Debt downgrade inevitable - even helpful

The downgrade of US debt to AA+, was inevitable. It could be describe it as the "tea party downgrade" because it was the debt ceiling brinksmanship line that really stood out in the S&P report. Consider if you were China's central bank and your largest debtor just said "maybe we won't pay" - you'd expect a downgrade and to collect higher interest rates based on that risk - especially since the value of the debt is decreasing as a result of QE. Substantively, the US is still AAA. It is the ultimate safe haven asset, nothing is more secure. It is just a sign of the times that the most secure assets are being downgraded.

However, this can be a helpful downgrade if the result is the same as what followed Canada and Sweden's downgrades in the 1990s. This is a major psychological blow (probably why markets are tanking), which can be a wake-up call to voters that the US is not immune to similar troubles as Europe and so the country's leaders may look to improve credit rating to AAA again by making the tough and correct decisions about future spending. Canada's experience was of large deficit reduction, sustainable government debt loads and a longer-term fiscal outlook. This will be more challenging for the US as they do not have positive economic momentum right now, but it can still be done.

The US needs a 2% VAT (value-added tax), and this would begin to address the systemic issues affecting the long-term solvency of the country.