The Market Loses Faith

The Republican cave-in on the FY11 budget demonstrated to the markets that neither party is serious about deficit reduction and left them no choice but to downgrade America’s debt.

Standard and Poor’s Ratings Service downgraded America’s debt from “Stable” to “Negative” on Monday as Congress failed to get serious about trimming the budget. This is a stunning move from the markets indicative of their unease over Congress’ business-as-usual attitude towards its out-of-control spending. The Administration responded by attacking Standard and Poor’s decision as politically motivated.

The promised $100 billion budget cut was whittled down to $38 billion before settling at $315 million after all the accounting gimmicks are factored into the mix. Not the strong fiscal signal the market was looking to get after watching the dollar sink, inflation rise, housing prices continue to fall, and unemployment numbers rise.

Watching Boehner cave on the budget battle and signal capitulation on the debt ceiling has forced the market’s hand. President Obama attacked Paul Ryan’s mediocre budget plan effort with his speech at George Washington University and left no doubt as to his intention to obstruct any Republican effort to deal with the debt problem. The smart money has had enough and is heading for the exit. Not content to wait until 2012 for signs of real change, they have looked into the fiscal abyss and see the writing on the wall.

The trick to making money from a market bubble is knowing when to get out before the sheep catch on to the fact that something is not quite right and begin stampeding for the exits. The signs stand out clearly in hindsight, but are obscured at the time with the overwhelming desire to believe that the bubble will continue to rise. Astute investors look beyond the market hype and dispassionately weigh the evidence before them as they assess the true value of an investment. These professionals have determined that the risk of America’s debt is not rewarded properly and have downgraded their assessment of its future.

With this debt downgrade, the markets are reaching the same conclusion that Tea Party members discovered when details of last week’s budget deal came to light. The Republicans elected to restore fiscal sanity have abdicated their responsibility in a bow to the idols of bipartisanship. Outside the beltway, bipartisanship has become a code word for Republican compromise. Boehner sold us out on the budget deal and is signaling his willingness to sell us out on the debt ceiling, while Paul Ryan has produced a weak budget plan that doesn’t even get around to balancing the budget until 2020. This is hardly the stuff of fiscal discipline and even laughable when you consider that several governors are bound by state constitutions with balancing their budgets every year.

Where are the conservative freshmen that Tea Party voters sent to Congress? They promised to not rest until fiscal sanity was restored. Why didn’t they refuse to vote for the ridiculous budget deal that only cut $315 million of a promised $100 billion? Why are the Republicans so afraid to allow the government to shut down or the debt ceiling to be reached? They’re the ones always warning us of dire consequences if Congress doesn’t stop its reckless spending. So, why not allow the country to experience some of those dire consequences by refusing to raise the debt ceiling? Are you afraid of the market reaction? Well, guess what? The market is already reacting negatively because they expect you to cave in and raise the debt ceiling when they were hoping you would stand firm on your advertised convictions.

We can look forward to a weaker dollar as increased inflation eats away at its purchasing power. This means higher prices on everything we buy as foreign exporters demand more of our ever weaker dollars for their goods like electronics, cars, and oil. One of the effects of our weaker dollar has been increased home sales in Phoenix, Arizona to Canadians whose traditionally weaker Canadian dollar is now worth more than the American dollar. We saw this in the 1980s as Japanese companies bought up prime American real estate when the Yen’s value escalated due to the Japanese real estate bubble. Japan has suffered through two decades of economic stagnation by refusing to deal with the aftermath of this crash, and America is determined to follow suit by refusing to deal with our real estate bubble pop.

As one journeys through life, he learns to adjust to the disappointments of failed dreams and lowered expectations, but no disappointment is as bitter as the one experienced by those whose belief in a just cause is shattered by the reality that those charged with leading this cause are dedicated to their own desires over those of the cause. So it is with Tea Party members whose hard work to elect those they believed shared their ideals of fiscal discipline has been rewarded with craven compromise to reach a deal whose terms are antithetical to the movement’s principles in a bid to appease the gods of bipartisanship. Anger now surges through the Tea Party ranks at being sold out for such a low price. How quickly those we elected have forgotten our hard work and their earnest pleas for our votes. How quickly their bold defiance to the system evaporated once in office.

Once again we’re told to wait. Now is not the time. This issue is too important to hold hostage to politics. Meanwhile, America slides deeper into debt as our economy falters and the political class continues to shrink away from its responsibility to tackle the tough problems.

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