Moody’s has joined Fitch in declining to downgrade the US credit rating after passage of the debt limit deal, though they still have the US on a negative outlook. This means Standard and Poor’s can play their little game and it won’t functionally matter, because the other two agencies still have the US at triple-A.

Meanwhile, a Chinese rating agency did actually downgrade US debt all the way to an A, which could resonate with their sovereign wealth funds. The agency, Dagong, appeared to not so much downgrade the credit rating as the political system:

“The squabbling between the two political parties on raising the U.S. debt ceiling reflected an irreversible trend on the United States’ declining ability to repay its debts,” Dagong Chairman Guan Jianzhong told CNN.

“The two parties acted in a very irresponsible way and their actions greatly exposed the negative impact of the U.S. political system on its economic fundamentals,” he said.

To the extent that there’s any fallout from the political gridlock in Washington, it’s that the country cannot execute the simple, fundamental steps to improve economic performance. Contractionary fiscal policy gets combined with an anti-expansionary debt limit deal to magnify the effects of the end of the stimulus. We have the numbers on this. 1.5% reduction in GDP. 1.8 million jobs. Even if somehow, miraculously, the payroll tax cut and unemployment insurance were extended, that’s just extending current law and doing no harm. The current environment is not characterized by massive job growth, and “the weather” or “supply chains from an earthquake in March” are becoming less and less trustworthy excuses. The fiscal drag is undeniable, and the economy cannot support it.

Tim Geithner’s attempts at selling the deal border on comical, if millions of families were not at stake.

GEORGE STEPHANOPOULOS: But don’t you think that any deficit reduction now will — will hurt the attempts of the economy to recover?

TIM GEITHNER: You know, I think the — basic reality we live with and, you know, part of governing is recognize we live with — we don’t have unlimited resources, and we inherited and are left with unsustainable deficits long term. And the president understands that for the sake of the economy long- term it’s very important we demonstrate to the American people, to people around the world that we can get our arms around this and start go back to living’ within our means.

Now, we want to do that very carefully so we create room for the economy to grow and we have the resources necessary to invest in things that are going to be very important to the future like education, like infrastructure, like incentives for private investment. And to do that, it is absolutely essential to lock in these long term savings. Now — the president was very strong on this and made sure that we were not going to accept spending cuts that would damage the prospects for near term recovery. Now, with this behind us, and we get this —

GEORGE STEPHANOPOULOS: So this won’t cost us jobs?

TIM GEITHNER: No, it will not. Now … if we put this behind us then we can turn back to the important challenge of trying to find ways to make sure that we do everything we can to get more people back to work, strengthen our growth. And we’ll have more ability to do that now with people more confident and we can start to get our arms around the long-term problems.

Ultimately this comes down to the confidence fairy approach. While the near-term cuts are smaller than expected, the entire concept puts us in a fiscal straitjacket. And the cuts hit the very areas of public investment and infrastructure and education, in the discretionary budget, that make winning the future, whatever the hell that means, impossible. Heck, Larry Summers sees this:

The United States’s current problem is much more a jobs and growth deficit than an excessive budget deficit. This is confirmed by the fact that a single bad economic statistic more than wiped out all the stock market gains from the avoidance of default and the fact that bond yields reached new lows at the moment of maximum apparent danger on the debt limit.

On the current policy path which involves a substantial withdrawal of fiscal stimulus when the payroll tax cuts expire at the end of the year, it would be surprising if growth was rapid enough even to bring unemployment down to 8.5 percent by the end of 2012. With growth at less than 1 percent in the first half of the year, the economy is now at stall speed—with the prospects of adverse shocks from a European financial crisis that is decidedly not under control, spikes in oil prices, and confidence declines on the part of businesses and households. Based on the flow of statistics, the odds of the economy going back into recession are at least 1 in 3 if nothing new is done to raise demand and spur growth.

The White House will tell you that they are committed to this, through extending those two big stimulus programs (payroll tax cut and UI), and a host of other ideas. But these have to grind through the same Congress. And it looks like the bill with the best chance for passage is a bill on patent reform, and only because the Senate is just going to eat the House bill. (Remember when the House would have to continually eat the Senate versions of bills? I guess the relative conservatism of the chamber matters to which one dominates.) And let’s be real, no economist with a straight face will say that patent reform is a job creator.

I’m not seeing a path to anything but fiscal contraction. There are plenty of things that the executive branch could do with existing authority – TARP funds, TALF money, monetary policy, Chinese currency reform – but they’ve shown no appetite to do it. Look at Summers’ last paragraph, and remember it six months from now.