Daily Investment Interpretations
August 5, 2011
(Friday Night): The market indices
ended the day chaotically, with the Dow up 0.5%,
the NASDAQ down almost 1%,
and the S&P little changed on the day: Dow wilts in August heat. The NASDAQ
Composite fell 23.98
points (-0.94% ) to end at 2,532.41.
The Dow climbed 60.93 points (0.54%)
at 11,444.61; the S&P 500 drifted down 0.69
to settle at 1,199.38. Oil closed down at $87.26;
gold rose $16
to 1,666: The VIX ended at 32.
The big news tonight is the S&P downgrade of U. S. sovereign debt: S&P yanks coveted rating for first time: "The U.S. government's AAA sovereign credit rating is stripped by S&P in an unprecedented action that could send shock waves through the global financial system." I haven't quoted Paul Krugman for a while because he missed the market up-legs and he spoke of Depression 2.0 before its time. But long-term, his forecasts and interpretations seem to me to be spot-on. Dr. Krugman pointed out in January, 2009, that President Obama's stimulus package was ½ to ⅓rd as large as it needed to be to jump-start the economy, and that President Obama would lose the political window of opportunity he had at the beginning of his term if he didn't shoot for what he needed from the outset. Furthermore, when the stimulus package didn't work, the Republicans would argue that Keynesian economics doesn't work in the first place, and that the stimulus had been a failure. And although the $700 billion TARP program was the Republicans' opening shot at the crisis, most people would forget that it was the Republicans who had run up the deficit during both the Reagan-Bush and Bush II administrations. (The budget had been balanced during the Clinton administration, though in deference to the truth, this may have had more to do with a booming economy than it did with fiscal prudence.)
But the bottom line is that the ratings agencies are pushing for fiscal restraint and deficit cutting. If we slide into another recession, there will be no fiscal stimulus programs to pull us out. Furthermore, most of the deficit spending that the Obama administration inherited has stemmed from safety net spending in areas such as unemployment compensation and bailing our state and local governments. It could be that as a society, we've learned nothing from the Depression of the 1930's, and we may be doomed to repeat it.