We're not Wilde about Obama vision

WHEN billions of dollars are being wiped off the sharemarket every day. When you have been told that you will start paying more for the money you borrow. When the voices of people talking about recession have become louder, it is easy to forget that the journey to economic recovery is going to be a marathon, not a sprint.

On Monday afternoon, just as the Dow Jones Industrial Index had fallen 410 points following the Friday night downgrading of the US economy by ratings agency Standard & Poor's, President Barack Obama took to the lectern to try to rein in the sell-off of US stocks.

"Markets will rise and fall, but this is the United States of America," he said. "No matter what some agency may say, we've always been and always will be a triple-A country." While that statement may have been designed to lift spirits, it failed to lift the market, which ended Monday's session down 634.76 points, or 5.5 per cent its biggest one-day fall since the global financial crisis in 2008.

President Obama's comments glossed over the message that S&P was trying to send in its long-flagged downgrade that there is much uncertainty in the US market and that it is suffering a credibility problem. Of course it wasn't just US Treasury bonds that S&P downgraded. It took the knife to the ratings of five AAA-rated insurance companies that stack their investments heavily in US debt, as well as the ratings of home loan banks Fannie Mae and Freddie Mac.

It is as though Obama has embodied Oscar Wilde's Dorian Gray in a desperate attempt to project a more perfect image of the US economy than actually exists. But those struggling to find work and facing cuts to entitlement programs can see a more accurate reflection. Wall Street also did not buy the President's line that everything will be A-OK.

The reason US Federal Reserve chairman Ben Bernanke was able to achieve on Tuesday what Obama was unable to do a day earlier is because the statement from the central bank actually flagged ways to grow the economy.

Bernanke's statement that the Fed had discussed "a range of policy tools" that it was "prepared to employ" turned Tuesday's sharemarket around 500 points to post its biggest one-day gain since March 2009.

The market viewed the statement as a sign the Fed might soon step in with another round of bond purchases, known as quantitative easing, to stem the bleeding and provide confidence. The debt level has unfortunately become a political football on Capitol Hill when the focus of attention needs to be addressing ways to kick-start growth.

The market spiral began more than two weeks ago when second-quarter GDP growth was released, showing that the US economy grew at a pace of 1.3 per cent, which was lower than anticipated. Josh Feinman, global chief economist at Deutsche Bank Advisors, says the growth story is what policymakers need to be working on.

"We have taken our eyes off the ball and are so focused on debt. That is not to say that the US doesn't have a long-term debt problem. It has to deal with that eventually, which will involve difficult political choices like tax reform and the like, but if we focus too much on this to the exclusion of getting this economy going we risk doing real damage," he said. "[The US government needs] to not move to austerity too quickly while the economy is so fragile. Stimulate the economy while doing the long-term reform." Meanwhile, the Democrats have nominated former presidential candidate John Kerry, as well as senators Max Baucus and Patty Murray, as the first three of six Democrats on the joint-party panel entrusted to find at least $US1.2 trillion in savings over the next decade. These three are viewed to be pragmatists but certainly not pushovers.

The trio, and their yet-to-be-named colleagues on the panel, would be well advised to consider the riots happening across Britain as an example of what can happen if you cut too deep, too quickly.

Britain has brought in tough measures to cut spending by raising the pension age sooner than expected, reducing disability benefits and dramatically cutting funds to public libraries, forcing scores of them to close their doors.

Russian novelist Alexander Solzhenitsyn joins the dots between economic mismanagement and the scenes that the US is seeing play out across the Atlantic.

"You only have power over people so long as you don't take everything away from them," he said. "But when you've robbed a man of everything he's no longer in your power he's free again."

The Obama administration, along with the Republicans who are appointed to the "super committee" on spending cuts, need to be honest about the state of the economy and open about discussing with Americans and the rest of the world what steps need to be taken to turn it around.

So far, the two other big credit ratings agencies, Moody's and Fitch, have yet to downgrade US debt. However, Moody's has moved its outlook to negative, meaning there is a one-in-three chance that it will take ratings action. Fitch says it will complete a review of the country's investment quality soon. If a consensus arises between the ratings agencies that the US economy is in dire straits then it will be incredibly hard for the country to dig its way out.

On average it takes about nine years for the credit ratings agencies to reverse a downgrade. That could seriously compromise the government's ability to cut spending during the next decade at a time when it is paying more on its borrowings.

Markets tend to operate largely on perception and the perception at the moment is that the Obama administration either does not have the answers or is unwilling to share them with the public.

People, much like markets, tend to feel more comfortable if they have all the information in front of them, even if that information is ugly and grotesque.

Obama needs to drop the Dorian Gray impersonation, speak frankly and face up to the situation the US finds itself in.

mathewmurphy81@gmail.com

Twitter: @MathewMurphy81