What Just Happened?
By Tommy Haws
Roller Coasters have nothing on the US economy over the last few weeks. We have gone from a threatened default and debt crisis to several 400+ point swings in the US stock Market and a downgrade from one of the bond rating agencies of US treasuries. And that was just week 1 of August!
Let me give you my take on all of these in my own meager way and hope to make some sense of it.
It was said that on August 2, 2011 that the US was in danger of defaulting on its credit obligations if the Congress did not authorize a raise in the US debt ceiling. Both sides of the political aisle had a heyday accusing the other side of causing the problem and claiming that there was no way to get out of it unless the other side gave in to demands. Throw in the fact that the approval rating of the congress, president and everyone else are in the basement and there are a gaggle of people wanting to sit in the White House next year – the political pitch was fevered.
It could have been a chance to deal with the problem, but instead they “kicked the can down the street” and we will be in the middle of all this while we are roasting our turkeys for Thanksgiving again this year.
For what it is worth, I do not believe – and I have a lot of company in this – that the US government would ever not pay its obligations to its debtors. It would have caused a global meltdown that nobody wants to see or be a part of. There are mechanisms that would have prevented it, but the scare was to make sure that the problem gets addressed. Many feel we have a spending problem more than an income problem, but the situation is laid out that we are definitely spending more than we receive in revenue and therefore something must be done to address it long term. This leads to:
The US has always enjoyed rating agencies’ highest bond ratings: AAA. Standard and Poors recently downgraded US debt to AA+. Many saw this as a black eye and a warning that we are all in trouble and these rates were going to immediately spike. I mean even France had a better rating than we did. Then . . . rates went down instead of up. At least in the short term, there was no spike in these rates and they even went down.
There are a couple of explanations for this. First, there is no place else in the world where there is the capacity and safety of the US. We might be shaky, but so is the rest of the world. Even a country like France, who might carry the higher rating on paper, does not have the capacity to take on the massive amounts of debt that the US has from foreign investors. In effect, then AA+ became the new AAA and life moved on. That is not to say that there should be no concern for the downgrade; there should be. We are traveling down a road that leads to default eventually and that is what the downgrade is telling us, among other things. It should be our wakeup call. No person or family can move forward in life spending more than they make and the governments of the world cannot do so, either. Europe is feeling the effects of this now and Japan is also very vulnerable. This is not just a US problem; it is becoming a global one.
Stock Market Swings
I have discussed the uncertainty in our economy in past articles. Uncertainty leads to volatility. And we did see a very volatile stock market recently that underscores that. Often stock markets have a very reactionary and instable feel as they hear bad news. With so many stocks being set on buy and sell orders that are triggered by movement in the stocks, a downward slide for a while can become an landslide in a matter of moments. Same with going back up.
One thing to always remember is that usually no money is lost until there is a sale, so watching your 401K on a daily basis could result in only the stock for antacids going up. Get with a financial planner, make a plan and work the plan. Review it with them often and see where you are going.
What is coming next?
That is above my pay grade. However, I think rates will continue low for the short and maybe even medium term. Savings rates are continuing to drop, but so are borrowing rates. Mortgages are very low, so if you’re looking to refinance, this is a prime time to do so. There are good things happening in the economy, but the news will mainly report the bad. Politics will be, well, political for the next year. The tone will be nasty and that will drive down consumer confidence.
I encourage you to be involved in the selection of our leaders. Our right to vote is one of the most treasured gifts bestowed upon us by great sacrifice of our founders. But every right has an associated responsibility. We have the responsibility to make an informed vote. Our economic roller coaster ride cannot last forever.