It was sobering to wake up to the news that Standard & Poor's downgraded the credit of the USA from AAA to AA+, but it’s unclear whether S&P’s downgrade now makes more sense than Moody’s and other credit rating agencies' decision to delay theirs. Our current and pending finances more than justify the action as our nation’s finances continue to accelerate beyond the realm of reason. To the extent that S&P’s downgrade serves as a wake-up to our political leaders to get their fiscal act together before even more dire consequences occur, then the downgrade is probably good for America over the long term.
However, it’s unfathomable that the most powerful military and economic power the world has ever known now has a lower credit rating than more than a dozen other nations. How is that possible and what does the downgrade really mean? America is still the only nation in the world that can ultimately back up its promise to pay its bills (and defend other nations rights to do the same) with its superior economic and military might, which is why the US dollar, as battered as it’s been in recent years, is still the world’s reserve currency. How can Germany and France, for example, and other smaller members of a European Union (EU) that is crumbling before our very eyes still have AAA ratings? The imminent (hopefully) bailout of the EU will likely and ironically include assistance from America, just as our TARP program bailed out European banks along with our own.
What happens to all those AAA sovereign credit ratings if our newfound fiscal awareness leads to a scale back of our multi-trillion dollar program to keep the world safe from terrorists and open for international trade? What does it mean that Canada, our northern neighbor, is now the only AAA rated nation in the Western Hemisphere? Can AAA rated Switzerland truly remain a safe-haven without backup from American security? For that matter, what happens to the world’s well being if US financial aid and physical assistance shrinks to meet its new budget? Are other AAA rated nations going to risk jeopardizing their coveted superior ratings by offering to pick up the slack?
Aside from the disappointment and embarrassment of losing the superior credit rating enjoyed since such ratings began, S&P’s credit downgrade is probably justified and necessary. However, S&P will be remiss unless it updates other sovereign ratings in the new light of America’s loss.
Saturday, August 6, 2011
Tuesday, February 8, 2011
Economic Recovery Hinges on Business Finagling
Top-down empirical evidence from corporate America as of Q4 2010 is showing a robust increase in business sales and earnings, nearing in some cases pre-financial debacle highs. Bottom-up and admittedly anecdotal evidence of how companies are meeting those sales targets is less encouraging.
Unable to offer the dizzying and ultimately disastrous array of credit formerly available just a few short years ago, some companies have resorted to low tech and even pedestrian gimmicks in order to boost sales. Some methods benefit consumers and sellers alike, such as the buy-one-get-one-free policy (BOGO), enabling sellers to dump costly inventories while enabling consumers to stock up on items for future consumption. The BOGO policy is supplanting cheap and abundant credit as a popular method for encouraging consumers to consume today by borrowing from future purchases. What will drive future sales?
Less compelling are the “now you see it now you don’t” discounts that appear certain hours throughout a day, or on the internet but not on the phone, or in print but leave out important caveats that detract from discount offers. Some discounts don’t offer brand confirmation on receipts making consumers wonder if they’re getting what they pay for. Competition is fierce as businesses will do anything get consumers attention.
Unsavory and deceptive approaches to gin up sales further indicate an anxiety and desperation among sellers not seen in recent history. For example, have you noticed lately some of your monthly bills contain superfluous jargon that confuses you? It would seem that some companies hope you pay their bills without reading them, and it’s a fact that others will reward you for joining their automatic payment plans, so you never have to read their bills again. If you’re diligent and actually read your bills you may notice unaccounted charges, and learn that the agreement’s fine print automatically initiates the purchase of an additional service, unless and until you explicitly call them and tell them you don’t want it. Sometimes that service will automatically renew unless it is explicitly terminated. Even when those unexpected charges turn out to be an error, customer service representatives will attempt to sell you something new, even before THEIR error is corrected. Heads they win, tails you lose! Aggressive sell tactics have existed forever, but were once only used by small or fly-by-night purveyors. Now even image conscious corporate giants and household stalwarts heretofore synonymous with good customer service use those tactics. They have become so common that comparing experiences has become a mainstream pastime among many consumers.
It is clear that an economy 70% based on private consumption must expand that sector before meaningful economic recovery can occur. With unemployment chronically high, public and private pension plans under duress for decades to come, new household formation temporarily stalled and the housing sector in the doldrums in the near term, consumer incomes and spending are unlikely to expand much for quite awhile. Corporate America would be well advised to concentrate on offering consumers products and services they desire and need, instead of relying on deception and gimmicks to meet their sales goals.
Unable to offer the dizzying and ultimately disastrous array of credit formerly available just a few short years ago, some companies have resorted to low tech and even pedestrian gimmicks in order to boost sales. Some methods benefit consumers and sellers alike, such as the buy-one-get-one-free policy (BOGO), enabling sellers to dump costly inventories while enabling consumers to stock up on items for future consumption. The BOGO policy is supplanting cheap and abundant credit as a popular method for encouraging consumers to consume today by borrowing from future purchases. What will drive future sales?
Less compelling are the “now you see it now you don’t” discounts that appear certain hours throughout a day, or on the internet but not on the phone, or in print but leave out important caveats that detract from discount offers. Some discounts don’t offer brand confirmation on receipts making consumers wonder if they’re getting what they pay for. Competition is fierce as businesses will do anything get consumers attention.
Unsavory and deceptive approaches to gin up sales further indicate an anxiety and desperation among sellers not seen in recent history. For example, have you noticed lately some of your monthly bills contain superfluous jargon that confuses you? It would seem that some companies hope you pay their bills without reading them, and it’s a fact that others will reward you for joining their automatic payment plans, so you never have to read their bills again. If you’re diligent and actually read your bills you may notice unaccounted charges, and learn that the agreement’s fine print automatically initiates the purchase of an additional service, unless and until you explicitly call them and tell them you don’t want it. Sometimes that service will automatically renew unless it is explicitly terminated. Even when those unexpected charges turn out to be an error, customer service representatives will attempt to sell you something new, even before THEIR error is corrected. Heads they win, tails you lose! Aggressive sell tactics have existed forever, but were once only used by small or fly-by-night purveyors. Now even image conscious corporate giants and household stalwarts heretofore synonymous with good customer service use those tactics. They have become so common that comparing experiences has become a mainstream pastime among many consumers.
It is clear that an economy 70% based on private consumption must expand that sector before meaningful economic recovery can occur. With unemployment chronically high, public and private pension plans under duress for decades to come, new household formation temporarily stalled and the housing sector in the doldrums in the near term, consumer incomes and spending are unlikely to expand much for quite awhile. Corporate America would be well advised to concentrate on offering consumers products and services they desire and need, instead of relying on deception and gimmicks to meet their sales goals.
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