Reaction to U.S. Down Grade and Lack of Economic Growth

Reading the news over the weekend, I have been shocked at the reaction to the S&P downgrade. Did we think the meaningless theatrics in Washington over the debt ceiling would truly change the course that we have been sailing for the last 30 years? Did we think adding to our debt problem in the short term while promising future reductions would allow us to keep our AAA rating? I hate to be the bearer of bad news, but the U.S. should not have a rating of AAA. If there is even more than a slight chance, you are going to default; you don’t deserve an AAA rating. (Side note: I think all of the rating agencies have major deficiencies, but we have great issues as a country that must be addressed to truly be AAA.)

I am concerned, because the reactions from our politicians are to blame someone else instead of getting to work on placing our fiscal house in order. Unfortunately our political system has created the following goal for our politicians: (yes, I kept goal singular)
1.) Get Elected next time.
For the last 30 years, we have simply ignored and provided stimulus to any potential economic hiccup. I call some of these hiccups, because they were minor to what we faced decades before and what we are facing going into the future. What we fail to realize is that we have been on economic stimulus for the last 30 years. The following have been stimulants to our economy:
1.) Decrease in Interest Rates. We have seen our rates go from the near 20% range to almost 0%. Less you pay in interest the more you can pay on other items.
2.) Decrease in Tax Rates. Same as above lower taxes allow you to spend on other items.
3.) Deficit Spending. Each dollar spend above collections is being taken from someone saving the money and given to someone spending it.
4.) Increased Consumer Debt/Reduction in savings. Lowering our savings rate place more dollars in the economy. At some point (last 3 years), this gets to a point that diminishing returns on economic growth are pushing to zero, because of interest payments. (Imagine if we had high rates.)
5.) Stimulus plans. I really think these have added very little to the economy, but may have just prolonged the inevitable. This could also fall above in the deficit spending as it increases the deficit. However I wanted to note it, because even without stimulus plans we still have deficit spending.
Now that you have reviewed the five of these, tell me which ones are going to give a positive boost for our economy going forward. None of these will and that is what the politicians will not tell you, because they do not get elected by telling you that you might need to expect slow growth and high unemployment. They hope to blame the other guy. Changes of any of these will have a negative drag on the economy, but we must address the overall debt situation because it will only continue to compound if we procrastinate.

1.) Decrease in Interest Rates. We saw what kind of mess higher interest rates started a few years ago. As for being a stimulant, they cannot go much lower, so this will not assist the economy.
2.) Lowering of Tax Rates. We all know this is not going to happen with the deficit as it is and there is a good chance they increase.
3.) Deficit Spending. We cannot keep going forward with this, so this will be dollars taken out of the economy.
4.) Consumers are tapped out and will continue to reduce their debt.
5.) Stimulus plans. We have already fired most of the bullets we have and I do not see any stimulus plans being passed by the government in the foreseeable future. The Fed may try QE3, 4, 5. Etc., but this will only slow the inevitable and could lead to more pain.
We have heard the analogy many times over of “driving the economy off the cliff.” If we do nothing this is what will happen, however the actions that must be taken are not great for the economy either. Instead of driving off the cliff, it is like driving into those yellow containers full of water. It gives us some cushion, but it does a lot of damage.

After looking at many troubling signs of our economy, I will state several of our companies have tremendous amounts of cash. This should be a positive for growth once we work out our fiscal crisis, but I tend to believe several of these companies will hold on to the cash until more is known. They want to have liquid assets should we have a slow down or should we have a freeze up in the capital markets again.

Although I do feel U.S. debt is not AAA, I do not think the U.S. will default. We as nation will work through the hardships and come out better and more careful. The unfortunate part is it will create some pain for everyone and we will repeat the cycle again. Prosperity brings comfort and comfort allows us to be undisciplined, then crisis brings discipline which brings prosperity, then repeat.