The Sky Is Not Falling ...

YET.



But it is getting offally cloudy.



Yesterday, Standard and Poor, for the very first time in history, downgraded the US Government from Triple AAA status to Double AA+ - Now watch the fireworks; Obama is going to wear this one.



Am I surprised? Of course not - as you know, I have been saying for sometime now the the US Gov't is broke - as in flat broke. Of every dollar spent - 40% is borrowed. Try doing that in your own home for an extended period of time - say more than 3 months.



So why isn't the Sky Falling?



Because there are Two Economies at play here - one the Public One, as in bankrupt governments and the other, the Private One - as in the IBMs of this world. The first cannot take in enough money to meet their needs without borrowing and the second cannot spend their income fast enough; it just continues to build and build.



The recent bi-partisan agreement to reduce spending added to the Credit downgrade should at last cause Americans (read Democrats) to face up to the fact that they can no longer spend themselves into the promised land. Deep cuts are needed and they are needed now.

This is why I have promoted fiscal constraint for Government - not to see people hurt as in public service layoffs, reductions in entitlements etc but to see those matters preserved in a fiscally prudent fashion. Now we are going to see much stronger measures taken to get Government Spending under control which could have been avoided if action had been taken sooner. By the same token, if Governments continue to ignore the situation - the steps that will ultimately have to be taken will be even more severe.



In regard to the Private Sector - things are going quite well - record income and profits are being reported from a host of businesses. Where the economy remains weak is with respect to jobs - that is to say the lack of them. Business though will not hire until the "other economy" - Government - gets its collective act together.



Indeed, Business is benefiting from a devalued dollar and in the case of Europe, a devalued Euro. They are better able to compete in this ever-growing Global Economy.


The problem for them though, is that they are competing with Government for money and as Government continues its wasteful spending that money becomes more and more expensive (read scarce) for Business and Government alike ( ie interest rates are going to rise and the S&P downgrade will play a factor in this).



But there is an IF.



If Government(s) acts quickly to dramatically reduce its out of control spending and raise taxes where possible (e.g. a value added tax in the case of America), hopefully a rise in interest rates will be kept to a minimum. Businesses in turn will be better positioned to start bringing back employees.

A little word "if" but much hangs on it.

Conversely if Government response is weak -the other economy will soon falter resulting in more layoffs and another Great Recession or even worse Depression.

As I see it...

'K.D. Galagher'