Debt Ceiling and S&p Downgrade of Us

This $14.294 trillion ceiling was hit on May 16 invoking a debt issuance suspension period. Approval from both levels of congress is required to increase the debt ceiling level. Under a one-party government this is almost routine however a divided government as is the case now, has proven to cause instability. Any ceiling-increase bill that was passed in the democrat-held Senate was blocked by the republican majority of the House of Representatives. Given the current state of the economy many Democrats argue that spending is needed, and that jobs are paramount. The republicans on the other hand were pushing for responsible fiscal management, now and into the future. Politically, the Democrats and President Obama had already been lashed in the polls, and this political stability wasn't going to help, nor was it going to hurt the Republicans and the Tea Party, who now had political leverage, to try to destabilise the government as well as push their policies in the shadow of an election. The Republican refusal of the 2012 health infused budget further highlighted discord - even drawing criticism from some Democrats. Despite the existence of several remedies for the government to bypass the debt ceiling -ranging from Constitutional challenges to the rather romantic notion of minting large denomination coins1 - the Democrats could ill afford to lose the public relations battle that they were incapable of sound economic management under the status quo. Nevertheless it's clear that the instability caused by a divided government can affect the world economy so perhaps the idea of removing the debt ceiling all together isn't such a bad one. In fact it's this political instability that was highlighted as a major factor behinds S & P's decision to downgrade, citing that the "predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned"2. But where does one draw the line between healthy political process and instability? S & P clearly draws it at the point where duelling parties argue over a self imposed cap. Are S & P trying to save face at there failures and slow downgrade reactions to risky MBS's before the GFC? On top of this, despite saying it had no affect, S & P admitted to a $2 trillion error in assessing the rating. Furthermore, rates on treasury bonds post downgrade were unaffected - in fact buying drove yields down to 2.34% on the 10-year Treasury, from 2.56% late 3. Clearly the market hasn't given much heed to S & P's ratings downgrade as we stand. Keeping these factors in mind along with the fact that none of the other agencies have downgraded the US, the decision seems unfounded. While there may be a time when continual policy mishaps diminish the risk-free status of US treasury bonds, I don't believe that time is now.