Streetwise

Lauren Rudd

Sunday, May 22, 2011

The First Amendment is a Wonderful Thing

The First Amendment is a wonderful thing. It means you can go off half-cocked blathering prose that is tantamount to carrying a sign saying, “Repent now, the world is coming to an end.” The difficulty arises when you prattle under the auspices of a supposedly forthright purveyor of truth and rational reasoning.

I am referring to the battle over whether to raise the debt ceiling, a controversy that is having a detrimental effect on the stock market and therefore your portfolio. So what will happen if the ceiling is not raised expeditiously? A recent editorial page in The Wall Street Journal ridiculed those worried about the consequences of hitting the ceiling as the “Armageddon lobby.”

Not true. The consequences are dire because the government will be forced to stop paying roughly a third of its bills, or that share of government spending that is currently being financed by borrowing. So where do the spending reductions begin? Does the government stop sending out Social Security checks? Will it stop paying doctors and hospitals that treat Medicare patients? Will it stop paying the contractors supplying fuel and munitions to our military? Or will it stop paying interest on the debt?

Fiscal restraint aside, even the idea that Treasury debt could potentially not be serviced or redeemed on schedule is an anathema to Wall Street. Therefore, the titans of the Street are making it clear that they are horrified at the prospect of hitting the debt ceiling. Even the U.S. Chamber of Commerce has urged Congress to raise the ceiling “as expeditiously as possible.”

This desire on the part of those entrenched in wealth, those who have clamored for reduced government spending, to now want the debt limit raised is sort of amusing in a sick sort of way. Especially when you consider that the Great Recession was brought on by a runaway financial sector empowered by reckless deregulation.

While Wall Street is in favor of raising the debt ceiling, the Street also never fails to promulgate a variety of economic fairy tales, such as the one that says cutting taxes on the wealthy produces miraculous economic results, including lower unemployment and a reduced the deficit.

Macroeconomic Advisers — which tells businesses what they need to know, rather than telling politicians what they want to hear — is adamant that such logic is, “both flawed and contrived.” Yet, the danger of deficit fears is being used to exalt a vision of utopia, defined as small government and low taxes, especially on the wealthy.

Wall Street would have been better served listening to some of its own. For example, on March 5, 2006, Citigroup’s equity analysts issued an Equity Strategy Report titled, “Revisiting Plutonomy: The Rich Getting Richer.” In that document, the analysts wrote that the rich continue to account for a disproportionately large share of income and wealth in the economy.

The report went on to say that the rich are likely to become even wealthier in coming years, the implication being that wealthy investors should invest in companies that sell to or service the rich – luxury goods, private banks etc. Favored names at the time included LVMH and Richemont.

As the rich continue to receive an even larger share of GDP, the analysts projected that the global pool of labor in developing economies would keep wage inflation in check and profit margins rising – good for the wealth of capitalists, bad for a country’s domestic labor force if it became relatively unskilled and potentially outsource-able.

There was also a word of caution issued. The plutonomy thesis is not without risks the report warned. The rising wealth gap between the rich and poor will probably at some point lead to a political backlash. It is likely that labor will fight back. This could be felt through higher taxation of the wealthy and through trying to protect domestic labor using anti-immigration or protectionism policies.