It has been quite a weekend. On Friday we learned that the rating agency Standard & Poor’s had downgraded US debt to the AA plus level. In the day-to-day nuances of our lives that might not mean too much, but it was obvious to me a bad day was upon us. All you had to do was wait until Monday and markets would respond accordingly. It’s almost like it is 2008 all over again.
Today, August 8th, the Dow Jones industrial average dropped 634 points or 5.5%, the S&P 500 fell 6.6% and the DSX Composite Index fell 4%. For Canadians who remember losing most of their retirement savings in the 2008 market meltdown this latest salvo in market uncertainty is a sad reminder of that.
In my mind it does not make much sense. I understand that rating agencies have much to do with the optics of how healthy economies can be around the world. It has much to do with bond yields and the risk that is measured when lending money to these various countries. However, we are talking about the United States of America here. The United States has the world’s largest economy and also has the world’s largest military. The United States is going to pay their debt that is obvious. Why did this have to happen?
Explaining it away by saying it only has something to do with a debt-rating agency pushing a downgrade doesn’t make much sense. Yes, it acted as a flashpoint to the market drop today but the real problem is the amount of debt that the American government holds and the seemingly paralyzed nature of the same government to deal with it. What’s it going to take? I don’t know, as a Canadian I don’t really want to comment. It is up to our American friends to get this thing worked out.
In 2008 when we had the financial meltdown, I remember telling people it would take about a year and a half to get the US economy on the road again. I thought I was right with that estimation but increasingly in 2011 I found it hard to fathom how the economic numbers were not adding up. The US housing market was still anemic, employment numbers were poor and economic growth was bad. So the meltdown over the last few days and a credit downgrade has been like warm gruel for breakfast. There seems to be no light anywhere.
The ramifications for Canadians are pretty obvious. We have been a bit immune from the problems that the American economy has experienced. Our housing market has been buoyant, our banks are healthy and our employment picture is quite good. Sure, there have been problems with unemployment in places like southwestern Ontario but for the most part Canada has been making its way back out of the 2008/2009 recessions. The problem has always been that the United States has not made many strides to get their economy up and going again and build employment and wealth. With Canada shipping 80% of our trade to the United States, that’s a problem.
Of course the debt problem is not isolated to the United States. In the European Union there is constant news chatter about the problems they have with sovereign debt levels. In many ways there is no easy way out of this. At a certain point governments have to make deep cuts to reduce their debt loads and to build that confidence in the economy.
It just so happens that the Bank of Canada was considering an interest rate hike in the near future. However, now with the stock market in freefall there will obviously be an effect on business confidence and employment levels. I’m thinking that maybe the Bank of Canada changes its mind now, depending on what happens in the next few days and weeks. We need some installation of economic stability back into financial markets before any of us can get too confident.
Is hope on the way? Or did hope leave town and there’s no way out? Well, that “hopey-changey” thing is not working out too good for our American friends. Pres. Barack Obama went on television Monday afternoon to calm markets for at least to make some attempt to map the way forward. His presidency will certainly be framed by the economic calamities that had been all around him. His attempts to make this thing better have been good. Unfortunately, it’s not working and the American people will surely take it out on him in the next election. “Yes we can”, is more like “Maybe we can.” All of it rings so hollow.