Nassim Taleb's Black Swan Theory states that it's the unforeseen effects of an event that cause systemic shifts in people's lives, not the event itself. The majority of our politicians believed our country's debt would never be downgraded. So much for their expertise. Grab your boogie boards, the waves are coming in.
Thanks to that bickering family known as Congress and the Administration daily life for the American public just got more expensive. Triggered by the realization that the tsunami of debt is headed for the U.S., one of the credit ratings agencies actually declared that we could have problems soon. They've adjusted the rating for our capacity to honor all our obligations to reflect a less than 100 percent probability of performance. We are now one level below the best rating possible for the first time since these rating agencies have been around. The cost of debt will now be adjusted to reflect additional risk, i.e., interest rates are going to rise.
The reaction of our politicians has been predictable, though disheartening. When the news became public they act like a bunch of truant kids that have been caught having a mud fight between two houses. Covered in dirt and with mud splattered everywhere and on everything, their response when asked who was responsible for the mess - they blame everyone but themselves, saying it wasn't their fault. Right.
This entire situation has been a long time in the making. Its beginnings were in the 1992-1994 period, with a double peak in economic activity, 1999-2000 and 2007-2008. Since then, the collapse of the residential real estate market and the elimination of consumer financing accesses have contracted discretionary spending. Homeowners are being saddled with higher property taxes to pay for increases in public payroll expenditures even though the values of their homes have declined.
Businesses are also under stress. Higher tax burdens and regulatory pressures drain capital and other resources away from projects that would improve productivity and/or take advantage of growth opportunities. Not the best scenario by a long shot.
And how are the vast majority of politicians reacting? Because the government needs more money to fund their idealistic but poorly thought out promises they say we have to "share the pain", "pay a little more", and "pay your fair share". What planet do these people live on? They're like the alcoholic who has a tab at a bar saying "yes, I know I have a problem, but give me a couple more drinks so I can explain to you tomorrow how I'm going to fix it".
We are coming to the point where the American people will decide whether to end government deficit spending (at all levels, local, state, and federal) and revive our national productivity, or become resigned to sinking into the quicksand of socializing outcomes which will be surrounded by bureaucratic barriers that reduce and eliminate individual initiative while draining whatever financial strength our economic engine currently retains.
Individual freedom, supported by the rule of law, and the right to possess personal and real property are the keystone principles that allowed a young colony of Britain to become the most productive country of the 20th century. Despite the protestations of some, we were able to raise the standard of living for our population more than any other large country in the world. The growth of the world is not in decline, and there is no reason for the U.S. to decline.
Exposing the danger we face because of government‘s deficit spending could be the catalyst needed to make changes in how we select and allocate our taxes, or perhaps change our elected representatives so they exercise greater prudence. We will grow stronger again if we renew our commitment to equalize opportunities (not outcomes) and live within our means.
Until next time
Dow Jones Industrial Average 11, 392.61
S&P 500 1,195.98
10 yr Treasury Yield 2.40%
Equity markets will be fairly volatile while more information is revealed from European and U.S. countries. The trend is still down. Markets are oversold, so they can move abruptly higher at any time, but don’t look at this as anything but a reaction to the sell-off.
Crude oil is sharply lower, and should be watched as a leading indicator.