Thursday, July 14, 2011

When it comes to the economy, reality is perception.

I assume the Teapot conservatives who are thumping their chests in debt limit talks like silverback gorillas and making threats about forcing a financial default are doing so to apply pressure to make meaningful long term financial changes for the good of the nation's future. But just the threat of a financial default is causing damage to the economy. Perception is reality and the perception is that the politicians in Washington are playing chicken and no one wants to stand on the pegs in a game of chicken with a crazy SOB steering the bike through the crowd.
Obama, Republicans clash in debt talks; dollar falls
Talks have become more acrimonious in the past few days, as Republican and Democratic leaders have lashed out at each other and hardened their positions, making compromise difficult.

While the specter of Moody's announcement hung over Wednesday's White House meeting, it unnerved traders and refocused the attention of investors on the stalemate in Washington.

"They (Moody's) are worried they are having these ideological arguments while Rome burns. They want to say this is serious," said Carl Kaufman, portfolio manager at Osterweis Capital Management in San Francisco...

"What has been beginning to spook Moody's and some other people is that Congress may be dumb enough to actually default on the debt," said Cliff Draughn, chief investment officer at Excelsia Investment Advisors in Savannah, Georgia.
The doubt over how the game of chicken will end will eventually lead to a downgrade in the USA's credit rating which will result in higher interest costs for borrowing, thereby complicating any deficit reduction efforts.  So the grandstanding over hypotheticals comes with a very real price for the ordinary Joe Sixpacks that the Tea Baggers claim to be representing.  And if, God forbid any one's Social Security checks are delayed over the haggling, then Boehnner, Bachman, Paul et al will rightfully get blamed in the court of public opinion no matter how they frame the story after the fact for their willfully ignorant devotees. 

It took decades of politicians and voters sleeping at the wheel for the country to get into this mess. It's not going to vanish in the wake of sloganeering and political rhetoric. It will take a long-term pro-growth agenda that builds economic momentum by eliminating waste, promoting innovation and unleashing capital. 

Government has to remove impediments to profitability to generate sustainable economic growth. Simply slashing government spending or increasing tax rates won't eliminate budget deficits and the need for an ever-increasing debt limit.  

Hopefully sensible people will drown out the ideologues in Washington, but it is impossible to predict how a game of chicken will end when crazy people are playing.

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