What Does Change In S&P Outlook Mean?

Okay, first of all, let’s get one thing straight.

In my estimation there is a ZERO percent chance that the U.S. will default on its debt.

Yes, ZERO, zilch, nada, none.

The U.S issues its debt in the U.S., denominated in the U.S. Dollar.  So, if the U.S. needs more money to pay its debt it just has to print more money.  Now of course the printing of dollars and increasing the money supply  just to pay debt would in very likely have other negative consequences (inflation, further downgrades, currency exchange rates, etc.).

And of course a downgrade of the U.S. debt rating would cost us more money in higher interest rates that we would have to pay on all of that debt, exasperating the problem.

So clearly the increase in the U.S.’s debt is becoming problematic and weighting on the markets.  Something has to be done about it.  So what is likely to be done about it? 

The first tangible sign comes on April 27^th when the Federal Reserve (The Fed) Open Market Committee meets.  It is unlikely  to launch a third quantitative easing (QE3) and very likely to let QE2 expire.  Quantitative easing was an attractive policy tool after short-term target rates were cut to zero. By buying securities such as Treasury bonds, The Fed drove down interest rates in an effort to stimulate the economy.  And it sure seems to have worked.

But from published comments even the more dovish officials at The Fed seem to see little case for further asset purchases because the risks that led them to launch QE2 last autumn seem to have abated.  And of course the more hawkish officials at The Fed would likely become apoplectic if Bernanke tried to push for QE3.  So any debt increase caused by QE1 & QE2  is likely to be allowed to mature or be sold.

And Congress AND THE White House are talking about cutting the U.S debt.  At the same time.  In trillions of dollars. 

Who’d a thunk!