S&P downgrading the U.S. credit rating from AAA to AA+ is the first time since the credit rating business started that America’s credit rating has been downgraded. Since Washington reached a debt ceiling agreement and jobs numbers came in at a relatively healthy 117,000, this downgrade was unexpected to a certain extent. However, the major issue is that the debt ceiling deal is very ambiguous in nature. The spending limits have been raised by $2.3 trillion by 2013, while cuts of $2.1 trillion are spread over 10 years.
What does all this mean for small business owners already concerned by slow or no growth in the economy?
They key effects of the credit downgrade for small businesses are:
1. The U.S. government’s leverage to pump up the economy has gone down even further.
That means that cuts in federal spending along with increases in taxation are going to come a lot sooner. This will lead to even more weakening of the growth in the U.S. economy in the short to medium term, and increasing business and personal tax rates for small business owners will not help. Cuts in government spending will affect innovation even more in the short to medium term and will cause a slowdown in innovation in the economy. Small business has led the U.S. out of every recession after the Great Depression until now. Coupled with increased globalization, job growth and overall demand in the economy will be anemic and will lead to stagnation in the economy.
2. Interest rates will go up in near future as the cost of borrowing money in the U.S. will rise.
Lack of credit access coupled with higher interest rates will raise the cost of capital for small businesses, both further hurting their bottom line and slowing job growth even more. The dollar will fall, thereby raising the costs of imports, including gasoline. Coupled with weak real estate prices, this means small businesses should be braced for tough times.
However, everything is not gloom and doom, as a weaker dollar and lower costs can make small businesses more competitive. Small businesses, when run efficiently, can become big export engines, as Germany has shown. The key issue is whether small businesses will get enough incentives and support, including seller financing from U.S. Exim Bank, to boost exports.
Also, small businesses will need to make cash flow more efficient, become more cost conscious, and learn to operate in an economic environment that will see very low growth over the next three to five years.
The S&P credit downgrade should be a wakeup call for U.S. policymakers and business owners. It may indeed act as the best stimulant for the economy overall. Otherwise, America is set on a path of declining power, much like the U.K. in the post-World-War-II era.
Hope things get back to normal soon
Good article, but some real potential good news is the “wake up call” to our leaders that actually being responsible with our money will be a good thing going forward. Or am I just whistling in the wind?
Hugh J. Campbell Jr. CPA
The U.S. Trade Deficit, America’s Leak-in-the-dike
“The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to `political turmoil.’ Pretty soon, I think there will be a big adjustment.” – Warren Buffett, January, 2006
Our trade deficit is America’s leak-in-the-dike; as a result, any favorable effects of the Bush tax-cuts, Obama’s stimulus and monetary easing have been grossly disappointing.
In Chapter 19 of the 1817 classic, On the Principles of Political Economy, and Taxation, David Ricardo warned that, war, the removal of capital and a new tax are destroyers of the comparative advantage which a country before possessed in manufacturing. David Ricardo’s aforementioned competitiveness destroyers are either self-inflicted or persist due to the U.S. Government’s dysfunctional response. Administrations/Congresses of both parties have been unwilling or unable to connect-the-dots, between the declines in U. S. global competitiveness and the following changes since the early 1990’s:
– A change that has the effect of a new tax, namely China’s manipulation of the U.S. Dollar; which acts as a tax on all U.S. exports and a reverse-tax on all imports coming into the U.S.
– A change in U.S. corporate tax regulations for multinational corporations that has led to the flight of jobs, capital, and local/state/federal the tax bases.
– The enactment of value added taxes (VATs), by an increasing number of our trading partners at gradually higher tax rates, which tax U.S. exports.
The unresponsiveness of U.S. political leaders to these changes that David Ricardo, the father of classical political economics, warned; has subject U.S. businesses and workers to a similar plight as the frog in the boiling water parable. Other, independent and objective warnings about change follow:
“It is not the strongest species that survives, or the most intelligent but the most responsive to change” – Charles Darwin
“It is not necessary to change…survival is not mandatory” – W. Edwards Deming
The commonality possessed by Ricardo, Buffett, Darwin and Deming and is their ability to be systems thinkers and dots-connectors. Our political leaders’ lack of systems thinking is the learning disability that must be overcome to restore the United States to its former greatness.
As a small business owner we have been negatively impacted by the policies of Washingon for the past two+ years, and it does not appear that there is much hope in sight. Consumer confidence continues to decline dispite record spending on stimulus packages.
It’s not very encouraging to our business or our clients businesses.
Thanks for this nice breakdown.
Am I worried? You Betcha.
Is our national debt too high? Yes.
Have the Bush tax cuts done anything to help our economy, lately? No.
Do we need to look at Medicare, Social Security, and other related things? yes.
Do a few millionaire’s and billionaire’s need to get a Press Release out saying that they would not be opposed to paying a larger percentage of taxes? Yes.
That’s because there will be some long-term benefits to them, if they do. And, most of them are in this for the long-term, anyway. That’s just how they think.
Someone needs to step up…and soon.
The Franchise King®
Walker E. Burton
There is one thing for certain: from here on it will be much harder – even though it has been hard enough already – to get funding at acceptable conditions. And even though they may try to do something (e.g. via the SBA et al) this is not a good alternative. As to the “conventional” funders (VCFs, banks): fuhget about them.
It seems there is only one route left: try in Europe. That’s what we did earlier this year and we were lucky. A company in Luxembourg with a German at the helm worked wonders for us. The name is Manfred Haldenwang at Esolve Capital
Here are a few more pieces of good news that are coming out of this challenging time. It’s becoming more acceptable for “regular” people (I sometimes call them “consumer business owners”) to own a business of their own, whether or not they have a job. As small business continues to be the beacon of hope and light for families nationwide, we will see more entrepreneurs doing business with each other. This subset of the overall economy is exciting. Yes, it’s hard, and yes, it’s going to be a long haul. But as we pull together as individuals, and as technology allows us to do that more efficiently and cost effectively, individuals are discovering their voice and are using it more effectively to impact positive change for all.
What we are now seeing is a correction, not only of the economy, but also of the federal government. It needs correction, and while I am not happy to see so many people struggling, I am happy to see the correction.