Reflections on President Obama’s commentary and the U.S. credit rating downgrade

Let me start by stating none of the economic news in the last week concerning the United States is surprising.  A rating downgrade, like jobs or economic growth is a consequence resulting from actions previously taken, not as many appear to suggest, a signal.  The actions of our government and citizenry over the last 5 years in particular and the last 40 in general has for many people been like watching a slow motion train wreck one agonizing second at a time, something to be seen but nearly impossible to stop.  That it took so long for one of the three major agencies to downgrade US debt merely emphasizes the irrelevance of the whole charade that is “credit rating”.

The President’s reaction to the downgrade was, as is typical of bureaucrats, little more than a collection of sound bites lacking in both substance and insight.  In spite of his brevity, I obtained nearly 4 pages of quotes and statements to contemplate.  While most could be classified as atypical political remarks, a few were notable for exhibiting the precise mentality that led to the current financial situation.  For example, at just :49 seconds he offered this verbal stroke of brilliance:

“We didn’t need a rating agency to tell us we need a balanced long term approach to deficit reduction.”

Just like an alcoholic doesn’t need to be told to drink less.  Or at 6:26 he had this bit of sage wisdom:

“There will always be economic factors we can’t control.”

Yea, like all of them.  The assumption that we can control anything is exactly what contributed to many of the problems we face today.  Maybe if we just acknowledged that the economy can’t be controlled, fixed, or stimulated, real progress could be made toward a healthy economy (notice I didn’t state a growing economy, but I’ll have more on this topic soon).  Just :32 seconds prior, at 5:48 President Obama offered up this suggestion:

“We should also help companies that want to repair our roads and bridges and airports so that thousands of construction workers who have been without a job for the last few years can have a paycheck again…”

How does he propose we “help” said companies and construction workers?  How is the government  going to pay for their services?  How do you “tackle deficits” by spending more?  That the government wants to “help” is just another demonstration of how we accumulated such a gargantuan deficit in grave need of reduction.  However, perhaps no other statement he made demonstrated the arrogance and misguided attitude of our government and citizenry as this whopper at 6:47:

“This is the United States of America, no matter what some agency may say, we’ve always been and always will be a AAA country.”

What?  It’s statements like this and “consumer confidence” that have me most concerned.  Are we ever going to actually deal with our problems?  Or, do we merely want to elevate our national self esteem?  The stereotypes of a spoiled rich kid are so fully and completely embodied by this one statement that so succinctly exposes the root of our predicament, I’m forced to consider the possibility that we may have actually deluded ourselves into believing we’re endowed with the right to behave irresponsibly and without accountability, the rest of the world (and subsequent generations of Americans) be damned?
Unless we (politicians AND citizens) stop externalizing the problems we face, accept responsibility for our actions, and make the necessary changes to cultivate a healthy economy, we will likely be remembered as those who squandered the wealth of a nation.
What do you think?

Importing Economic Policy From The Land of the Rising Sun

Importing Economic Policy From The Land of the Rising Sun

Japanese FlagAfter the initial shock of the Japanese triple tragedy (earthquake, tsunami, & ongoing nuclear) wore off and it’s reality set in, I began to ponder what if any long term economic implications might arise as a result.  Commonwealth (my broker/dealer) recently issued a statement outlining their assessment of the situation which says the whole problem is “surmountable.”  This is consistent with the “that which doesn’t kill you will make you stronger” ethos, however my apprehension isn’t so easily assuaged.

There will likely be supply shortages for products manufactured (or partially manufactured) in Japan and while this will be an inconvenience the bigger concerns are what Japan decides to do with it’s investments in the United States and the consequences of the nuclear situation.   It’s not hard to imagine a scenario where the Japanese government reduces it’s foreign investments as a way of partially funding the massive cost of rebuilding.  Even if they make a graceful (systematic and measured) exit the reduced demand for treasuries would result in increased borrowing costs for the US.  With the amount of debt our country carries this additional interest expense would be immense and with our own economic challenges lingering (and on the horizon) repayment without dollar dilution and inflation is optimistic at best.  The primary argument against this occurring is the amount of exports from Japan to the US and what they would do with the surplus dollars if not buying US treasury bonds.  While this certainly sounds plausible, it may be another case of past experience not necessarily applying to the current (trade) situation.

Over the last decade, exports to the US have fallen by ~$51 billion annually despite a $217 billion increase in overall exports.  “Our” economy now accounts for just 15% of Japan’s exports.  Over that same time period China became a major importer of Japanese goods accounting for 19.4% of total exports, up from a mere 7.7% in 2001.  China has become the lynch pin of global trade and yet the US only accounts for 5.8% of their exports (at least directly, these numbers to not account for items sent from China to other countries that ultimately make their way to the US).

The nuclear situation is by no means finished and may end up being a far bigger challenge than any economic “inconvenience” we’ll likely face…but I’ll save that for another post.  I’m still ruminating on the investment possibilities and economic ramifications of the situation as it is (and continues to develop) but it’s clear that we (in the US) are more subject to the decisions of politicians in Japan and China than we realize.

Bloomberg is the source of the export numbers, view the full detail here.