August 7, 2011
Emergency Economic Commentary on the S&P Downgrade
The expulsion of the United States from the AAA Club, that is the club of 16 nations with AAA ratings, from both Standard & Poor's and Moody's Rating Service now contains only 15 members because the United States was kicked out on Friday afternoon. The Obama Administration is trying to blame it on a math error by S&P while the mainstream media is soft-pedaling the issue. But it is much more serious than people realize. In fact, the problem is an emergency.
It’s not really about stock market volatility, or oil prices, real estate values or even the interest rate. It’s about being second rate.
The perception of the United States as the global powerhouse and world leader has been irreparably tarnished. The conduct of our government representatives and our politics has done damage that is beyond comprehension and it has opened the door to trouble and trouble-makers.
The initial thorn in our side is in Asia. The Chinese government has already called for international oversight over the United States economy because they are the largest creditor of the United States government. They do not believe that the United States currency should any longer be the standard that dominates world monetary transactions. They further do not believe that the United States has been fiscally responsible, and as a giant creditor, their opinion carries some weight. You may not hear much about this because most of the other countries who are creditors are sugar-coating their opinions by saying that this is really not such a big deal. But I believe that it is. The United States is still the largest and most stable economy in the world, but our reputation has been tarnished.
The Chinese are not in the habit of sugar coating anything. China’s government has been looking for an opportunity to supplant the United States as the dominant force in every category of business, commerce, finance, manufacturing, and other disciplines, every day over the past 30 years, and they are taking full advantage of the opportunity to run us over now.
Ten days ago, I chaired a round table of high level business leaders in Los Angeles. There was consensus that the debt ceiling (before it was raised by congress and signed by the president) was a serious issue, but that it would somehow blow over. My response was that I can't imagine that in 50 years from now, the government of the United States is going to look the way it looks today. Something has to change because the accumulation of debt cannot continue indefinitely, and the gridlock in Washington cannot continue. Putting 40 cents of every dollar on a credit card can't continue, and further, having nearly 50% of the entire population on some form of public assistance is not something that the country can continue to bear.
I'm not a tea party supporter, but I can see that a lot of what they demand, at least on the economic front, will come to pass. Fiscal reform is inevitable because the impact on this country will be devastating if appropriate action is not taken, and quick.
I wouldn't want to be the person who has to tell retirees that their benefits have to be cut; and I wouldn't want to be the person to tell poor people that their benefits have to be cut; I wouldn't want to have to bring the bad news to anybody's attention. But Congress cannot continue down the path that it's on.
The sheets have been pulled off the bed in Washington, and now everyone can see what's going on. Everyone is clearly focused on how much debt we carry, and on how much money we continue to borrow every single day. It has to stop. The impact on consumers at every level will be known starting Monday when the stock market opens. The impact on business will be dramatic; the impact on the ability of the country to create jobs will be dramatic. The impact on interest rates could be dramatic.
Some news reporter said that a little tick up in interest rates shouldn't be too bad because interest rates are at the lowest rate since the Eisenhower presidency. We live in a world of rationalization. What that journalist neglected to mention is that consumers are carrying their body weight in debt. During the Eisenhower administration, there weren't credit cards. In the 1950s, people had tiny mortgages that they paid off over a 30 year period of time. There were no refinances. People developed equity in their assets. People had one car and they kept it for a long time. There wasn't a consumer treadmill the way that we have it now. Nothing can be compared to the days of old.
This opportunity leaves China chomping at the bit, and I hope that the United States government and the people who put them in Washington will be level headed enough to create a vision for this country that starts to erase debt and starts to create some level headed thinking, because otherwise our country is not going to continue winning the race that we run every single day.
Our pride as citizens is affected and our pocket books as consumers have already been trampled, and that will continue and get worse. We've handed this opportunity to the Chinese on a silver platter and they now are working to lock down their win in a dramatic way. I don't believe it's a foregone conclusion, but if we don't take careful aim at resolving the problem, this situation will continue to get worse. Is the American spirit alive enough to keep us in the game?
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Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenues and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and is an astute investor. Joel is CEO of Bullseye Capital , a full-service real estate company supporting owners and buyers of real estate assets with brokerage, leasing, property management, and mortgage services. Joel is also the founder of the Bullseye Capital Real Property Opportunity Fund, LLC which is an investment company that acquires distressed real estate by working with accredited investors.
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