Analysis of Macro Environment by Anthony La Lota, Rutgers University, '13
Due to the ongoing political impasse in Washington and mounting concerns over Euro Zone debt contagion, confidence in the Western markets has been undeniably rattled. Further damage has been levied by S&P’s downgrade of the U.S.’s vaunted triple-A credit rating in response to turmoil over raising the debt limit. In actuality, the downgrade means little in terms of the U.S.’s solvency. Our nation’s ability to pay off its debt has not significantly changed, but what has changed is the perception of the U.S. as the world’s beacon of creditworthiness. All of this uncertainty is reflected in the VIX, widely regarded as the best gauge of volatility in domestic markets. Currently trading at 32.73, the VIX is off from a 52 week high of 48 in early August. Nonetheless, it is still an indication of a shaky economic environment. The Thomson Reuters index on consumer sentiment remains at a similarly low level at 57.8.
In light of the aforementioned developments, coupled with the dual courses of action that the U.S. government and Federal Reserve have chosen to take, it is unlikely that the economy will show signs of life for the remainder of the fiscal year. Specifically, the President’s 447 billion September 8th jobs bill, which is geared toward infrastructure improvements, incentives for school teachers, and increased taxes on the wealthy, is unlikely to reduce the 9.1% unemployment rate. The Federal Government’s solution to the now 14 trillion debt hole should not be to pump additional funds into an already problematic financial situation. What the administration fails to understand is that Keynesian-style tax increases and government intervention rarely spur economic development, especially in times of distress. Similarly, Federal Reserve Chairman Ben Bernake is expected to soon announce “Operation Twist”, which amounts to selling short term notes and bills and replacing them on the balance sheet with longer bonds in order to suppress the yield curve. This, too, will likely prove to be a futile effort in fueling economic growth as long as tax hikes are the order of the day. Definite head-scratching arises when considering that the long bond is yielding only a paltry 3.20% at present, which suggests that long term rates shouldn’t be lowered any further. Whether the raise in short term rates succeeds in encouraging lending remains to be seen, as most investors will still likely hold cash close to the vest. Despite improved balance sheets, both large corporations and small businesses are reluctant to hire, and understandably so. Consumer confidence, and the spending that accompanies it, will take time to improve. On the Euro Zone front, debt contagion has spread to larger economies such as Italy and France, two holders of significant Greek debt. Despite the insistence of Greek Prime Minster George Papandreu and Greek Finance Minister Evangelos Venizelos that they will right the ship, The European Union should call for an orderly default on Greece at this point. As a relatively small economy, its failure would be unlikely to cause long-term global economic ruptures. The European troika has demanded that Greece meet austerity measures in order to receive yet another round of aid in the coming months. However, much like the U.S.'s situation, throwing good money after bad usually proves ineffective. Over-leveraging across the Atlantic, as evidenced as well by Italy’s 120% Debt to GDP ratio, has trickled to the states and has complicated a precarious domestic scenario.
