republican movement, even though most of its supporters voted elephant in the past, and they run on the Republican ballot. Their intent was to lower the deficit without raising taxes, and granted, they're annoyed that the debt ceiling was raised at all, much less over cuts of (merely) 2 trillion dollars, but despite their griping (which they set themselves up for by promising no compromises, which I agree is absurd) they did accomplish something -- some spending cuts with no tax increases.
The truth is that in general, I would be in favor of greater fiscal responsibility over raising the debt ceiling. It is not the policy that makes me so upset at the Republicans/Tea Party as much as it's these buffoons who put it forth. Where was the Tea Party, or at least the elements in the Republican Party who represent them, when Bush was attacking Iraq? What did they contribute to the national debate other than the ridiculous birth certificate thing and a little splash of racism, before this? There was no intent to accomplish anything here, and the proof is that supporters on both sides are annoyed at the result.
And if they keep going, they might get the tax system simplified a bit, something people have been talking about forever but never done (as had been happening with the deficit as well). But I agree that they'll have to mature a bit, and not cancel the entire proposal if it ends up being 5$ off revenue-neutral.[
And yet the (original) reason for the downgrade was not the fighting in Congress or the last-minute deal, but the deficit itself. So they were not risking so much -- the writing was on the wall whether they let the debt ceiling be raised without cutting spending or whether they got the 2 trillion$ deal.
All they intended to do was take the bloom off Obama's rose, and in the process, they were willing to risk something that is far far greater than what they would have accomplished in a best-case scenario. In the long run, it won't matter, hopefully. The yield hasn't risen yet, and Michelle Bachman still has a smaller chance of being elected president than I do.
As for Bachmann -- if only she weren't so good at kissing babies! She won't be elected president, but who knows about the ballot. Scary indeed...
BTW, welcome back! We missed you.
I don't think the rating agencies really care if you have no deficit because you tax-and-spend at 50% of your GDP or 5. Just saying.
While I'm no fan of the credit rating agencies (these people rated many mortgage backed securities backed by subprime mortgages as AAA and gave Bernie Madoff a similar rating even though everyone knew he was a fraud) I can't challenge the logic. Our spends more money than it "earns" in "tax revenue", has been doing so for decades and like a true drug addict wants us to give it more money because this time it'll kick the habit (just anyone whose had the "joy" of having to live with a drug addict how true and angering that statement is).
Until our government stops spending our money I can't object to our credit rating being lowered. And given how the clowns in Washington D.C. act I can't see real spending cuts occuring anytime soon, at least voluntarily.