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Sunday, 17 December 2017

Crisis is far from over for US (and Indian cricket)

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I was padding around my home listening to the news this morning when it occurred to me that if our sports reporters were as bad as our business reporters, they’d be fired. I confess that I was far more interested in hearing the former repeat the amazing result from the second test against India (if you don’t do cricket, you’ll miss this one and, by jingo, you don’t know what you’re missing!) but once again it was the business correspondents that had me scratching my head.

How about something like “the US debt crisis seems to be over” or “the immediate economic crisis seems to be over”? What is over is the risk of tripping over the self-imposed deadline for an increase in the equally self-imposed capacity of the Treasury to take on more debt. Apart from that, nothing is over.

Both sides of Congress (and the White House) saw the debt ceiling issue as a great opportunity for political and ideological grand-standing and in fact that have all ended up shooting themselves in the proverbial foot, the right one or the left one, depending on their respective stances. August is a very good month for Treasury receipts and in fact the government’s cashflow would have withstood a delay in the raising of the debt ceiling without too much trouble. It was the White House which brought the supposed threat of default into the debate but anyone with half a brain for government finance knows that that was nothing more than political rhetoric. However, it was dangerously loose talk and once out there, it couldn’t be put away again. What has to be worrying is that the story which is being beamed into Joe Sixpack’s front room is significantly removed from the truth and that the real issues have yet to be addressed. Spending needs to be reduced by US$1trn a year, every year – not by just US$2trn over 10 years.

Politicians make a living out of drawing strength from staring at and preaching best case scenarios. However, instead of dreaming of being lifted out by 3%, 4% or even 5% annual GDP growth (which is, according to them, always forecast to kick off just a few weeks from now), they should draw lessons from Japan where growth has now been flat for the best part of half a generation. Near-zero growth could be with us for a long time and I would be gratified if I heard politicians begin to make some contingency plans for such a possible outcome. All in, Congress is about to pass savings of something in the region of an average of US$300m–$400m per year over the next 10 years which would mean a ongoing annual deficit still north of US$800bn. That to me sounds like wanting to make a contribution to saving the planet by only driving 10 miles for a pint of milk rather than 12.

Meanwhile, I have had confirmation of what all of us have known for a while, namely that some serious investors have kissed peripheral Europe good-bye. I heard the story of one asset management firm which received a correspondence from one of its largest clients announcing the immediate implementation of a new benchmark on one of its guvvie mandates which specifically excluded all peripherals. In a lightening action, the asset management team shed all of the newly excluded risks and rebalanced the portfolios. This might affect prices in the market in the short term – we are talking some adult numbers in this particular case – but far more to the point, this is money which will not be there when the peripherals in question come back for funding. The debate on the subject of a central European funding agency might have to be revived pretty pronto if we come to the point when there simply is not enough investment capital allocated to the borrowers in question in order to meet their not inconsiderable financing requirements. Raising money is not always simply a matter of price.

I keep on falling back on the analogy of the family which funds 10% of its life-style on a credit card. Take the card away and the life-style has to be adjusted by 10% plus maybe an extra 2% which is required to service the interest and to begin to reduce the accrued balance on the card. I look at and listen to President O’Bama and to other political leaders and I wonder which part of that simple equation they do not get. For reasons beyond my ken, they all still seem to believe in the free balance transfer and the cash-back bonus.    

Well, I go into the new day confident and gratified that at least the cricket commentators know what they are talking about; scant solace.

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