It turns out that the S&P downgrade was a ‘political’ downgrade instead of an economic one.

At first, the dunderheads at S&P tried to downgrade the U.S. based on economic factors. The Treasury Web site provides the details:

In a document provided to Treasury on Friday afternoon, Standard and Poor’s (S&P) presented a judgment about the credit rating of the U.S. that was based on a $2 trillion mistake. After Treasury pointed out this error – a basic math error of significant consequence – S&P still chose to proceed with their flawed judgment by simply changing their principal rationale for their credit rating decision from an economic one to a political one.

S&P has said their decision to downgrade the U.S. was based in part on the fact that the Budget Control Act, which will reduce projected deficits by more than $2 trillion over the next 10 years, fell short of their $4 trillion expectation for deficit reduction. Clearly, in that context, S&P considers a $2 trillion change to projected deficits to be very significant. Yet, although S&P’s math error understated the deficit reduction in the Budget Control Act by $2 trillion, they found this same sum insignificant in this instance.

http://www.treasury.gov/connect/blog/Pages/Just-the-Facts-SPs-2-Trillion-Mistake.aspx

So S&P has revealed themselves as a bunch of clowns. Unfortunately, it appears that after the U.S. Treasury pointed out the $2 trillion mistake, S&P went ahead with their downgrade (to save face?). However, the new downgrade is based on the fact that Republicans/TeaParty/Libertarians refuse to raise taxes:

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DUS_Downgraded_AA%2B.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243942957443&blobheadervalue3=UTF-8

In reaality, the U.S. fiscal situation isn’t that bad. It’s nothing that some relatively small tax increases couldn’t fix. However, the Tea Party would rather destroy the credit of the U.S. than let the 3% Bush tax cuts expire.