The man with his finger on the pulse says the U.S. economy faces
two main risks. We have no control over one of those risks and the other, well,
we do have some control, but whether our politicians will appropriately
exercise that control is a big question.
Federal Reserve Chairman Ben Bernanke faced Congress last
week and he delivered a rather subdued outlook in his semi-annual monetary
policy report. He said our economy faces two major headwinds:
1.
The Euro-area fiscal and banking
crisis and its potential spillover effects on our economy.
2.
The unsustainable path of the U.S.
fiscal situation (e.g., the “fiscal cliff”).
Source: Federal Reserve
The U.S. has little control over the euro-area situation so
we’re at the mercy of European leaders to make bold and tough decisions to get
their houses in order. The second item, though, is clearly within our control.
The so-called fiscal cliff, in which a series of tax hikes
and spending cuts will take effect in 2013 if Congress takes no further action,
could throw the economy back into a recession. The Congressional Budget Office
estimates if no policy changes are made, then our 2013 federal budget deficit
will decline by about $600 billion. On the surface, that sounds great. However,
such a huge shock to our system in a short period of time could be problematic.
So, will Congress agree to adjust the legislation for the
benefit of the economy? We’ll see.
For his part, Bernanke said the Federal Reserve “is prepared
to take further action as appropriate to promote a stronger economic recovery
and sustained improvement in labor market conditions in a context of price
stability.” It’s good to know that the Fed is ready to help if needed.
IT’S BEEN ALMOST A YEAR since
August 5, 2011, the day the U.S. lost its coveted AAA credit rating from
Standard and Poor’s. So, how have the financial markets responded in the year
since? Quite well, actually.
It may not feel like it, but the broad U.S. stock market, as
measured by the S&P 500 index, rose 13.6 percent between August 5, 2011 and
last Friday, according to data from Yahoo! Finance. Despite all the angst from
the credit downgrade, the threat of a double-dip recession and the turmoil in Europe,
the stock market has hung in there.
The returns in the bond market are perhaps even more
startling. The 10-year Treasury yielded 2.56 percent on August 5, 2011 and by last
Friday, the yield had dropped to 1.46 percent, according
to Yahoo! Finance. Normally, you might expect interest rates to rise
after a credit downgrade since the ratings agency is essentially saying your
bonds are riskier than previously thought.
The U.S., though, is perhaps a “special” case. The day after
the credit downgrade, none other than Warren Buffett went on Bloomberg
television and said he thought the U.S. should be a “quadruple A” rating. And,
to this day, the U.S. dollar remains the world’s leading reserve currency as
more than 60 percent of the world’s foreign currency reserves are held in U.S.
dollars, according to BusinessWeek.
We shouldn’t get overconfident, though. While the U.S. has
tremendous assets, it might only take a few bad decisions from our leaders to
undo what took decades to build.
Weekly Focus – Think About It…
“There is nothing wrong with America that the faith, love of
freedom, intelligence, and energy of her citizens cannot cure.”
--Dwight D. Eisenhower, 34th president of the United States
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