U.S. Economy: One Big Game of Musical Chairs

It appears the best any of us can hope for today is to be sitting somewhere when the music stops.

Let's see if we can follow the logic of the marketplace today.

Standard & Poors downgrades United States government debt, taking the rating down from AAA to AA+. They do this for a variety of reasons, but primarily because they believe the U.S. government lacks the political willpower to make the necessary cuts and tax increases to bring the debt under control.

This should, in theory, drag down the bond market. After all, S&P is saying that bonds are a less-healthy investment today than they were yesterday.

Does the bond market tank? Of course not. Ten-year treasury bills are up — yes, up! — by over one percent. Granted, yields are down. But still...S&P downgrades government debt and government debt is the one instrument that goes up? How crazy is that?

Meanwhile, the equities market is in some kind of death spiral, as investors panic themselves into selling off, accepting losses across the board. The Dow just closed trading, down 632 points on the day (5.53%). Certainly not our worst day, but it's hardly the sort of news that Americans want to hear on their commute home tonight.

Of course, the United States benefits from being a safe haven for investors. Even in troubled times (and right now probably qualifies as a troubled time), investors feel that American companies will rebound and innovate and profit, and that the American government will be strong and solvent into the future.

So, while it seems counter-intuitive, even bad news in the U.S. bond market becomes good news, relatively speaking, for the bond market. The thought is that, if things are bad for the bond market, they're even worse for equities, other government debt, or even corporate bonds. This is how a debt downgrade morphs into a flight for that same, downgraded debt.

The United States debt downgrade isn't the only negative topic weighing on the world markets, so perhaps it's a little premature to blame the steady decline of the Dow on it. However screwed America is, Europe is just as bad, if not worse. Sovereign debt crises are the name of the game in Europe, with Portugal, Ireland, Italy, Greece, and Spain raising warning flags the past two years.

Greece is like two steps removed from an actual default on its debts, which would trigger the kind of crisis that the Tea Party folks were hoping would happen here. (Before you fire off an angry email, read this.)

Since Greece's debt is owned by other eurozone banks, and credit default swaps are spread across the entire system, a Greek default could mean a Lehman-style bank run. So, it's safe to say that America is a safer bet than anything in Europe.

Today, investors proved that by landing precisely on what was considered America's troubled treasury bills.

I hope your trades tomorrow don't leave you chair-less when the music stops. You can reach the author on twitter @johndthorpe.