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Well last week wasn’t fun. The Congress agreed on a debt ceiling bill which was hailed as a victory by politicians yet the stock market crashed, dropping 700 points in a week. Apparently they weren’t impressed. Neither were the analysts at S&P which downgraded the USA credit rating from Stellar (AAA) to Very Good (AA+). While that move was well telegraphed to the markets and to the Congress, it is a clear signal, that using the same criteria as is used for other governments, we aren’t doing as well as we did in the past at managing our financial affairs.
Politically it gives others like Russia and China the opportunity to chastise us for our profligate ways and rebuke our holier than thou attitude.
What all this means remains to be seen as we have never been there before. What I am sure of is that there will be over reaction and the markets; both equity and credit are going to be volatile and a little chaotic for the next quarter. No one is sure if the 1.3% GDP growth in the second quarter is accurate or if it might be revised downward as was the first quarter. More uncertainty comes when such a modest growth could easily be revised to a negative growth, the first of the requisite two quarters to indicate a new recession.
What do you do when you are uncertain? I stop spending for a while. Until I have reason to feel more confident. That means I don’t hire, I don’t build and I don’t spend on anything I don’t need, I cut debt. None of that is positive for the economy. I am considering buying a car; mostly because both of ours are getting older and I don’t want to need two at the same time. Apparently there is a KIA dealer in town near home that doesn’t believe in economic stimulus as he has window stickers with a $2000+ dealer markup over sticker? You’ve got to wonder if the showroom is a front for a different business. How can you sell cars in these times asking for more than sticker when your competition VW, Toyota, Nissan and even Honda are selling for a discount? Maybe they know something the rest of us don’t.
As for me, I’m playing watch and see but if Monday opens badly I am likely to reduce my exposure to equities and cut to cash. But that is just me. I’m afraid of the herd mentality.
Congress is on summer break and that is good. They can’t make mischief when they are home. If you should happen to see yours, or if you’d care to write to him/her, let them know that cutting spending is important but so is keeping key programs healthy and, as much as I hate it, may take a tax increase (no not a rate increase so much as an increase in what you can deduct). Second home mortgage interest (also applies to boats and RV’s) may have to go away and there are many other base broadening measures that may have to happen. I’m not thrilled but I can live with them if they are tied to a balanced budget law that could only be repealed by a super majority of both houses. That way they can’t spend what they aren’t willing to fund without borrowing. I’m sure we could manage a super majority if there were another Pearl Harbor or 9-11 to allow borrowing when it is a bona-fide crisis and not just to fund operating expenses when Congress members didn’t have the cahones to admit the real cost to their constituents or their incompetence at calculating the real cost.
Until we do that, S&P is not going to reconsider. Moody’s and others are likely to give little time before following suit and downgrading the USA debt in much the same way as S&P.
When your own internal debt rating agencies aren’t supporting your approach, isn’t it time to consider change, real change? In the business world changing corporate culture is one of the most difficult things to do. Often we have to fire the entire top echelon and replace them with new folks who get where we need to go and are willing to do what it takes to get us there. Perhaps we need to do that in Washington. Perhaps every incumbent who has been there more than a few years (one term) should be tossed out and replaced. That makes a level footing for all interests and allows an entirely new culture to be born.
It is a thought. Perhaps you might consider it when voting next year.
