Wednesday Night #1536

It was a great pleasure to have John Evdokias introduce his wife, Dominique Beauchamp, who, despite her youthful appearance is a seasoned reporter – since 1985 – with Les Affaires, having lived through and reported on the Crash of ’87 and the Crisis of 2008.

It is all about the economy.

There are times when the obvious becomes inexplicable. It was inevitable how the drama in Congress over raising the debt ceiling would end. The fact that the United States is the only country in the world in which a debt ceiling exists and the inevitability of the passage of the legislation should have turned this drama into a bad movie script, were it not for the fact that with presidential elections coming up next year, some legislators, apparently forgetting their role of serving the best interest of their country, have placed a higher value on their personal careers than on the reputation of the country they represent or the well-being of the electors. Although it is true that the United States is in no better position as a debtor nation than many European countries, it is also true that a more realistic policy regarding raising taxes, closing loopholes and/or reducing expenses would have done relatively little harm, and will, at some point, have to be faced, and Congress has the power to resolve the present problem as it is defined.

With over $2.533 trillion in revenues, $3.529 trillion in outlays and debt of over $14.5 trillion, the United States. through its own policies, finds itself in a position similar to that of any of the PIIGS countries, but could easily reverse the degree of indebtedness with tax increases and spending reduction. However, in addition to being a career killer for its instigator, such a policy might possibly lead to riots in the streets. It would appear that the concept of making the sacrifice of giving to the community through the election process has been corrupted by the thirst for power and/or profit. (Perhaps Congresspersons should recommend a reduction in their remuneration as their contribution to the solution to the national problem.) No one dares suggest the reduction of spending on defence, although it has been suggested by some but not all Wednesday Nighters that money could be saved by harmonizing purchases by of standardized equipment  by the various branches of the armed forces as has Canada), or reducing unemployment through investment in infrastructure. Unfortunately the latter solution yields results only after a delay of up to five years, necessary for planning, defining and executing projects.
Curiously, the bankruptcy of individual states including California, Michigan and others, does not evoke the same degree of emotion or hand-wringing.

The stock market
The fallout from the debt ceiling the debate has resulted in an unnecessary stock market instability. The market meltdown has resulted in potential bargains, but the instability invites caution in its erratic, unpredictable (in the short term) behavior. People are reluctant to invest in uncertainty. If we compare our current situation with 1987 (we are not at the same point as 1929 or 2008), it will likely take three to four months for the market to once again come to life. During this period of instability, some Mavens recommend investment in securities, others in Treasury bonds, while still others make no recommendations. Some attempt to calculate the impact of electronic trading on trading mobility and its short term mathematical decisions versus traditional emotional ones, although it has yet to be established that algorithms are more adept than brain power, training and intuition in acquiring wealth.

U.S. military expenditures
The role of policeman of the world has been a drain on the U.S. economy, although we in Canada, as well as the rest of the Western World, should be grateful for that role. Vietnam was costly,  not to mention the prolonged war in Afghanistan as was the taking out of Saddam Hussein, who, although a local bad guy, may not have been worth the money spent. There is some debate about whether the trillion dollars said to have been spent on executing Osama Bin Laden was a wise investment. However, the expenditures on defence by the U.S. have been excessive, often very poorly monitored by the Pentagon. The other side of the equation sees military equipment and weapons as the U.S.’ largest export.

Some believe that the U.S.’ solution will arise from a crisis much greater than the present one, that we tend not to think of the future but in the immediate.

Banks are in the enviable position of operating outside the game rules established for other businesses as governments would be extremely reluctant to avoid risking harm to private depositors.

The Prologue

Welcome to the first post-downgrading Wednesday Night. Surrounded by gloom and doom, we can at least take comfort in the knowledge that S&P will never lower the rating of WN and its participants. We have no Tea Party rump; we are always able to arrive at amicable conclusions with polite dissent; none of us has presidential ambitions (at least not that we know of); we have no plans to raise the taxation – a contribution to the bar; and, although a number of us have dogs, it is not because we needed a friend.
We don’t plan to dwell on the S&P action, as it will undoubtedly be the subject of many long-winded analyses for weeks and months to come. We will only suggest a few commentaries that you may have missed and that seem worth considering.
Slate’s Annie Lowrey gives a no-holds-barred view of the logic of the S&P move in S&P Is Right. It’s Congress’ Fault.
A message from TD’s Senior VP and Chief Economist, Craig Alexander, offers a fairly sanguine view of the markets’ initial reactions and reminds us that “we are not really out of the financial crisis that started in 2008.  We are in the political crisis stage of this balance sheet recession [and] in the United States, all political actions must be seen  through the lens of this being part of the 2012 presidential election.” Not exactly reassuring, but true.
Kenneth Rogoff adds that “the markets are simply adjusting to the reality of a continuing slow and halting recovery. … Wall Street forecasters, and many central banks, had been starting to think that there was going to be a sharp uptick in the recovery. But they have got this wrong again and again because they keep wanting to use normal postwar recessions as a frame of reference. But this is a post-financial-crisis recovery, a rarer and very different animal. ‘Some European Countries Are Fundamentally Bankrupt’
Joseph Stiglitz offers his usual clear-eyed view of Dumb Ideas From Both Sides of the Atlantic “There has been much concern about financial contagion between Europe and America. … But the real problem stems from another form of contagion: bad ideas move easily across borders, and misguided economic notions on both sides of the Atlantic have been reinforcing each other. The same will be true of the stagnation that those policies bring.”
For a change of pace, consider the plight of the hapless Swiss with a currency that “the typically silent Swiss central bank declared ‘massively overvalued’ against the dollar and euro and unexpectedly cut interest rates in an effort to whip the currency back into complacency. The franc retreated but still remained much too strong as far as the Swiss were concerned.” Pity our poor friends working for all the UN organizations in Geneva who are paid in USD! Thank you for this item, Kimon; at least it will make Udo very happy. Update: Swiss ministers meet over surging franc
The surging franc had prompted Swiss government ministers to hold a third unscheduled meeting as the country’s leaders are bombarded with potential solutions, including emergency tax cuts
And what of Canada? Speaking from Brazil where he is trying to drum up trade, our Prime Minister says that a slow global economic recovery is still possible as long as Group of Seven countries prudently manage their fiscal houses and avoid being dragged into crises. Others (experts and officials) are more cautious: Canada won’t be immune to the mounting fears over the health of the global economy despite the country’s strong economy and sound fiscal policy.
At the same time, the House of Commons Finance Committee is soliciting ideas for next spring’s budget – seems they already have 325 requests to appear and the deadline for submitting written submissions is Friday. Surely Wednesday Night should offer its thoughts? Shall we strike a Task Force this Wednesday and rush a submission in. After all, we have what Kimon terms the WN Economists Caucus; we have a wider representation of interests, ages and professions than any other group would offer, not to mention lots of policy wonks; it would be fun to see whether they can come together with all those qualities praised in our opening paragraph and agree on a PLAN.
One issue that we are sure all would agree on is the desperate need for investment in (transportation) infrastructure. As Montrealers suffer under the increasing stress of how to plan even the most mundane trip to the grocery store in order to avoid falling concrete, collapsing roads, tunnels and bridges, humungous potholes and consequent traffic jams that fray the nerves, contribute polluting emissions and wear and tear on brakes, it is evident that there is a need for an uprising of the population.
What happened to the report and recommendations of the public inquiry led by Pierre Marc Johnson following the collapse of the Laval viaduct?
What follow-through was there to Mayor Tremblay’s brave pronouncement in September 2007 “If there is ever a threat to the safety of our citizens, we will make the investments necessary to not only ensure our safety, but our sense of safety as well”?
What about the SNC-Lavalin report of 2008 on the Ville-Marie expressway (built by predecessor Lalonde, Valois, Lamarre, etc.) – See It has a finger in every pie  
What response has there been to this summer’s united editorial stance Montreal’s infrastructure: An intolerable situation (and well documented reporting) of La Presse and the Gazette?
You will be comforted to know that Transports Québec has a Management Plan for Greater Montréal Area Transportation – it recognizes that transportation problems are ‘acute’, but as far as we read, we did not see one word about crumbling infrastructure.
Isn’t it high time that the citizens called all the governments to account?
Beryl, surely it is an ‘indignant moment’. Let us rally behind NDP transportation critic Jamie Nicholls, and carry McGill professor Saeed Mirza on our shoulders to the barricades (not concrete ones) to confront Real Grégoire, the TQ spokesperson who offered this feeble advice “some parts of highway 40 should be avoided”. Aux armes les citoyens!
Now that we have issued that rallying cry, allow us point you to a thought-provoking TED Talk by Harvard professor Michael Sandel  “What’s the right thing to do?” recommended by our daughter, Fiona.  “Is torture ever justified? Would you steal a drug that your child needs to survive? Is it sometimes wrong to tell the truth? How much is one human life worth? Professor Michael Sandel probes these questions — and asks what you think, and why.” It is an hour long and positively riveting.
A final word – are you watching the almost-daily additions to the list of candidates for the Republican nomination? Were they not so scary, most would be laughable – latest entry: Texas Governor Rick Perry And God Will Send Rick Perry  However, in fairness we should add that unlike some of the others, he seems to have traveled widely and have thought about foreign policy. Note of caution — “Former Defense Secretary Don Rumsfeld has also reportedly played a role in organizing his national security briefings”. We were not too thrilled when we saw a photo of him brandishing a pistol, but it turns out that he used it to kill a coyote that was threatening his “puppy” – so he is a politician who can take his own dog to Washington. (Thus, we return to our opening paragraph.)