The Low Hanging Fruit of Credit Downgrades

In the beginning of the 1970s, the Volkswagen Beetle redefined the small car in America. Japanese cars at the time were not serious competitors, European two-seater sports cars were impractical for families, but the Beetle had hit all the rights notes. They dominated the category much as the Apple (AAPL) iPhone dominates its market today.

The rest of the small cars decided not to market against one another but to direct their aim at the people’s car from Germany. Then, the first oil embargo and oil shortage occurred, changing consumer’s tastes, Volkswagen made a few tactical errors, the quality of the Japanese cars improved significantly, and by the end of the decade, the Beetle’s leadership in market share was lost forever.

The constant companion of change throughout history is serendipity. American Capitalism dominated the world after WWII. We set the rules; we defined the market, and excelled against all competition. Europe and Japan’s manufacturing infrastructure laid in ruins by the war, so the US had to assist in rebuilding our future competitors. The rest of Asia was embroiled in regional conflict; its estimated Russia had lost more than 20 million people; a huge blow to their society for years. Africa and Latin America were underdeveloped areas before the war. World War II fundamentally reorganized worldwide political and economic power for decades. The global economic meltdown of 2008 is achieving its own disruptive results without the loss of lives and physical destruction.

On Monday, Standard & Poor has cut the credit rating of the Republic of Ireland, down to AA, for the second time in 3 months. Last month, S&P also placed the United Kingdom on negative credit watch. The Guardian UK reports that Austria is vulnerable to political and economic instability this summer from emerging European nations. Iceland is insolvent and Spain lost is AAA credit earlier this year. For now, the US credit rating of AAA is safe, but the future has menacing clouds gathering.

Meanwhile, exports from Germany and Japan, the engine of their respective economies, are off sharply this year, due in part to a decline in American deep recession and consumption curtailment, and China introduced a 4 trillion Yuan domestic stimulus package to prop up domestic growth.

The world economy is far from bouncing back from 2008. Sometimes, the beginning of change is imperceptible. Do these facts mean that the US is soon finished and done as the last superpower? No, but keep in mind that the money in addition, talent that we poured into the space program of the 1960s and 1970, has yielded new products and industries from the 1980s until recently. What, if any, is the golden nugget we have in our back pocket this time to put us back on a winning economic path, long term?

Disclosure: No positions

Comments

[Dave Wrixon:]

So now S&P and Moody's credibility have sunk to such a low ebb that anything they trash is seen as a sure fire winner?

Jun 10 04:34 AM

[Roger Knights:]

"What, if any, is the golden nugget we have in our back pocket this time to put us back on a winning economic path, long term?"

Very little. Technological advances fueled the west in the past two-plus centuries, but nothing comparable on the whole is coming. The past decade has been one of blasted hopes. Here's support for that viewpoint from today's Business Week, Cover Story June 3, 2009, 5:00PM EST:

The Failed Promise of Innovation in the U.S.: During the past decade, innovation has stumbled. And that may help explain America's economic woes

By Michael Mandel

www.businessweek.com/m...

Jun 10 05:09 AM

[Marvin Clark:]

I'm glad not to be out on that branch alone.


On Jun 10 05:09 AM Roger Knights wrote:

> "What, if any, is the golden nugget we have in our back pocket this
> time to put us back on a winning economic path, long term?"
>
> Very little. Technological advances fueled the west in the past two-plus
> centuries, but nothing comparable on the whole is coming. The past
> decade has been one of blasted hopes. Here's support for that viewpoint
> from today's Business Week, Cover Story June 3, 2009, 5:00PM EST:
>
>
> The Failed Promise of Innovation in the U.S.: During the past decade,
> innovation has stumbled. And that may help explain America's economic
> woes
>
> By Michael Mandel
>
> www.businessweek.com/m...

Jun 10 06:27 AM

[Eye Forget:]

"What, if any, is the golden nugget we have in our back pocket this
> time..."

Don't sell us short. Financial innovation, tort law, Congress (oops, lobbyists), leverage at every level, education, the world's healthiest gun (oops, crime) industry, health care, extremest political (oops, religious) groups and a public too preoccupied to bother getting involved.

The rest of the world need not advance, we will do it for them.

Jun 10 08:55 AM