1. If ultimately money is just a question of belief (signs, symbols, rites and rituals, see my previous anthropology of finance notes) and we understand the particular rules for isomorphic exchange of the parties (what Marcel Mauss called "the gift") then you can shortcut or short circuit the normal "spheres of exchange" (see Dalton and Bohannon) as an "entrepreneur" (see Mary Douglas' classic study on the suspect moral character of such) to become extraordinarily rich in any society! This sums up my observations of the investment banking tribe over the past 24 years. Given this "anthropological view" of finance and and banking, what are we to make of the August 5, 2011 S&P downrating of the US long term bonds to AA+ from AAA?
2. From a "moral spheres of exchange" perspective and from a very technical Securities law and Investment Act perspective, the rule governing isomorphic exchange tells us specifically that public pension funds normally may not invest in less than AAA credit rated bonds. Don't worry. This does not mean that ALL US pension funds will suddenly try to trade out of the US long bonds. Why? Because other credit rating agencies still have the US bonds as top rated. But if the other two credit rating agencies (Moodys and Fitch) were to downgrade then there would not be any other reasonable existing alternative and the US government would be forced to make up stuff on the fly. For example, the President could invoke emergency powers or maybe even more fancifully, rush through Congress a bill freeing all public pension funds and investment funds from the requirement of holding AAA bonds. I'd expect this sort of legislation to be introduced rather soon.
3. How about the rest of the world? Well, S&P and all other credit rating agencies have a specific function keeping the buyers of genuine information SEPARATE FROM the ultimate sellers of information. Call this the "information spread". The tighter the spread, the less need for the credit rating. So, if everybody knows that the US Budget Control Act of 2011 is just stupid and just makes the US debt addiction worse--note, the current $14.5 trillion will become $23 trillion under the terms of that law with an estimated expected net present value of $66 trillion--then there will be a tendency to simply "ignore" the rating as not having the quality of news. The effect of the re-rating, however, will have significant impact on the already near mortally wounded money market funds. Again, technically, the MMFs won't able to justify holding US bonds (long end) but also, will now face a grave reluctance to hold any short term US treasuries. This is a similar risk transmission mechanism as August 2007.
4. The D Rating and Invariance of Default. So all the positive alien spin by the President and Congress has been translated into the decorous signs, symbols, rites and rituals of the credit rating event into a morphism which is headed towards default. If anything, S&P's action is not entirely correct since a raising of the debt ceiling should have been interpreted as a de facto default. The US Federal banking authorities will do their darn best to relegate S&P's opinion. See:http://www.fdic.gov/news/news/press/2011/pr11133.html This is all part of the n-FINANCIAL WAR that is now beset us.
For S&P report on the downgrade of US long term debt, see 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
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