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Now What?

Kevin Raymond August 8, 2011 Freedom by Friday 5 Comments on Now What?

If you’ve been following these pages over the last few weeks you knew that there was no danger of the US defaulting on its debt. The home-made crisis was another “show” that was put on by the politicians that we elected to represent us. I wonder how much the fiasco cost both in terms of money spent on all the shenanigans and the money lost by the markets and businesses that suffered as a result of watching a destructive political free-for-all. It was ugly. And, in the end, the markets are voting with their feet and investors are scurrying out the door. Who can blame them?

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After-all, there is nothing that the market hates more than uncertainty and while we are certain that the fools on the hill should be voted out of office, we are certain of little else. There was an opportunity to do some serious soul searching and make the types of decision that would really make a difference to the long term picture of the United States. Issues like tax reform, entitlement reform, spending reform -all of these could have been on the table. Instead, the pols did what they do best – kick the can down the road.

The S&P disliked the news and downgraded the AAA rating for the United States to AA plus. While the other ratings agencies kept the AAA rating.  Once again they have proved to be behind the curve. The US has long since been anything but AAA, with debts and obligations far exceeding GDP. But, these agencies are the same ones that told us sub-prime mortgage debt was AAA as well. Go figure.

Investors and business people are no better off. In fact they are likely even worse off since there was no real agreement on future tax policy. In just over a year, the Bush tax cuts will once again expire and if they do, taxes will go up for all Americans who pay taxes. Worse hit will be capital gains tax, the bane of all businesses. It’s a punitive tax for doing well, for employing people and capital profitably. It should be abolished.

Not all the news was bad however. Those seeking to live with a social safety net that they don’t contribute much to can keep enjoying life on the dole. Down the line there will be another chance for the government to take a bit out of the deficit. The writing in the new law provides for across the board cuts if legislators fail to make the cuts they are obligated to make. Still, while that is good news, without entitlement reform, it will be barely a drop in the bucket. The fact is that there is not enough income coming into the system to support the spending obligations of government, and until that fact changes, I for one am not optimistic about the long term of any social program. Just as compound interest can make you wealthier faster, compound debt can make you poorer faster.

Scared Buyers

The United States is an economy reliant on spending by its consumers. That spending generates income, taxes and jobs. Problem is that people are doing the opposite today. They’re not spending as much, paying less in taxes and not getting employed. Instead, they are saving money at a faster clip than at any other time in recent memory. While that will work for strengthening their individual financial positions, it will likely make them poorer in the end as asset values will plummet as a result.

The twin threats of unemployment and falling home prices are the most significant hurdles for this country to overcome. Had the government spent more time addressing these issues, rather than working on sound bytes about the debt crisis, then we would likely be in a better position today. Washington has money, lots of it. It’s all ours. We just don’t have enough influence to make them spend it properly. That time is coming and it will be the focal point of the 2012 debates, as it should be.

So, while the market is sending  a decisively negative message right now, that message could change come Thanksgiving as it will be then that our elected officials will be forced to act. It is then, when the first round of real debt cuts are to be decided on.

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