The Uncertainty in the US v Europe
We hear daily about the crisis faced in the world markets as a result of the 27 European nations failing to reach an accord in how to debt with overwhelming debt levels in many member states. So much so that the failure of the Super Committee in the US has lost its place in the daily headlines.
The Overall Debt Situation in the USA
To no one’s great surprise, as a result of the failure of the Super Committee to reach agreement, politicians in the US are now coming to the realization that major cuts are coming to the defense budget and social programs next year.
Of course, politicians will still wrangle about whether the coming cuts are appropriate and the feeling is that those cuts which are so arbitrary, will be moderated. Time will tell.
In Spite of the Debt Load, the USA Can Still Pay its Debts
The key fact to keep in mind is that the United States has the absolute capacity to pay its obligations. It is the largest economy in the world – $15-trillion dollars. Its debt-GDP ratio is below that of many other large nations, and it sits in the middle of the pack in these comparisons. Its currency remains the world’s reserve currency.
It does have an ongoing large deficit and a rising debt-GDP ratio, and it is witnessing an ugly political process that features poor leadership in both Houses of Congress and in the White House. These are substantial problems, but not insurmountable. The very fact that people all agree on what the issue is, and the disagreements are about how to solve the issue are in the headlines, makes for confidence in the future.
Because of This Lack of an Accord, Default Discussions are Still Worrisome
US default risk continues to be discussed. When we talk about the word default, we are talking about the payment of principal and interest on notes, bonds, and other indebtedness. There is absolutely zero chance that the United States of America will default on any principal and interest payment it owes or has guaranteed.
Could the US Economy Collapse?
The Perfect Storm can always happen. It is possible that we could again have a Great Depression like in the 1930’s, but I highly doubt it. The simple different factors in today’s wold have been been discussed many times. The age of communications. The age where the middle class has doubled and then doubled again, and then again. The enormous flows of money around the world instantaneously. And so much more.
If you look at the US and all reports out last month was slightly positive – unemployment is dropping. Employment is rising. Oil imports are projected to decrease. Manufacturing is slightly improving. Retail sales are slightly improved. Travel is slightly improved, and almost all reports show a similar either stabilization or improvement.
We are in a period just before the next cycle is set to start.
What Can be Done to Improve Matters?
The first thing is to let US companies bring their money home without enormous income tax consequences to them.
In 2005, Congress allowed companies to bring money back to the U.S. at a low tax rate. They brought back over $300 billion. Time to do it again.
Under U.S. tax law, a company that earns a profit overseas must, in general, pay income tax to the overseas government AND to the IRS if they bring the remaining profit back to the U.S. The company gets a credit for the foreign income tax paid, but the difference between the foreign tax and the U.S. rate must be paid to the IRS. In practice, deferrals and other tax rules allow companies to keep foreign after-tax earnings locked overseas. That money generally remains unavailable to be used in the United States.
Time to bring this money home.
Another Quick Solution
Capitalism has been given a bad name through the 2008 crisis and the stupid desire by politicians in the US to disturb capitalism and legislate companies to give loans to those who refuse to honor the debt. Their naivety contributed grossly to this world malaise.
We Should Change Our View on Politicians
Somehow, we we consider that “flip Flops” on policies by politicians are the prime negative that the media should search for. What we need, are thinking politicians, that are not mired in dogma, and stuck in policies in order to pander to groups, and to avoid being labelled as flip flops.
The prime example that the media is ignorant of the feelings of the people, is Newt Gingrich. He is the only one that says he will deal with matters as they arise and we must look at matters in a common sense way. Mr. Gingrich has a checkered past, yet when he speaks this way, it rings a cord with voters who are so tired of hearing the dogma, and the fixed immoveable positions of the others. He has shot up in the polls because he seems to be a thinker rather than a dogmatist.
What we really need, are leaders, who aren’t afraid to change positions to deal with issues.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
