The Standard & Poor's Treasury bond downgrade

While I see significant prospects of a U.S. fiscal disaster at some point, reflecting my pessimism that the U.S. political system can handle a predictable set of problems that everyone sees coming, I am unsurprised that the bond market, as the Business insider blog put it, gave Standard & Poor's a "gigantic middle finger" by pushing Treasury bond prices up (and yields down) upon hearing of the S & P downgrade.

There are lots of interesting theories regarding why the bond market would react at all. E.g., the S & P downgrade would force Washington to get serious. Or, it caused stock prices to drop (as indeed happened simultaneously) on the view that economic disruption would hurt earnings, and this caused a flight to, ahem, quality.

But the big mystery is that anyone would react at all. It's not as if S & P knows anything special about the bond market situation. And even when they do arguably know something, it's not as if their reputation is (or should be) stellar these days.

Presumably it's a Keynes beauty contest reaction of some kind - investors are reacting to how they think investors will expect investors to react.

Of course, there's one surefire way for the federal government to prevent any future downgrades: pay S & P to rate the bonds. Then wow the S & P analysts with models in which (a) default is ruled out because it has never happened and (b) inflation forecasts are based purely on post-1982 data, and it's AAA, all the way, until the very end.