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Wednesday, 20 August 2014

On posing on the fiscal cliff; Rebuilding Glass-Steagall

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So we’ve seen and heard the second of the Presidential debates and with the immediate post transmission polls showing 37% of those asked calling it an O’Bama victory, 33% calling it a draw and 30% suggesting it was Romney’s night, there is something for everyone to take away from it. That is of course only if you’re not trying to extract the substance of the punch-up.

Anthony Peters, SwissInvest Strategist

One of the undecided voters for whom the debates are supposedly laid on and who was interviewed after the show very poignantly remarked that she had no doubt that both candidates cared passionately for all Americans but that she still had no idea what they exactly intended to do. You can’t argue with that as she went on to suggest that she was still no closer to deciding who she would be casting her vote for.

However, what commentators are beginning to point out – and not a minute too soon in my opinion – is that the “fiscal cliff” has remained resolutely undiscussed.

It is quite true that US economic numbers are strengthening across the board and there certainly have to be some grounds for optimism. Nevertheless, it takes a lot more than a splash of hot water to bring a cup of cold coffee back up to temperature.

As with the debt ceiling issue not so long ago, (the fiscal cliff debate) offers incomparable opportunities for political show-boating and rhetorical flights of fancy but it does little or nothing to actually address the issue of America living above its means in just the same way as Europe has been doing.

Think of the fiscal cliff in the following terms: according to figures on the tax take as a percentage of GDP which are published by the Heritage Foundation, France takes 44.6%, Germany takes 40.6%, the UK has 39% but the USA only collects (at all levels) 26.9%. Put that opposite the Debt/GDP ratio of over 100% and a deficit of 8.7% and you should start to get the message that the recovery we are seeing is hanging by a thin thread.

The assumption is that, should we hit the “fiscal cliff” and should the mandatory tax increases and spending cuts be implemented, that GDP could drop by as much as 4.5%. As in the UK, there is much talk of reducing the national debt but the structural changes which need to be faced up to in order to get to that point are huge and the prospect of simply growing oneself back into a primary surplus, whether structural or cyclical look to be quite modest.

Dealing with immediate issue of the “fiscal cliff” has nothing to do with addressing the problems but is an all-American kicking the can down the road competition. As with the debt ceiling issue not so long ago, it offers incomparable opportunities for political show-boating and rhetorical flights of fancy but it does little or nothing to actually address the issue of America living above its means in just the same way as Europe has been doing.

Sure, on paper at least, the modest tax take offers the authorities plenty of flexibility in terms of being able to raise extra funds if necessary. But, as the “fiscal cliff” debate lays bare in the simplest of ways, if the government tries to take a higher proportion of the GDP, the production/consumption cycle will be broken and much of the pick-up we have seen in the States will be reversed.

I can’t see the US economy, any more than I can see any of the European economies, being able to grow faster than the necessary cuts in spending need to be implemented in order to bring just a modicum of control into the burgeoning debt mountain. That is, of course, unless one believes in the imputed growth rate which would be necessary if the reported fall in the US unemployment rate between July to September from 8.3% to 7.8% were to be anything other than a statistical fluke.

Bring back the banking divide

Meanwhile, Vikram Pandit, erstwhile CEO of Citi, joins the scrap heap of former investment bankers who made it to the top if a commercial bank and where it was demonstrated that the management skill-sets are not necessarily interchangeable.

Commercial banking is in many respects more like a utility and needs to be managed in such a way. It is as much the attempt to generate investment banking-like returns from commercial banking-like risks which has led to investment banking like risks now delivering no more than commercial banking like returns which has brought these men down.

I admit to having been there and having celebrated when Glass-Steagall crumbled. Count me amongst those who now agree that dismantling the division between lending and underwriting was a mistake and amongst the proponents of re-establishing the divide.           

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