It’s not the whole story, but something like this threatens to develop:
1. US debt is downgraded, sparking demands for more ill-advised fiscal austerity
2. Fears that this austerity will depress the economy send stocks down
3. Politicians and pundits declare that worries about US solvency are the culprit, even though interest rates have actually plunged
4. This leads to calls for even more ill-advised austerity, which sends us back to #2
Behold the power of a stupid narrative, which seems impervious to evidence.
Or, as David Frum tweeted earlier:
Markets are saying: We fear recession and deflation. Washington consensus: now is the time to fight debt and inflation.
Are we entering the double-dip recession? Were we never out of the recession to begin with? Has the Tea Party’s austerity-only zeitgeist brought us here, or is this a failure of the president’s leadership? Or did the more sensible members of the GOP let the clown out of the bag when they embraced so wholeheartedly the uncompromising right?
All of the above maybe?
All I know is that after the plunge in markets last week, today’s even deeper dive is bad news.
Silver lining of the day: oil is down (thanks to Alex Knapp for the tip). Still, we’re left talking about deficits, tax hikes, and spending cuts when we should be talking about getting people spending money again.