Economic Issues Remain in Wake of Debt Resolution
The 11th hour agreement by the US government is unfortunately not where the story ends.
Patriotic citizens will argue that the political process is alive and well. They may be right, but the greater good took a backseat to partisan agendas.
As aware as we've been through the years -- proactively watching this financial monster build from the inside out -- the fact that a US debt default was even on the table is a testament to the sorry state of our union. (See: The Upside of Anger)
The discussion isn’t just about financial performance anymore, although that will likely serve as the measuring stick for most Americans. We've witnessed the devolution of the capital market construct and the societal implications will be profound. (See: Short Sale of American Icons)
Put yourself in China's shoes, or slip on a pair in Eastern Europe. In their view, the financial crisis was engineered in the USA and outsourced in kind. And while they’re being force-fed a bitter pill of austerity while the rest of the world weighs their fate, stateside politicians used this phase of the financial crisis to further their own interests.
All the while, the US dollar -- the world reserve currency and the measuring stick for global asset-class success -- is down almost 40% during the last decade. (See: The Anatomy of a Recession)
The first step in solving a problem is admitting that you have one and despite the finger-pointing currently in play, I've yet to see anyone accept blame, offer a mea culpa, or reference past mistakes they’ve made or learned from. There would be no shame in that. In fact, I (and I imagine everyone else) would appreciate a humble dose of candor.
We don't "do" acrimony in the 'Ville -- that's long been our mantra and yes, it's easier said than done -- but I will share that I’ve found this recent process disgusting. I understand that no one person or party is responsible for the enormity of our economic condition, but many of them were -- in some way, shape, or form -- complicit.
Rather than using this crisis as a battle cry to unite our fractured financial fabric, policymakers seem intent on grinding it to dust. They’re so busy chanting Republican or Democratic ideologies that they’ve lost sight of an inconvenient truth: upward taxation (select incomes and items) and austerity measures (spending cuts) will be needed if we’re to meaningfully move the national needle.
To be clear, I believe we'll navigate this historic stretch and emerge better, stronger, and more learned. (See: George Soros follows His Own Advice)
Until we take our medicine, however, we’re compounding the problem in cause and effect. It's akin to telling a fib; once you lie, it creates an increasingly tangled web with a thinning margin for error. The half-truths and dark corners have been a long time in the making. It’s almost as if policymakers now believe their own bull... case.
Societal acrimony indeed. Whereas once that was a foreign concept, it's now edging from the exception to the rule. I will ask you to keep your mind clear and your thoughts lucid as we find our way. One thing is for certain, there will be fewer and newer players when we chew through this pooh. The goal, as always, is to get there together.
What a Debt Downgrade Means for You
In 2008, I offered that the crisis would cycle through the financial, economic, and social spheres and it now appears to have infected the political spectrum as well.
As European leaders navigate the most dangerous economic juncture in the history of the Eurozone, stateside policymakers were on a mission all their own -- to arrive at a bipartisan agreement to raise the debt ceiling. (See: The Most Important Juncture in History)
While that topic confused many Americans, it is actually quite simple: The United States has been writing checks at such a feverish pace that its coffers ran dry. Unless the legal cap that the federal government is allowed to borrow -- the debt ceiling -- was raised, our country would have run out of money.
Before you react to that scary fact, please remember that the debt ceiling has been raised 74 times since 1962 -- averaging roughly once per year -- and most of the current debate is predicated on political infighting, competing agendas, and shameless self-promotion.
The government wouldn’t default; the resulting financial fury would have made Lehman Brothers look like a pimple on an elephant’s ass. No, they arrived at an 11th hour rescue that appeased both parties, avoided the worst-case scenario, and even made politicians look magnanimous for their sacrifices in the summer heat.
Unfortunately, that’s not where this story ends. In some ways, it’s where it begins. The US will still lose its vaunted AAA rating, in my view, which is an outcome already signaled by the rating agencies. The venomous political process, coupled with the structural debt dilemma, warrants such a move and the ramifications will manifest for mainstream America.
How? Two words: higher rates. The consumer, many of whom are over-extended on their credit or underwater on their homes, will be forced to pay more interest on their credit cards, car loans, gas prices, and mortgages. It won’t be a sudden spike -- it will be a gradual bleed -- but those can be just as debilitating.
Conventional wisdom dictates that the market will enjoy a relief rally on the heels of the debt ceiling agreement despite the negative longer-term implications (slower growth). That’s what everyone is banking on, for obvious reasons; the alternative is pretty scary indeed. (See: Will The Fed’s Last Bullet be Pointed Inward?)
Should that scenario unfold -- and I sense the bulls give it a try as long as Europe holds together -- enjoy it for what it’s worth and remember not to overstay your welcome. You always want to leave a party while everyone else is having a good time.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at email@example.com.
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