The Markets, Politics, and National Debt
Since the last quarter of 2007, the global economy continues to deal with the brutal realities in the aftermath of contagion and market instability. As of August 4, 2011, many economists realize that investor fears remain warranted as central banks attempt to right their currencies, and politicians attempt to shore-up confidence to protect their respective nations from default while structuring some form of austerity measures to please both the global financial markets and citizens.
Unfortunately, on August 3, 2011, the Japanese central bank attempted to put more currency into circulation to stabilize the Yen, but investors in the global-markets viewed this as a bad sign and responded out of fear with sell-offs that continued through the European markets, and finally made it onto the New York Stock Exchange (NYSE) on the morning of August 4, 2011. Adding to existing concerns were the economic conditions in Italy and the internal measures to develop a plan that will thwart the failure of the world’s eighth largest economy and Europe’s third largest economy.
Fostering investor confidence is the focus for many heads of state as governments are required to shrink their debt obligations such as pensions, non-essential expenditures, and services. This is where nations like the United States, Italy, and Greece finds themselves having to under-take austerity measures that have taken place in Germany and France. The problem as we witnessed with the debate in the United States about raising the debt-limit implies that a combination of both spending cuts and revenue generation are required at some point to stabilize these markets. Another consideration is the pending possibility that the United States may be required to pay even higher-interest rates as it continues to borrow even though the triple A credit-rating was lowered by Standard & Poors. This situation may be viewed as a person going into an automobile dealership to purchase a new car with good credit, but with possible lay-offs on the horizon. The fundamental fear for investors is the ability for the nations to repay the debts under terms.
Many times Americans use a domestic perspective when thinking of the markets, however a great percentage of the wealth traded through Wall Street comes from countries other than the United States. Sometimes, there is confusion about the reason why the United States is so important to many of the world’s markets. Think of it like Las Vegas, a great place to take a chance and make a lot of cash without really carrying about whether the casino makes enough money to keep the lights burning. To these investors the opportunity out-weighs the domestic problems outside the realm of their investment interest. China for instance is far more diversified than the United States and therefore it may take bigger risks in developing nations or nations that the United States cannot associate with due to political constraints. This level of diversification has far more risks, but the strategy of safety in numbers put the odds in China’s favor.
According to CNN, one of China’s premier credit-rating services Dagong Global Credit Rating Company views the United States as a not so worthy investment as in the past. It should be helpful to not e that in November of 2010 Dagong lowered the United State’s credit-rating. This may seem irrelevant when it comes to Standard & Poors or Moodys, but the fact remains that we continue to borrow considerable sums from China.
One lesson from this week of the stock market activity is that whatever happens in Asian and European markets can and will impact Wall Street. This period of transition of the markets integrating is the first step in the long process of recovering from a problem impacting the world market. An example of this is similar to creating a united front between the nations to attack the common foe of global debt.
Politicians in many grass-roots organizations throughout the world may view this in a simplistic manner and become tempted to allow their leaders to take a knee-jerk approach to the problem as did Japan on August 3, 2011, but we see how something of this nature can and will impact the economies of other nations. The political key is for national governments to avoid the temptation of allowing emotional activism to dictate the political discourse and become an agenda to get change through sending inexperienced political talent into public office due to a sluggish economy to deal with complex international issues along with domestic issues. Several pivotal points for many politicians throughout the world are job creation, debt reduction, and revenue generation.
One major factor hampering global job creation is fear even though American firms sit on trillions of dollars while only expanding the employment base for unskilled jobs. The job number of 117,000 (CNBC, August 4, 2011) for July 2011 reflect this reality. College educated individuals were not the main beneficiaries of these jobs. This fear (lack of confidence) for both consumers (people and businesses that purchase items and services) and investors (financiers, employers, goods, and service providers) are impacted by this period of uncertainty. Consumers fear going into more debt, investors fear losing for investing in non-profitable endeavors. The government’s role is to foster a state of calm and normalcy so that both investors and consumers regain the confidence in order to expand the economy. One major sticking point for investors is the process involved in passing legislation that fosters this confidence.