Is politics killing the economy?
In our Dow Live Report earlier this year (see Dow Q1 fails to reflect global turmoil) I highlighted the somewhat artificial buoyancy of the markets and warned about a repercussion during Q3. Although this now seems to come true, the current market weakness has largely been triggered by a political spark rather than fundamental values. Politics should of course influence the economy but the influence this time comes from what seems like a blind eye towards the consequences and all attention focused on winning the game in Congress, no matter what.
One cannot but wonder: did the political squabble kill the American credit rating more than the financial figures did? On the surface, it would seem to have been a situation where entrenched stubbornness and pride overshadowed responsibility, with historic consequences.
Although there is a lot of focus on USA and many expect the Dow to take a beating as the markets open, the American credit loss is just a trigger that may ignite another severe global dip. The EuroZone problems (political and economic) are the real pitfalls to watch as more than one core member quickly slides toward financial chaos.
Following the freefall trading on the weekend markets, political leaders all over the world are communicating during Sunday in an effort to calm the markets before Monday opening. That in itself is a telltale sign of how extreme the current economic situation is.
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US Debt infographic
The ongoing US debt crisis brings to light the fact that government financing is a global mesh. The debt is held by foreign lenders and in a nutshell, Asia own the US with China and Japan topping the league.Japan has problems of its own and would take a severe financial hit if the US were to postpone payments. China, being the largest creditor and a good negotiator, may on the other hand gain from US late payment treaties.
All modern economies are interrelated and although it might seem paradoxical, most industrialized, leading economies, build their strength on credit. The US debt infographic tells the story:
Created by OANDA
More US DEBT infographics on who owns the debts:
Budget Plannerfrom Mint.com
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The US once again out on thin ice as the battle over US economy rages on in the Senate. Not too long ago, the US was urging China to better manage their currency. Now China, as the US largest creditor, is urging for a better Dollar management. The same can be said for the global financial community which will be severely hit if the US economy defaults. Without a doubt, such a occurrence may send us into another global recession with DJIA and all stock markets taking severe hits.
As the deadline draws near without a political consensus on how to deal with the debt ceiling, the political battle is putting America at risk of losing its tripple A credit rating.. as well as its credibility. The debt ceiling is after all a technicality, a measure point and does not in any way address the underlying problems that are creating the continued rise in debt. The world economy is being put to risk over a technicality and political arm wrestling that may backfire on the Dollar as the choice global currency.
From a investment perspective, a falling stock market is not always bad. In fact, fortunes are made just a much during negative falls as during positive gains. Spread betting is one way of investing in falls. If you have mainly invested directly in shares I recommend you brush up on some spread betting tips and strategies before putting your money on the line.
