Friday, 19 August 2011 20:27

U.S., EU Economies: Bad, Worse And Lousy

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The bad news is the U.S. credit rating was recently downgraded by Standard and Poor’s. In essence, that rating agency said the soundness of our government’s finances is more risky than that of nations like England, France, Canada and Australia. The good news is that, directly in the wake of the downgrade, money poured into U.S. Treasury bonds from all over the world. Why? Because world financial institutions—particularly in Europe—are under pressure and investors, in spite of the downgrade, still think the U.S. government-backed securities are the safest of safe havens.

             The yield on 10-year U.S. Treasury bonds recently went as low as 1.99 percent—the lowest since before World War II. This happened after our credit downgrade. The good news is this will likely lower interest rates on home mortgages and small business expansions. The bad news is that fewer individuals are looking to buy homes and fewer small business owners are looking to expand their operations in these uncertain economic times.

            The good news is that the European Union (EU) has not collapsed under the weight of the bailouts the Union had to cobble together to prevent Ireland, Greece, and Portugal from defaulting on the bonds they must sell to pay for their soaring deficits. The bad news is that the European banks that hold billions of euros worth of those bonds are perceived to be on thin ice by investors and financial regulators. Further bad news for the EU is that it will likely have to cobble together more loans and bond guarantees to keep its weaker members from defaulting.

            The good news is that major U.S. banks are on sounder footing than their European counterparts. They have de-leveraged considerably since the crash of 2008. They have been flooded by essentially “free” money from the Federal Reserve as part of its quantitative policy to loosen the money supply in an—thus far—unsuccessful attempt to jump-start the U.S. economy. The bad news is that those banks have been investing much of the “free” money not in business and consumer loans but in buying other banks. The further bad news is that, if the European banks begin to falter, it will impact U.S. banks as well.

            The good news for consumers is that the price of oil has recently dropped significantly to below $85 per barrel. That has lowered the cost of gasoline from $4 per gallon to below $3.50. The bad news is that the drop in the price of crude oil is tied directly to investor confidence in the world economy. When speculators sense the international economy is weakening, they bid the price of oil lower. Contrast that to the soaring price for gold, which is now approaching $2,000 per ounce. Gold rises when investors fear rising inflation and economic weakness.

            The good news is that inflation and economic weakness rarely occur at the same time. The bad news is that is exactly what appears to be happening at the moment. Weak housing prices are masking rapidly rising prices in other areas of the economy. If consumers have to pay more for goods and services while their wages are stagnant, there is less consumption and the U.S. economy is consumer driven.

            The good news is that members of Congress and the Obama administration could work together to take steps that would take many of the uncertainties out of the equation for employers, consumers, and investors in America. Government-imposed regulatory mandates could be removed, a dysfunctional tax code could be reformed, necessary adjustments to entitlement spending could be enacted, and a realistic plan to reduce the suffocating levels of federal debt could be put in place.

            The bad news is it isn’t likely to happen.

by Dan Juneau, CEO and President of Louisiana Association of Business and Industry


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