Ad Age is feeling awfully bullish. The trade magazine published an article yesterday–the same day that Standard & Poors downgraded the nation’s debt rating to AA–with this headline: Why Marketers Shouldn’t Worry About Wall Street’s Late-Week Panic Attack.
“In the months ahead, financial markets likely will be volatile, consumer confidence will remain under pressure and marketers will need a strong stomach,” Ad Age reasons. A strong stomach? I’m surprised the article doesn’t recommend buying Rolaids by the case.
According to CNNMoney, S&P gave two primary reasons for downgrading U.S. debt: The nation’s fiscal path and its broken political system. In the months leading up to yesterday’s decision, S&P went out of its way to point to the political brinkmanship over the debt ceiling as a key reason for the downgrade. That puts the blame squarely on lawmakers — and the political culture they cultivate and participate in.
In June, Fortune ran a feature on Bob Rodriguez, CEO of $16 billion money management firm First Pacific Advisors, that helps clarify some of the salient points about the state of the economy.
Fund managers, emboldened by their mammoth gains, clamor for risk. Junk bonds remain wildly popular. Even more stunning, says Rodriguez, is the government’s failure to address its debt. “I know one thing from business,” he says, his voice quavering as he tries not to yell. “Unless you correct the problems that are already occurring, you don’t add on new leverage and new, other responsibilities until you correct the old! All you’re going to do is capsize the ship!”
Rodriguez argues that the U.S. debt as a percentage of GDP ratio (currently 64%) is massively underreported because it doesn’t count off-balance-sheet entitlements such as Medicare, and debt owed by Fannie and Freddie. If you factor in those liabilities, he says, the actual ratio is greater than 500% and growing. The U.S. must reduce that before 2012, Rodriguez says, because it’s unlikely to accomplish anything during the election year. If nothing changes, he adds, investors will start to get nervous about the amount of debt on the U.S. balance sheet. As lenders balk at buying Treasuries, rates will spike, causing borrowing costs to skyrocket across the financial system. “The financial system is held together with a very thin filament called confidence,” says Rodriguez. “When you clip that, all hell breaks loose.”
The Fortune article also points out that Rodriguez was a Republican once upon a time, but today he casts a pox on both their houses. And therein lies the ultimate problem. The shitstem that created this problem and continues to profit by it, isn’t able, or willing, to self-correct. And where does that leave us? Up a creek without a paddle? So it seems.
Meanwhile, corporate profits in this country continue to soar, while workers’ incomes shrink. I may not understand economics very well, but it’s pretty obvious that corporate profits have to be properly taxed. So-called entitlement programs are bloated and desperate for reform, but corporate welfare is the real problem. The very people who stand and salute free market capitalism are the ones benefiting the most from a thousand loopholes put in place to protect their interests by the elected representatives who they bought and paid for.
Americans ought to be enraged, but we’re not. Instead we’re playing Farmville and Tweeting our locations. It’s sad but true that more Americans will have to fall victim to circumstances before there’s enough out of work and out of money people to create some real noise and real change.