Like many economists, stockbrokers, and a few pundits, we projected that the US credit rating was in danger of default – regardless of the debt crisis deal that was reached on 8/2/11. As warned, S&P downgraded the nation to AA. The reaction of the other credit rating agencies is sure to follow in the same direction.
The result of this will be both immediate and significant. Our estimate is an increase in interest rates of 2%, which will directly affect mortgages, credit cards, loans, and more. We expect that credit card rates may increase 5 – 7%, and the ability to get a loan or mortgage will evaporate for most Americans.
We are sure that there will be an increase of approx. 15 cents to gas prices over thenext week to month. Add to this an increase in food of possibly 1 – 3% in that same time frame.
The big thing will be the decrease in the stock market. On Monday we will be surprised if there is not a drop of 800 – 1200 points. That is even with all the accusations of the Obama Administration, and the finger pointing of both political parties. The added downgrades from Moody’s and Fitch will likely occur over the month, with far less dramatic results, as the impact is in the first.
The big problem though is not the above. It’s in the fact that the economy will be struck a massive blow. The illiquidity of money from banks, and the higher cost if it can be given will directly stall any job growth that was previously projected. Given the lackluster expectations going into the 3rd Quarter, and the current 9.1% unemployment rate, we would project growth to slow by 50% and an increase in unemployment to 10.5% by December and 11.5% in the first quarter of 2011. We would like to be wrong on this.
As these items take effect one by one, the Obama Administration will try to lay blame on everyone it can. It will fail to take into account the budget and spending programs instituted by President Obama. It will fail to denote the failure of Congress to make any real change to programs that are desperately in need of correction. It will absolve Democrats, and demonize the Tea Party.
The fact that America has lost the ability to reshuffle its debt by arbitrarily increasing its ability to spend will not be stated. Rather it must be the faulty math of the rating agencies. But what math, we must ask, does not signal a problem when debt equals GDP? What math states that slowing the increase of debt is the same as cutting debt? What math states that spending more money than is earned, at a slightly slower pace, is the same as not spending money that exists only on the books of a government accountant?
We agree with Rep. Michelle Bachmann that Treasury Secretary Geithner has failed in his position of Treasury Secretary. The Obama Stimulus has failed the golas stated by the President, the Health Care Reform will not acheive a debt netrual stance, and the contemplated sale of GM stock at a substantial loss all rub of inefficiency and the worst planning possible. Proof of this can be seen in the unemployment level, the debt level, the projected deficit, and the downgrade.
Again, we want to be wrong. But considering that every politician we have spoken to that has been willing to give any response has stated, in effect, that they have no plan that accounts for the current and now future problems, we see little to alter our view.
We suggest Americans plan and budget accordingly, as Government seems incapable of doing.
Don’t blame one of them, blame tham all. The President’s leadership, the poor execution of his Administration, the inflexibility of Congress as it seeks to preserve political power. Add to that one other, the public. In allowing politicians to act as if they make the final decisions, which had no concern for the problem beyond passing it down the road, we gave them the power to cause this debacle.
But what happens next, now that everyone is paying attention, will be critical.