Friday, July 22, 2011

How The Debt Debate Is Hurting the Economy

From Slate:

This Northern Virginia consulting firm, for instance, has recommended that companies "collect any fees owed your company by the government as soon as contractually possible, just in case" and "anticipate delayed program starts (for the limited number of new programs), and delayed acquisitions for upcoming solicitations." If the Federal Reserve is doing contingency planning for a potential default, shouldn't you be too?

Wall Street is also preparing for the possibility that the government might miss its deadline. According to a New York Times story, investment banks and boutique firms alike are looking for ways to reduce exposure to a possible default—and even to make money off of it. For example, at Wells Fargo "executives said they had been keeping close tabs on the bond market and making sure they had ample cash on hand." The Times report adds: "[E]ven if a deal is reached in Washington, some in the industry fear that the dickering has already harmed the country's market credibility."

Hedge funds and venture capital firms—major investors in new and growing businesses—have also changed their ways, just in case. George Soros' $25.5 billion Quantum Endowment Fund has pulled back trading and is now holding a whopping 75 percent of its assets in cash—just hanging onto them, not investing them, not using them to help the economy grow. Why? In part the debt crisis in Europe, in part China's tamping down on inflation, and in part the "debate over the U.S. debt ceiling," Bloomberg reports. Many other money managers, like the giant asset manager BlackRock, are doing the same.

The almighty American consumer has also started getting worried, according to a Goldman Sachs note this week. Goldman attributes the recent hit to consumer confidence to a few things, including high unemployment and the failure of the recovery to pick up steam. But it says that all the news reports coming from Capitol Hill about the world's biggest economy teetering on the verge of an unnecessary default are starting to have an impact too.

"A sharp drop in measures of consumer confidence in recent weeks coincides with a surge in news coverage on the debt ceiling," the company notes. "A model incorporating lags of the unemployment rate, the year-over-year change in the unemployment rate, real average hourly earnings, the S&P 500 index, home prices, and consumer lending standards … explains only about half of the recent drop," it says, suggesting worry over the debt ceiling makes up much of the rest. "Confidence in government economic policies" has fallen to the lowest level in 50 years.

Not that any of this matters to the Yahoos in Congress...