Has the sky fallen?

No, but the bottom seems to have dropped out of the stock market. Market reaction to the last minute resolution of the self-induced US debt ceiling crisis and S&P's downgrade of the US from AAA to AA+ status (yes, it's spawned bad battery jokes) serves to remind how vulnerable exchange rates, stock prices and capital flows are to confidence. 


To my mind, the key phrase in S&P's announcement is this one:

"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011."

Whew...

At the very last minute, the US increased the debt ceiling, averting a default. It's not so clear the US will avoid a downgrade of its debt rating. The markets weren't overly impressed by the resolution: on August 2, the Dow posted its 8th consecutive day of losses, dropping 2.19%. The Nasdaq and S&P 500 didn't do any better, falling 2.75% and 2.56%, respectively. In Mexico, the peso weakened 0.12% against Monday and the IPC dropping 2.56% in pesos.

Obviously, it's going to take more substantive efforts to confront the twin dangers of a weak economy and unsustainable deficit to re-establish faith in the US as a triple A player.

Can the President raise the US debt ceiling?

A sentence in Section Four of the 14th Amendment to the Constitution states: "The validity of the public debt of the United States, authorized by law, including debts incurred for payments of pensions and bounties for services in suppressing insurrection or rebellion shall not be questioned.”


Legal scholars are debating whether the President can invoke Section Four to unilaterally authorize an increase in the debt ceiling. Former President Clinton has stated he would. President Obama has voiced reservations over the applicability of an amendment to the Constitution written to deal with debt obligations stemming from the Civil War to the present situation. As August 3 looms and the debt ceiling stays at US$14.3 trillion, we'll see whether his doubts about Section Four dissipate.

Buckle your seat belts...

The news coming out of the US is not good for the US and not good for Mexico. The US economy is weaker than we'd thought: the revised GDP numbers show the recession was worse and that this year is weak. Revisions cut the first quarter 2011 growth rate from 1.9% to 0.4%. In the second quarter, the economy grew just 1.3%, less than half the average annual growth rate of the 60 years prior to the "Great Recession". Unlike Mexico, the US economy is still smaller than before the recession began in 2007.

Then, there's the debt ceiling. It's looking like the unthinkable could happen: lawmakers may well not agree to raise the debt ceiling before the August 3 deadline. Higher interest rates across the economy would be one result of failure to raise the debt ceiling. A financial market meltdown could be another. When business groups make common cause with the Obama Administration, it's obvious that failing to raise the debt ceiling is not what a weak economy needs.

Yet another trade surplus for Mexico...

For the sixth consecutive month, Mexico ran a surplus in its trade account. At US$107.9 million, June's surplus was the smallest of this year, but the fact that the trade account was in surplus while the economy is growing is striking. The 44.3% increase in oil revenues through June (compared to the first six months of 2010) was complemented by the 19.9% growth of non-oil exports.

In the first half of this year, the trade surplus totaled US$3.34 billion, 1,058.1% higher than in the first half of 2010. In the first half of 2009, the trade account was in deficit to the tune of US$1.84 billion. However, if oil is excluded from the calculation, the trade account showed a US$3.69 billion deficit through June; that was 21.0% less than in the first six months of 2010.

The average Mexican household

was composed of 3.9 people in 2010. Average annual household income was US$11,065 in 2010, down from US$12,613 in 2008. Households spent, on average, US$9,691 in 2010,  down from US$10,075 in 2008.

It's not over till it's over...

The European financial crisis is entering a new phase. Even though the Greeks managed to squeak through the latest iteration of their financial woes, the pressure is mounting. Last week, Moody's downgraded Portugal's debt to junk bond status. Last Friday, Italy came under attack...