On fear and loathing in a second term
It was the FT which created the advertising slogan “We live in financial times….”. I can’t disagree but we live in political times too and I still suspect that 2013 will prove to be a more political than financial year. Having spent the past five, nearly six years blaming the bankers for more or less all evils which have befallen us, the political chickens are coming home to roost.
The poor showing of Mutti Merkel’s CDU/FDP coalition parties in the Lower Saxony state elections is one thing but I am thinking more of the set-piece jollifications which will be taking place in Washington DC today as Barry O’Bama swoops from one inauguration ball to the other in celebration of his formal anointment, having taken the oath of office for second term in the White House in private on Sunday as it has to be done by January 20.
The “Yes We Can!” mood of four years ago has become “Perhaps we could have done but we didn’t” and, truth be told, the greatest legacy for future generations of his first term will be an increase in the public debt pile from US$10trn to US$16trn. In his inauguration speech today, he will surely allude to the objective of reducing debt but even a fool can work out that to go from a US$1.3trn a year deficit to a surplus — you can only reduce debt when running a fiscal surplus — is a huge ask and one which this president and most probably the next one and the one after that can barely achieve.
If I were him, I would not be looking forward to the next four years and if I were, I’d expect to be committed.
Well, even the longest journey begins with but a single step and somewhere the President will have to bury his ideological instincts and face the fact that the country needs to begin to travel in a new direction, and fast. For too long Washington politicians of both hues have been committing funds they didn’t have to buy votes they didn’t deserve. The critical fiscal position should be uniting the political class but, not surprisingly, it has polarised it. However, O’Bama is possibly the only man in Washington who cannot legally run for re-election and so he is, theoretically at least, ideally placed to offer moral guidance to the squabbling multitudes on Capitol Hill. Chance of that happening?
How long can it last?
According to the Bureau of Economic Analysis at the US Department of Commerce, annualised Q3/2012 US GDP was estimated to be US$15.811trn. Of this, we know that somewhere between US$1.0trn and US$1.5trn – fiscal revenues are still unknown – were funded out of deficit. Q3/2012 GDP growth was 2.6%. Thus, if the country were being run on a balanced budget, the economy would be in melt-down. O’Bama is generally credited with having saved the economy in 2008 but, you might rightly asked, what from and for how long?
How often do we have to remind ourselves that deficit to GDP is wrapped around 8% and interest rates are near to zero, the Fed is funding major chunk of the deficit and the Treasury Secretary has had enough and is walking. Some 40% of the total national debt has been piled up in just four years. What part of the economy has O’Bama saved and what parts has he simply preserved in aspic? If I were him, I would not be looking forward to the next four years and if I were, I’d expect to be committed. Do his pension and benefits improve for having served two terms instead of only one? I very much hope so.
Meanwhile, as noted, Frau Dr.Merkel has her own issues to deal with. The failure of the black/yellow coalition to hold the red/green opposition at bay in Lower Saxony. The CDU is still the largest party but in German politics that counts for little. Peer Steinbrueck will be much relieved and Merkel will need to do some thinking but for the rest of us, things will remain very much the same.
The role Germany has taken on a leader of the eurozone has also limited its freedom to manoeuvre, both economically and politically. It has significant commitments towards its currency union cohorts and, despite the rhetoric, I would humbly suggest that post-election Germany will be much the same place and in much the same space, irrespective of who occupies the Chancellery. In other words, there’s not too much to get too fussed about when it comes to yesterday’s election results – the progressive federalisation of Europe will take care of that.