It Looked Like the Tea Party Sell-off in Stock Markets Last Week.
The well publicized standoff in the U.S. Congress over how to manage the country’s debt was perhaps the biggest factor in last week’s stock market slide. American stocks fell 7 % on the week -- the worst performance in two years-- and the TSX/SP Toronto index fell 6%.
Late Friday night the unthinkable happened when Standard and Poor’s, the most important debt rating agency in the world, lowered the credit rating of the United States. This doesn’t mean that the United States is collapsing, but it does mean the two main scorekeepers, a giant rating agency and the stock market, are nervous about the game of chicken being played in Washington.
“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” said Standard and Poor’s in announcing its rating cut, adding that “it weakens the government’s ability to manage public finances.”
Most people agree that in spite of the histrionics in Washington, the fight is not about money, but ideology.
“America’s ability to pay is neither here nor there: the problem is its willingness to pay. And there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the U.S. into default. The Tea Party is fully cognizant that it has been given a bazooka, and it is just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point.”
That’s not the New York Times or the Washington Post (seen as left by the Republican right) attacking the wackiness of the politicians who represent the Tea Party, but a relatively conservative financial journalist named Felix Salmon who writes for Reuters, among others.
The problems in Europe, Greece and now Italy, also made stock markets jumpy. There is a similarity between what is happening in the U.S. and Greece; a refusal to pay taxes to fund government. In Greece people dodge taxes, in Italy there is a huge underground economy and in the United States, Congress refuses to tax the rich or close gaping tax loopholes.
Many Democrats, including President Obama, want to increase taxes on “millionaires and billionaires”, in the president’s words. However the government could raise more money by minor tweaks to the tax system such as removing the subsidy on corn-based ethanol, which costs the U.S. government billions and benefits Midwest farmers.
Wall Street also makes out well. One of the top tax evasion schemes is called ‘Carried Interest’. Like all high-level tax loopholes, it is complicated. Here is a simple explanation: Large investors, such as hedge funds, claim performance bonuses as capital gains which are taxed at 15%, rather than as income which is taxed at 35%.
The Wall Street Journal—hardly Marxism Today—lists this as number three on its list of the top ten tax loopholes that should be closed.
The continuing dysfunction in America’s political class does not look like it will end any time soon. Last week’s events don’t resemble the market meltdown of 2008 when so much value was sucked out of pension funds.
Employment numbers in the United States (and Canada) were bright last week. But unemployment in the United States is still stuck at 9.1%, the housing crisis—falling prices and foreclosures—is still not over, and public confidence is shaken by the drama in Washington. If there is indeed another recession in the United States, Canada’s economy won’t escape unscathed, regardless how healthy it appears to be compared to that of the U.S.
“Though the Canadian economy continues to show domestic strength by adding jobs at a relatively healthy pace, the overwhelming financial distress does signal weakness amongst its key trading partners,” says the Toronto Dominion Bank.
In plain English, if Europe and the U.S. can’t get their acts together, Canada’s economy will feel the pinch too.
Fred Langan is a financial journalist and ACTRA member. | 
