It’s been just over a week since the Congress and the President passed the debt ceiling bill. The fact that it was a complete piece of crap did not miss the attention of Standards & Poor (a credit rating agency) and they rightly downgraded the US’s Credit rating from AAA to AA+. This threw the stock market into a completely irrational panic (which happens often) and it has been in free fall. The amount of (virtual) wealth that has disappeared because of this would have made a substantial dent in the national debt, and precluded the problem in the first place. Of course all this panic will cause consumer spending to go down and the economic boost of “back to school” will be killed. Kinda makes me wonder what those idiots have planned for Christmas.
Of course rationality will prevail, and eventually the stock market will settle down. People will stop hoarding their cash and start spending again and this will all be a bad memory. But, for an economy that was tentatively sticking it’s toe back in the water it will slow the eventual recovery by another year. The brave will buy stock in solid companies and make some money off of the fearful, and the rest of us will struggle on.
The sad thing is it was unnecessary for it to happen, and even so, the credit downgrade isn’t really a terrible thing. Our rating is still better than Japan’s and no one thinks they are in trouble, in spite of the disaster earlier this year. The rating simply says we aren’t being physically responsible. It’s like we were a person with a $500,000 debt, an income of $75,000, who spends $100,000 a year and wants to borrow money to pay the difference. Any bank would laugh at you, even if you had a perfect payment record. The difference is, the US has assets equivalent to $1,000,000 so the debt is safe in spite of the lousy money management. But I don’t see the government paying down the debt by selling Yellowstone park to condo developers anytime soon though.
The whole thing boils down to matching income with outgo, plus a little extra to pay off the debt. In short, live within your means. It can be done by cutting expenses or by increasing income. Neither is easy. It’s easy to say "cut expenses", but remember, that money eventually pays someone’s salary, so cutting expenses throws people out of work. To raise income means more taxes, which of course means we have less money to spend, and that throws people out of work too. It’s easy for us poor people to say “tax the rich”, but we have to remember it’s those rich that create the companies that give us our jobs. Basically, raising taxes moves workers from the private sector to Government supported jobs or welfare.
There is no good short term solution. There is a excellent long term solution, and that is to move the government’s spending to projects that will have a long term economic benefit, and try not to increase spending until the economy catches up and tax revenue increases naturally. (see my blogs on job creation and energy independence for more details).
As an example of how screwed up the Government’s thinking is, I just saw that the President has decreed out of the blue that heavy trucks must lower their fuel consumption by 26% in the next few years. This throws a huge cost burden on an industry that is already reeling from high oil prices. This is an industry that affects the price of everything we buy, so we all are getting hit with a cost increase to satisfy his ego. Sure it sounds on the surface like a good idea. But you can’t just decree something without some knowledge that it can be done practically. In an industry whose major expense is fuel, don’t you think they are already doing everything practical to cut fuel consumption? Now if he had started a research project to seek ways of improving efficiency of heavy trucks I could be behind him 100%. But while its easy to decree things, you need to lead by showing a path to the goal. The industry would leap on a way to save 26% of fuel if it were practical. We just don’t need this kind of "say it and it will be so" Godlike attitude at this time of economic “disaster”.
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