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Field trip to MAINE: The economic tide pulls back

(08 August 2011)  The annual wave of tourists on the coast of Maine is not reaching far inland this year.  Few RVs are cruising on the roads and vacancy signs are plentiful outside the main vista corridor linking Portland to the National Park of Acadia.  Perhaps only the lobsters can happily celebrate this pressure falling off.

It does not look upbeat either for vacationers who stayed home.  The day following the credit rating downgrade, I found a poster pinned to a roadside mailbox, reading:  ‘The republicans are destroying our economy’.  The squabble is not about to abate.     

The warning sign from S&P is triggering a bout of market realism, downwards to a new economic floor for America.  QE II has fallen short of expectations and growth prospects are now being scaled down.  Will the current soft patch turn into a dip?  Politicians are doing their best to bring it closer to reality.

Democrats and Republicans are camped on opposite shores:  The first are resisting cuts to entitlement programs while the second remain opposed to higher tax revenues.   The end result is to pay lip service to programs and reforms that could aim at growth and employment.   This sort of middle-of-the-road muddling is not serving anyone.  In fact the real costs of any serious adjustment will merely increase in size with time, as Europeans are finding out at their end. 

We can foresee any of the following scenarios if America does not get its act together soon:  The American dollar could take a serious beating if inflation is chosen as the stealth option to reduce debt; social entitlement programs or the military budget eventually could get a much BIGGER chop later than would be the case now; or America could be condemned to forego strategic influence in spots that matter, such as the South China Sea.   

One way or the other, they are losing ground by procrastination.   America is still under a ‘command’ mindset with the rest of the world. 

The next warning shot will hit harder.

André Du Sault

Posted in CFO & treasury, Country visits, World economy.

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