Investors have lost confidence in politicians – Have you?

The recent inability of US politicians to compromise have lead to US credit rating being downgraded. Add to that European politicians’ inadequate response to the debt crisis in the euro zone and it’s understandable markets are in turmoil.

investors, US debt rating, S&P, Moody's, European Union, Obama, China, recession, credit rating agencies
Hopefully politicians all over the world will now get their act together and coordinate efforts to start dealing constructively with the world economy. There is no avoiding sorting out the main problem of excessive sovereign debt. Until that’s done, any relief will be short lived.

Politicians all over the world really need to step up to the plate and do something drastic to reduce the risks to the global economy.

Is another time bomb ticking somewhere in the world?

The global system is now faced with having to adjust to the many implications and uncertainties of the once unthinkable loss of America’s AAA. US treasury bonds are actually rated lower than bonds issued by countries such as Britain, Germany and France.

China, the world’s largest holder of US debt, has condemned the “short-sighted” political wrangling in the US and are of the opinion the world needs a new and stable global reserve currency. Understandable considering the circumstances.

And I can’t help wondering if there is another time bomb waiting to explode somewhere in the world?

Politicians postponing the problems

There are economic solutions to economic problems, but so far politicians have just postponed dealing with the problems. Presumably hoping they will go away? Which, as we all know is unlikely. If anything they will, just like the US debt problem just did, get worse.

Hopefully politicians all over the world will now get their act together and coordinate efforts to start dealing constructively with the world economy. There is no avoiding sorting out the main problem of excessive sovereign debt. Until that’s done, any relief will be short lived.

S&P considering US politicians not able to govern properly

It’s interesting to note that credit rating agencies are still regarded as capable of judging credit worthiness despite their role in the sub prime crisis. Seems a bit like having drunk drivers policing the roads. Not least since their initial calculations were wrong by 2 trillion. But for some reason they are, and Moody’s will review US credit rating end of this month.

S&P are of the opinion that US policy making and political institutions have weakened and that it will have a negative impact of America’s sovereign debt and budget. They are for instance worried that the Bush tax cut will not expire end of 2012 because of Republican opposition to raise revenues.

Americans & Europeans tired of political games

Voters in both the US and Europe are unhappy with their elected leaders’ failures. But voters are part of the problem too. On both sides of the Atlantic voters want debt levels reduced but no raised taxes or cuts in government programs such as pensions and health care.

Understandable since it’s the fault of bankers and politicians rather than voters. But unfortunately all belts now have to be tightened. Otherwise the huge sovereign debts will not be reduced.

Personally I used to think the main reason for the US debt was the wars in Iraq and Afghanistan. But according to The New York Times the main reason is loss of revenue due to the Bush tax cut, followed by the costs of those wars.

Unfortunately US voters will most likely be affected by S&P’s cut of US credit rating since borrowing costs will increase not only for the American government but US companies and consumers as well.

Could the EU rescue both Spain & Italy?

The sovereign debt problems within The European Union may be a ticking time bomb that could freeze credit and undermine banks in Europe, hence spreading chaos throughout the world.

US politicians ignored the signs of crisis ahead of Lehman, and European politicians are now following suit. They have reacted slowly and not enough. Can the present rescue mechanism really handle bailing out large economies like Spain and Italy? Or, heaven forbid, France as well.

Financial markets more to blame

Governments aren’t doing a good job but politicians move slowly because they have to please voters in order to get re-elected. They can’t afford to make the mistakes the financial markets and credit rating agencies made by, for instance, underpinning sub-prime loans in the US and Greek borrowings in Europe.

In my opinion nothing politicians have done before or during the financial crisis since 2007 can match the mistakes made by the financial markets and credit rating agencies.But unfortunately S&P’s decision to downgrade US credit rating could prove to be the trigger for another financial crisis that sends the US and other western economies back into recession. However, that does not change the fact that politicians need to get their act together and deal with the problems facing not only their own country but consequently the world economy. The fact that US politicians recently were unable to do so resulted in their debt rating being down graded.

Why isn’t the EU better run? Why is the US government, as Obama put it, dysfunctional? What’s your opinion? Do you believe it’s time for world leaders to step up to the plate and coordinate actions to make the world economy work better? Or should it be left to the markets and credit rating agencies to run the world economy?

Photo: The United States Government Work – Flickr

35 thoughts on “Investors have lost confidence in politicians – Have you?

  1. Catarina,
    I generally find your comments to be on target and concur with the concerns you have expressed.
    From the US perspective it is true that too many tax cuts, two wars, and reckless domestic spending during the prior administration have created much of the problem. However, voter expectations should not be discounted. I used to put full faith in Alexis de Tocqueville's comment that "America's republic will stand until the Congress realizes it can bribe the people with their own money." More recently I have modified it to "…..until the people believe they can get everything they want on borrowed money."
    On a macro level, though, I wonder if any of the national leaders realize that they are now truly playing to a worldwide audience and the demands of a global economy make it incumbent upon them to show deeper and broader leadership than ever before. George H. W. Bush got it, but more recent administrations don't seem to.

  2. Good points Catherine. Let's hope the US down grade makes your politicians get their act together and realize that they cannot just keep on borrowing but need to take action to make your economy work again. There is no avoiding it.

  3. Certainly. One only need listen to the Campaign Chatter when being interviewed. It is a slap at the voters from both parties. I never want to hear a politician say, Grown up in the room; full faith and credit; kick the can down the road; plant the flag; economic disaster.

    Mr. Geithner's response to S&P? a. Moody's said I could; b. I'm telling Moody's; c. You're a big meanie; d. I wanted a downgrade anyway?

    As I once said, taking responsibility is a way of denying blame.

    Sincerely,

    Slim
    My recent post Side Street Journal 8 August 2011

  4. Catarina, I agree with everything you said. I would add two comments. Any politician that thinks prayer is an answer to anything is dangerous to the rest of us. It is hard to lose faith in something if you never had it in the first place. Bob Cherny

  5. I agree with you Catarina especially about the tax cuts and the wars especially when I read (not sure if it is true) that they had to borrow to go to war. This level if uncertainty affects not only the US and Europe it also affects other countries and consumer confidence such as my country which in reality should be quite confident. I do wonder if politicians ever think of the economic realities instead of the politics of their decisions at the time.
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  6. You guys have the government you deserve. You elect people to serve you and then you give them life guaranteed job with a big pension in addition to all the old stuff like time off for harvest.
    Why don't we all become politicians? The only job where there is guaranteed lifetime job – no requirement for result (the party will anyhow decide what you are thinking).
    Churchill was right democracy is terrible. The part where he says we have not seen any better is also true. However, does it not tell us something that we so far ( 75 years after Winnie's quote) has not been able to even improve the system. In my opinion there ought to be a demand for ROI to receive ANY benefits being a politician. How can we avoid using our new technology (vastly improved communication) to improve "our" administration? How many of us accept (in our heart) all the stupid rules we are supposed to follow? I think the answer is none of us except for when the rules apply to others.
    To reach a better situation we need to limit how many people we need to serve us and how much we can afford to pay them. I am a Swede and I left Sweden in 1988, when there was 57% of us working in the public sector – I guess Sweden is at par with GB today. In the US (1988) I guess the public sector was 25%. We are fast approaching European proportions without European advantages.
    In any company worth its salt it is not enough to have the PnL in order. It is required to keep the balance sheet with at least the same proportion equity as last year. To borrow and liquidate old assets is just as bad as showing the losses as we all know from General Accounting Practices. How can we accept that type of inadequate bookkeeping from our representatives, who make rules saying we need to follow GAP? One rule for the rulers and another for the ruled. I think Orson Wells was right – " All animals are equal but pigs are more equal".

  7. It seems a no-brainer to increase tax. But for those politicians too scared to face their electorate with this common-sense answer, why don't they dress it up as a loan to the country? They can use this extra money to pay off unsustainable debt, (to the guys who got us into the mess in the first place but seem to have got off without any pain) and boost the economy. They can then think about paying back the loan to tax-payers as and when the economy inproves.

    1. Glad you agree with me Martin. It's amazing isn't it that voters always blame whoever is in power when a problem develops. Always happens in all countries all over the world. Interesting suggestion.

  8. Catarina,

    I have absolutely lost faith in American politicians, they are not looking out for the people at all, this extends to both parties. I listen to NPR quite a bit and it seems to be all around the world where the people seem to be the last thoughts on their minds. Oh they say they are thinking about us, but their actions show us that they are not.

    Jenn

  9. Hi Catarina. I agree with Bob. It is hard to lose faith in something you never had faith in to begin with. We are all faced with a very tenuous situation and a scary future. I feel like Chicken Little waiting for the sky to fall – not very comforting.
    My recent post HOW Do I Actually Use Video in MY Business?

  10. Interesting way of looking at it Ankesh. Unfortunately one of the problems in the US congress was people comparing running a nation to a house hold. Wonder who should pay for taking care of the elderly, infrastructure, education and other public services?

  11. Is the US credit rating down grade really a big issue or just a hype??
    because i have read lots of news about it. And still confused.
    My recent post Trading signals| Trading systems| Trade alerts

  12. Catarina, I am so totally sick of hearing liberal views from newspapers like The New York Times blaming the Bush tax cut rather than putting the blame where it should lie and that is with the reckless spending of our current administration. Since President Obama has been in office, the debt has increased from $10.6 trillion to $14.6 trillion. Under this administration our debt is increasing approximately three times as fast as under President Bush. We have to stop spending.
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  13. Sending light and positive energy to any appearance of lack, scarcity, and fear-thoughts around the world.

  14. Lou in your opinon the US, France, Italy, Spain, Greece, Britain, Ireland, Iceland and Portugal have for approximately 10 years had evil governments that God have been against. China, on the other hand has a government that God wants to prosper. Let's just agree to disagree.:-)

  15. Catarina, as you likely have gathered I am not as politically astute as I should be but I do know that the reigns have to be pulled in sooner than later where the US is concerned.

    As far as losing faith in politicians: Yep… sure have. I honestly have very little faith in most of them, even here in Canada. It seems they are more interested in lining their personal pockets at the expense of the tax payer and that many do not have a 'true' desire to better the country.

    I think we need honest individuals who are genuinely concerned for the economic health of our countries. I'm not sure there are many who are wiling to stand up and be counted and spell things out to the citizens and act accordingly. There will have to be some pain to make any financial gains for all citizens in order to get the US on track. I don't think China will put up with no action to make things better for long. In that regards I do agree that perhaps we are watching a ticking time bomb.

    My recent post Sometimes You Have to Let Your Hair Down & Have Some Fun !

  16. Hi Catarina,

    If there is an uncorrupted politician out there, I haven't seen them. Sure many of them got into politics with good intentions, but the system has corrupted them.

    I really don't have an answer for what could be done. This is why I am making my own economy and not relying on the government for anything.

  17. Well, good insight! however, the buck stops with us as citizens, employees or employers for one there is no affirmative action for someone to be a politician. We vote them in or we send them home i.e the power belongs to the people. Before making any judgement we should ask ourselves whats wrong with politics and what's the influence of politics on various industries?

  18. IMO there are no simple answers. Till such time as democracy evolved, communism was a proven concept. India too based its model on the then Russian model. Then capitalism and market forces became stronger and stronger, reducing the impact of public sector companies. We are probably now looking for a different model than the letting the financial markets work as is.

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