Debt downgrade inevitable - even helpful

The downgrade of US debt to AA+, was inevitable. It could be describe it as the "tea party downgrade" because it was the debt ceiling brinksmanship line that really stood out in the S&P report. Consider if you were China's central bank and your largest debtor just said "maybe we won't pay" - you'd expect a downgrade and to collect higher interest rates based on that risk - especially since the value of the debt is decreasing as a result of QE. Substantively, the US is still AAA. It is the ultimate safe haven asset, nothing is more secure. It is just a sign of the times that the most secure assets are being downgraded.

However, this can be a helpful downgrade if the result is the same as what followed Canada and Sweden's downgrades in the 1990s. This is a major psychological blow (probably why markets are tanking), which can be a wake-up call to voters that the US is not immune to similar troubles as Europe and so the country's leaders may look to improve credit rating to AAA again by making the tough and correct decisions about future spending. Canada's experience was of large deficit reduction, sustainable government debt loads and a longer-term fiscal outlook. This will be more challenging for the US as they do not have positive economic momentum right now, but it can still be done.

The US needs a 2% VAT (value-added tax), and this would begin to address the systemic issues affecting the long-term solvency of the country.

Immigration: Growth in population equals economic growth

With the economy in stagnation and growth an uncertain prospect, one idea that isn't being floated, but is an immediate boost to growth, is immigration.

Americans are underwater on mortgages, have high debt and are using more and more of their disposable incomes to pay off those debts - the messy process of de-leveraging. If a family earning $50,000/yr can find $360/mo. for debt repayment from disposable income it will take 2 years to pay off $8000 in credit card debt (at 8% interest).

The average credit card debt in the US (2010) was $15,799 - if you apply the same formula that is 47 months. If you take an interest rate of 22% it is 53 months. That is $108 billion that consumers do not have to buy goods. That is taking off 0.77% from annual GDP growth. The debt ceiling deal passed by Congress is also taking almost $200 billion/year - another 1.4% off growth.

What does this mean? It means that the US economy needs to grow at 2.2% just to stay stagnant.

To grow the economy there needs to be more people, more people with needs. Immigration is the quintessential American value. The Statue of Liberty is not to glorify the US, it is not for military triumph. Lady Liberty represents freedom to "the huddles masses yearning to breathe free". It says whoever you are, wherever you're from, you can work hard and make something of yourself in America.

Comprehensive immigration reform should be the most important economic stimulus that gets passed. It would bring millions of undocumented immigrants into the fold and paying taxes. It would create wage growth as employees demand minimum wage. Immigrants, usually being lower income, would spend their earnings on essentials - household goods, food, toys for kids.

If 20 million undocumented immigrants in the country earning $20,000/yr would add $200 billion to the economy (assuming they contribute $10,000/yr now in the shadow economy today). Eclipsing the damage of de-leveraging or government austerity. As the economy grows, these immigrants will want iPads and stainless steel fridges and new cars as the family units mature. There is also supporting evidence to show 2nd and 3rd generation Americans earn at the national average ($54, 283 in 2009).

The US is facing a demographic challenge. The Millennial Generation - the children of the Baby Boomers, cannot pay for the retirement of their parents by themselves; the Medicare and Social Security tax burden would cripple their standard of living. New immigrants are what is needed to grow the population base, which will grow the economy and tax revenues and help fix this current problem.

We are all the children of immigrants.