The US media set is once more full of recovery rhetoric. But America is beginning to rival the EU in its level of denial.
The short-termism of the American business community is now beyond parody. Less than enthusiastic about Ben Bernanke’s drip-feed QE strategy, last week the Republican Party used a Mexican burn on President Obama in order to get him to extend George Bush’s upscale tax cuts. The quid pro quo for this (not that the GOP needed one) was for there to be no cut in Federal spending. So the bottom line of is that the US now has the worst of all worlds: a growing debt, less revenue – and no real evidence that any of middle and upper-middle class or corporate America are in the mood to revive the economy by spending.
Ever since, however, soi-disant experts throughout the West have been falling over themselves to call this a ‘game-changer’, the new cliche for coming out of defence to score in galloping style. Tom Stevenson of Fidelity Investments wrote this in the London Daily Telegraph at the weekend:
‘….the outlook is clearer in the US than almost anywhere else in the world. Not for Americans the fiscal austerity that will make 2011 a chilly year in Britain. Not for them the sovereign debt worries afflicting Europe (although the $900bn increase in the US’s deficit as a result of last week’s measures will come back to bite it at some point). Nor do they face the inflation concerns hanging over China and other emerging markets.’
The assumption behind this confident prognosis is that both American consumers and corporate finance directors are straining at the leash to spend their cash piles. This didn’t happen during QE1, and the situation is much worse today than it was then. But the prevailing media stance over there is to get behind the product. Respected American financial website Saving to Invest told it’s readers a year ago that
‘The good news is that it seems that most economists are predicting that 2010 will be a good year for the economy and markets building on gains in 2009. Only time will tell what eventuates, but the outlook entering 2010 definitely seems much better than it looked going into 2009’
Well, the markets are sort of OK, but anyway it’s been obvious for years now that the world’s bourses consist almost entirely of wide-eyed optimists who can, nevertheless, be sent spiralling into a pit of despair by the news of a lost house sale in Anchorage Alaska. Neither of these is true of ordinary Americans these days: I’ve never heard so much cautious pessimism in the States as exists at the moment. It has been a fault common to all Free Marketeers throughout the decade that you can model what the mass market will do: they were wrong a year ago, and they’re wrong now.
Models are usually constructed by folks who know nothing about human packs and their emotions. Very much in this tradition, Michael Cloherty of RBC Capital Markets told the media last week that “The rise in Treasury yields reflects that the economy is doing better, and that takes the risks of double-dip recession out of the picture.” A statement by somebody still unable to grasp that the real recession never went away has to be bollocks. Let me try and put some flesh on that insult.
“One risk is that home prices are likely to fall further in 2011 which will temper consumer spending,” said Richard Berner of Morgan Stanley’s New York office. This is about as close as any goforit would go last week along the road of “Er, hang on a minute here”. Many people in the West have a home as their main (if not only) asset. As over half of them think prices will tumble next year, and 30% are worried about job loss, another credit splurge – even among the relatively well-heeled – is unlikely. It didn’t happen during Britain’s QE, nor during Bernanke’s QE1, so it’s hard to see why a stimulus at a fifth of the original level (plus a tax-cut extension) should do it now. Lest we forget, hardly anyone in private America is going to be any better off come New Year’s Day.
The President having decided to forget about the deficit, I’m forced to refer readers back to my post of early July, when I tried to make clear why a consumer boom in the US would only widen its trade gap. Opponents of that view point to China’s serious inflation problem, but this is a false hope: the Beijing jackboot is being vigorously applied to the problem, and it will anyway be a long, long time before Chinese products are anything other than vastly cheaper than their American equivalents.
Lowering UK export costs merely makes the US less of an asset in itself. As Gregg Easterbrook observed in his masterly Reuters analysis of last week, US corporates are hardly likely to chuck money at a depreciating America. More likely is that Chinese and Arab sovereign funds will pile in. Gregg also asks ‘why [US corporates would] innovate in hopes of future profit when systemic fiscal irresponsibility by both parties means either the United States will become a stagnant mega-Japan, or steep tax increases will be the only way out when panic sets in?’ Why indeed.
Much as it pains me to pass any praise Slick Willy’s way, Bill Clinton eschewed any form of giveaway nonsense, instead cutting federal spending in order to reduce the deficit, and create confidence that America would in the future be worth more, not less. After Reagan and Dubya, I’m astonished that the GOP retains its reputation for fiscal responsibility: it is ill-deserved. Barack Obama has now joined their ranks: just another elected and spineless politician prepared only to dance, rather than face the music and dance.
From Day One of the start of meltdown (late 2007) the whole strategy of zero rates and outrageous levels of bank bailout has been proved wrong. In one taxpayer splurge alone – Hank Paulson’s mystical $800 billion SOS of 2008 – Wall Street simply pocketed the dosh, and carried on paying bonuses. Zirp and QE1 in turn merely allowed large US multinationals to deliver effortless profits to fat shareholders. Hardly a Dollar has gone to emerging businesses, and almost nothing was spent at retail. As I’ve written now to the point of everyone’s extreme boredom, the chief result on both sides of the Pond has been to deprive a huge market of retired Silvers – folks largely devoid of debt – of money to spend in the economy. But as ever, the banks came first, Zirp allowing them invest in Treasuries and rebuild their balance sheets. The inbred selfishness of it all beggars belief.
Little or nothing has been invested in diversification, new plant, new research staff or some degree of practical and realistic of mortgage debt relief for the less than hopeless cases. All the US elite has done is grumble about Yuan valuation – entirely justified, but no subject for a considered recovery policy. Bizarre as it seems to write this, the American governmental and banking Establishment is beginning to rival the EU for directionless, clueless economic and fiscal pain avoidance. Not only will the ‘game-changer’ not succeed, it doesn’t deserve to succeed.