Evening Thoughts

It's Saturday evening. Almost bedtime. Just a few evening thoughts.

Friday late afternoon, S&P downgraded the US to AA from AAA. Accusations are flying from both camps. I think Ezra Klein at the Washington Post is right when he says that S&P is downgrading our political capacity to effectively manage our economy, not the US' ability to pay its bills. If there is a hostage taking crisis each time we need to raise the debt ceiling, the odds are not negligible that one of those times we will slip over the edge. That in S&P's eyes is a real risk. Hence the downgrade. Hard to pin that on the Democrats, and I am very comfortable calling this the Republican downgrade.

Will the markets spook? Yes, but not just because of the downgrade. The markets are waking up to the fact that the US is in for a tough slog. Double dip? Possibly. But whether it's a second dip or only meager growth, it will, in either case, be rough sledding. If the consumer has pulled back, and business is not spending because there is little demand, and the government will now be retrenching, there's no source of economic demand. And we have one party that honestly believes that demand is not the issue: it's lack of confidence. According to Republicans, business will only spend when they have confidence that government will not change the rules and will stay out of the way. This is the myth of the confidence fairy. It's just utterly wrong. Business will start spending when orders start coming in the door. Right now the consumer is not spending, and until she does, or until government does, there will be no growth. With the softer dollar, exports have gone up some, and we have an improved trade balance, but exports will never drive the US economy.

These are different and difficult times. I do not think I have seen anything like this in my lifetime: We have a true balance sheet recession: the private sector vastly overleveraged; housing maxed out; the housing asset bubble burst; probably half the US households, and possibly much more, experienced a 30-50% decrease in their net worth, mostly from loss of housing value; unemployment is running, on a true basis, between 16 and 18%, so consumers, in many cases have little coming in; so they are not inclined to spend until their balance sheets have been repaired.

At the same time, we have Europe moving visibly towards the edge of their precipice; and there are even clear signs of trouble in China and Japan. So who will stimulate the world? And through all of this, we have a radically intransigent Republican party who does not believe stimulating the economy can work, who believe deficits and debt are the problem, and think austerity will help us grow. It's beyond crazy. It's incredibly sad.