Morning in Arizona

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Rainbows over Canyonlands - Dave Stoker

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Friday, May 22, 2009

The Unavoidable Big Payback: America’s AA Credit Rating

Bill Gross on Bloomberg TV yesterday predicted the inevitability of the US losing its AAA credit rating.  Running deficits at 10% of GDP for many, many years, and projected growth rates of 1% to 2% in the future, this will push debt as a percentage of GDP from current levels of 50% toward 100%.  An inflection point for country credit downgrades.  In addition, a protracted monetary policy of quantitative easing and deficit spending will cause an unhealthy re-inflation and effect interest rates and the value of the dollar.

This comes the day after that Britain’s AAA rating was threaten by Standard and Poor’s lowered outlook from stable to negative.  After listening to Bill Gross, the last scene in Paramount Pictures 1972 classic, The Godfather, written by Mario Puzo, between Marlon Brando’s Don Vito Corleone and Al Pacino’s Michael, then flashed before my eyes:

 Don Corleone: I never wanted this for you.  I work my whole life - I don't apologize - to take care of my family, and I refused to be a fool, dancing on the string held by all those bigshots. I don't apologize - that's my life - but I thought that, that when it was your time, that you would be the one to hold the string. Senator Corleone; Governor Corleone. Well, it wasn't enough time, Michael. It wasn't enough time. 

Michael: We'll get there, pop. We'll get there.

In this economic translation, Don Vito represents Thatcherism and supply-side economics is Michael.  Deregulation and lower taxes were supposed to free capitalism from the straightjacket of Keynesian economics and deliver all to a financial utopia.  After a generation of less government, our stock market value is half its worth from as recently as 2007.  Our banking industry and credit markets are broken; propped up by taxpayer’s dollars.  The economy is fighting off depression – and losing.  Moreover, the accumulated wealth of baby boomers, earmarked for retirement, along with their dreams, is truncated.

The US automobile industry, once the envy of the world, now laid dismantled awaiting auction to the highest bidder for pennies on the dollar; 500,000 jobs are disappearing monthly, and the end game is the lost of our credit rating.  Cities and states have run out of cash just like many of its citizens.  Corporations continue to lower earnings estimates, quarter after quarter, because a de-levered future means a smaller pie.  Therefore, government will continue to print money. 

Treasury Secretary Timothy Geithner stated yesterday that the rise in treasury interest rates is proof the economy is getting stronger.  Perhaps.  Another theory is the world is adjusting the risk premium for holding US debt.  There was no comment on the slumping dollar.  At this point, the godfather, a shrewd businessman, would short the dollar, buy gold, and look for emerging markets to invest in.

However, just as Don Vito deluded himself into believing his actions, a lifetime of criminality, could escape into the non-criminal world, for future generations of Corleones, we deluded ourselves, too.  We believed it was possible to consume reckless leveraging, loose credit, cheap money, zero personal savings, obscene amounts of personal, corporate, municipal, and federal debt, and low taxes, without any cost to our brand of capitalism, jeopardy to our economic system, or any real personal pain.

Francis Ford Coppola subtle metaphor in the final scene employing Don Vito as a fanged monster to frighten his grandson is the 12 trillion dollars in debt that awaits our grandchildren.  Be very afraid, children.  The beloved monster suddenly dies unfulfilled in his garden. I hope there is enough time for us to redeem our gluttonous spending ways, avoiding sure financial cardiac arrest, so that we can “get there”, like pop wanted us to do.

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