Downgrade Reaction

Today’s slide in stock prices around the world is not due to the downgrade of US bonds. It is due to the final realization, by hitherto myopic analysts, that we are on the brink of another recession, and that for all the talk of recovery over the last year or so, what growth we have experienced was fragile enough to wither when stimulus was withdrawn.

This was entirely predictable, and should surprise only those who pay no attention. Unfortunately that includes most of Wall Street and Washington.

There are two sources of this renewed crisis. European inability to resolve the roiling debt problems of its southern tier; and America’s inability to undertake economic policies aimed at growth. Both crises began as economic problems. Both are now wrapped in political ineptitude, weakness of leadership, lack of vision, and internal divisions that appear fatal.

It’s as if the western world has chosen to fail. We have certainly elected leaders way too small when measured against the task at hand. We need leaders to bend into the wind, not sway with it. This is an epic moment and we are blessed with bit part players better suited for walk on, not lead roles.

The drum beat of failure has been constant since our leadership failed to grasp the depth of the crisis. One of last week’s more miserable reports was the release of the re-calculated extent of the decline as the collapse gathered speed. We went way deeper than anyone thought at the time. The distress caused by the banking system’s historic incompetence, coupled with the sudden realization of the dependence of average households on debt rather than income as the drivers of rising living standards, produced an implosion whose aftershocks still rattle through the economy two years later. Indeed those aftershocks are reaching a level of intensity that they stand as crises in their own right.

The current obsession with the indebtedness of nations is a direct consequence of the collapse of the banking system’s “ponzi-style” financial model – a model that has emerged unchanged despite its obvious failure. Governments found themselves facing a choice between economic depression and crippling bail-outs coupled with wildly costly restorative fiscal policy. Since the depression route was simply not an option they chose the latter. Now the banks have the temerity to decry the gaping deficits that they, in essence, created. This is what makes the S&P downgrade of US bonds so appalling: they were implicated in the ludicrous financial illusion that contributed to the mess they now opine on. Their fingerprints are on the very debt they criticize. That no one is sufficiently outraged by the deep ethical duplicity the downgrade represents to enquire whether S&P should be investigated more thoroughly speaks volumes about the total lack of rigor in our financial world.

The more disturbing aspect of what S&P said – to me at least – is that I actually agree with them, the US is behaving like a banana republic, and so it should lose its pristine credit status. Remember that we have just had a conversation, in public, about whether we want to be bothered paying back our debt. As if it was a choice. Think about that: there is a significant part of our Congress quite willing not to pay off our debts. They are acting as if those debts are not part of our shared responsibility, or that they can somehow be defaulted on because the reason for the debts is ideologically outside the narrative these extremists want to tell. This extraordinary and willful negligence is deserving of whatever opprobrium Wall Street, iniquitous as it is, can muster.

To be honest, I am not sure which I disdain the most: Wall Street’s greedy duplicity and connivance in our demise; or those in Congress who see default as a badge of ideological courage. Neither group deserves respect. Yet we have just gone through a period whose features were shaped by those two groups, and these two groups alone. No one else stood tall.

Where were the sane folk supposed to keep the crazy people at bay?

Quivering in self-doubt, surrounded by feckless advisors, and apparently so bludgeoned by the bullies that they lost their voices.

This ridiculous interlude has exposed America as a weak nation. Weak leadership, weakly imagination, weak management, weak education, weak intellectually, and weak infrastructure. Daunted by the problems that have now punctured the illusion of Reagan’s endless dreamy myth of American exceptionalism and effortless superiority, voters realize that it is hard work generating wealth. Yet the response of our elite is to retreat to greater incantations to the gods of market magic; to sleights of hand; and to brazen ignorance of the real ailments afflicting us.

For some reason they have all decided that it is all too difficult. So the fiddling has begun.

Let me repeat: today’s decline in stock markets is a flight from risk due, not to the impudence of S&P, but to the total and abhorrent dereliction of duty of our elites. The world has awoken to the reality that we are mired in malaise and that we have no leadership strong enough or courageous enough to chart a course out. So the reaction is predictable: sell stocks because the outlook for profit is weaker the previously imagined; and buy US bonds because, S&P and Congress notwithstanding, they are much safer than anything equities.

This is the prediction. This is what is happening. Analytically it is straightforward, once we strip away the fantasy.

The penny dropped. The economy sucks. It just happens to have been a very large penny.