This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Notes from Alex Carrick - Jul 26, 2011

Alex Carrick
Damage to the credit rating of the U.S. has made tomorrow today

It’s not the same old world. In a game of political one-upmanship, the Democrats and Republicans in both the House and the Senate are pushing agendas that risk sending the U.S. government into default on its financial obligations.

The fact of the matter is that even if an agreement is cobbled together before August 2nd to raise the debt ceiling from $14.3 trillion, a great deal of “damage” has already been done.

“Damage” is one word that can be applied to the current circumstances. It defines the likely set of circumstances that will arise in the aftermath of Washington not being able to make its payments to pensioners, government employees and the military.

Those are the everyday people likely to be first affected by a failure to reach a financing agreement. Commitments to them will be skipped over before interest rate payments aren’t made on bonds and treasury bills, many of them held by foreigners.

The reason has to do with priorities and future costs. The bigger upward impact on interest rates will come from a failure to make payments to debt holders than from a delay in issuing income slips to Joe-and-Judy-average.

There is a danger in becoming too alarmist about the extent of the problem.

The fact is everyone will get paid eventually. The U.S. economy, present floundering notwithstanding, is strong enough to support its current debt load with sufficient growth potential, unlike some countries in Europe, to bring finances back in line.

“Damage” may be a good word to use, not so much on account of the present circumstances, but more in the sense of placing a wake-up call.

The reason public finances have come to a head – not just in the United States, but in Europe as well – has been due to profligacy and an absence of restrain when it comes to government spending

Or at least government spending that isn’t backed by sufficient tax revenue.

The Democrats want the debt issue resolved now, so it won’t linger on into the 2012 Presidential election year. Plus they want more of the costs to be borne by the wealthiest tiny tier of the social and corporate strata.

The Tea Party and Republicans also have a point, although they risk making it at the expense of too many of the common folk. When does taxation become too much? In developed nations, it probably became over-the-top some time ago.

Something does have to be done about public sector spending.

In some areas - for example health care - costs have become next thing to uncontrollable. In others, such as compensation for government employees and padded benefit and pension plans, a lack of resolve and a “put-off-until tomorrow” attitude has largely delayed dealing with the issues.

Some state governments in the U.S. have shown remarkable fortitude in finally getting real with their employees. In Europe, restraint has been forced on several governments and on workers, both public and private, as part of financial rescue packages.

Also complicating the debate is the timing. It can easily be argued that now is not the time to impose austerity when the economy is so fragile. Theoretically, the best time to tackle fiscal excess would be when the economy is buoyant and in no danger of suffering a mortal blow. 

But this flies in the face of reality. When the good times are rolling, most everyone is too content to be bothered upsetting the status quo and there is no political will to take on the hard choices.

In any event, the “damage” to the reputation of the U.S. has already been done. The nation’s financial system is no longer the impregnable bastion it once was. This has been gradually occurring for some time, except only a few people have acknowledged the truth. 

The U.S. dollar will continue to be the world’s reserve currency, because it is vastly more liquid than all other alternatives. There are far more greenback-denominated debt instruments used in common trade than euros, yens, Chinese yuans, Swiss francs and British pounds.

But a turning away from the U.S. dollar can hardly help but gather momentum long-term. It’s an inevitable reality. Acceptance of that fact doesn’t necessarily have to be a bad thing.

In any event, application of the word “damage” has meant that tomorrow has become today.

Finally, in further evidence it’s not the same old world, the NFL and its players have reached a new deal. For a change, fans won’t be subjected to the spectacle of multi-millionaire owners and players sitting on the sidelines taking pot shots at each other while the season drifts away.

And everyone else need not wonder how many games must be played, if an agreement can be reached and a truncated schedule established, to yield a legitimate Super Bowl winner.

And no, the “pigskin” labor agreement isn’t just important for football fanatics. Many jobs and incomes are dependent on the league beyond the immediate participants.

There are ushers and vendors in the stadiums, proprietors and waiters/waitresses in local drinking establishments and most important of all, from an economic standpoint, advertisers lined up to hock their wares over TV networks and sports channels.

So thanks NFL for coming to your senses. Now if only the players in the game of politics can also avoid going into overtime.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.


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