They're a brave bunch at Standard & Poor's. The rating agencies' reputations were shredded after their collective failure to spot the financial crisis coming. They then incurred the ire of the EU after stating the bleeding obvious about various European economies. But taking on the US? They don't lack courage.
Of course S&P have been under the cosh, and their dodgy arithmetic didn't help (they overstated the problem by $2 trillion). They have given China and India the opportunity for some lovely Schadenfreude, and it seems unlikely that it will help the stock markets bounce back next week.
Yet who can realistically argue with their decision? The US has no plan whatever for reducing the deficit, or for adjusting its long-term liabilities downwards in any meaningful way. The $2 trillion was a drop in the ocean; the headline story is that the deficit will grow, and the political will to do something about it is close to nil. Even the shambolic Italian government is nearer to making sacrifices.
The real issue, however, goes well beyond the current polarisation of US politics. The problem is the unsustainability of our current model of democratic politics in the West. Voters demand too many goods from their governments, which are either too nervous to refuse, or too scared to raise the revenue, or cynically prepared to pass the bill onto a future generation.
We have been spending more money than we earn, the 'we' here applying both to individual consumers and national governments. We have to adjust.
This will not be pleasant, but there really is no non-painful way out. People are over-indebted, so will be forced to save while releveraging. This will depress growth, of course, which will extend the bear market (although markets have been bearish for a decade, 20-year bear markets, such as that which ran from the early 60s to the early 80s, are hardly unknown). This will finally make it clear that pension commitments cannot be cheaply funded on the back of inevitable and rapid equity growth. That in turn will mean pension funds investing in longer-term assets with steadier and more predictable growth, which will require more saving for pensions over and above releveraging. So even less consumption, and even less economic growth. Fewer productive places to put savings, and so more saving to be done.
Any growth-led strategy will be futile for years to come (which is not to say that governments should not pursue growth, only that they won't get very much of it). No doubt exports can help things along, but they cannot by themselves keep us in the manner to which we have become accustomed. More borrowing over the long term is hardly feasible. Austerity is the only serious option, whether this is achieved by lower government spending, lower consumer consumption or inflation (or a combination of the above).
Yet most policies of most governments assume that the only way to keep voters happy is growth. This assumption had better change. As Tom Burkard pointed out in this blog, here is much to mock in recent attempts to widen measures of satisfaction (such as Richard Layard's work on happiness, or Cameron's promotion of measures of General Well-Being), but woe will certainly betide us if we are to rely on increasing prosperity over the next decade or two. At all levels of society, from the individual to the nation, we will have to adapt to there being less wealth around. Burkard is absolutely right to say that governments can't, and shouldn't, create that adaptation on their own, but our social structures, networks and connections will need to take up a lot of the slack.
My recent book Conservatism argued that a conservative should be suspicious of change, but should welcome it when the risks of change were outweighed by the risks of stasis.
We have reached that point; the S&P downgrade, which will have a few no doubt temporary material effects, has greater significance as a symbol of the need for a new politics of austerity.