The Fear Machine Is Not Working


You have to wonder what sort of headline-munching nonsense Bloomberg and the WSJ had queued for this morning.  Over at Bloomberg you can read:

U.S. stocks fell, dragging the Standard & Poor’s 500 Index down from a two-week high, as President Barack Obama and Congress failed to reach an agreement on raising the federal debt limit, intensifying concern the nation will default.

and at the WSJ:

NEW YORK—U.S. stocks fell sharply and gold hit another record as Washington’s stalled debt negotiations spurred fears of a default or loss of the government’s triple-A credit rating.


 by genesis

Yes, the market is down.  But none of the primary indices are off more than 1%, which is hardly “slumping” and it certainly isn’t the sort of utter disaster that Turbo Timmy and Obama claimed would occur if they didn’t have a deal by this morning.

So as Marvin the Martian said, “Where’s the kaboom?  There was supposed to be an earth-shattering kaboom?

In point of fact it appears that the market has already priced in a credit downgrade.  Oh sure, when it comes (and it will, given the fact that Congress and the White House appear to be unable to face reality – that cutting the deficit which must be done, not in a gimmicky way but rather for real, will hit GDP) I’m sure the market will swoon – for a while.  But the real problem comes later, when we actually stop the deficit spending, whether by choice or by force.

The mathematics cannot be argued with on this point – the longer we wait to do the right thing and stop the deficit spending the more cutting we have to do and the more damage to GDP we will have to accept.  We have already more than doubled that damage by running the housing bubble in the years 03-07 and we have then made it worse again with our three-year delusion from 2008-10, likely adding five full points to the GDP loss that we must now take from 2007 levels – and perhaps more.

Nothing can change the mathematical outcome; the longer we play the dysfunctional and name-calling game in Washington DC with both sides unwilling to do the right thing – bring the budget into balance over the short term – the worse it will be.

We could claim the “intermediate term” in 2007 – we could have gotten back to balance in five years from then.  But that’s 2012, which is next year.

We no longer have the luxury of the “intermediate term.”

Sorry folks – it is what it is.

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