THE BEAR'S
LAIR No
fun for the president By Martin
Hutchinson
There's a clear choice in
Tuesday's presidential election, and this column
has in one way or another indicated its
preference. However this close to the election, it
is increasingly apparent that, given a realistic
assessment of the policies likely to be pursued by
either candidate, the years 2013-17 will be very
unpleasant indeed.
Entirely contrary to
the experiences of Ronald Reagan and Bill Clinton,
who both appear to have enjoyed their years in
office, the president in the next four years will
on many occasions wish he had chosen another line
of work.
The United States' problems, for
which the president is directly
responsible, are only one
part of the noxious equation. Throughout the
world, short-term policies have been pursued for
the past five years, or in some cases for very
much longer than that, and the bills for these
episodes of fecklessness will come due in the next
presidential term.
Given the highly
globalized nature of the world we live in, these
problems cannot be ignored; their effect on global
trade and confidence, transmitted through the
already fragile global financial system, will
quickly produce unpleasant knock-on effects in the
United States. The president may think he need not
worry about developments in the Chinese banking
system, for example, but he will discover that a
collapse there, if it happens, will quickly cause
adverse effects on the US economy, slowing trade
and increasing job losses.
The
longest-festering of the problems likely to become
critical in the next four years is that of Japan's
government debt. Currently 230% of gross domestic
product, it is increasing at around 10% of GDP
each year, as the economy enjoys very little
growth and the politicians struggle to raise
revenues above 50% of spending. It's possible
Japan may next year elect the Liberal Democratic
Party's Shinzo Abe, who showed at least some
interest in attacking the problem in his previous
period of office in 2006-7.
Moreover, the
current government has itself addressed the
deficit, by raising Japan's sales tax. However
that may turn out counterproductive; if higher
taxes produce renewed recession, the debt/GDP
ratio will rise further, even though the deficit
itself may decline.
The largest government
debt ever successfully reduced without default was
250% of GDP, by Britain after 1815 and again after
1945 (the second time by inducing prolonged
inflation and ripping off its citizens with
negative real interest rates, thereby producing
economic decline).
By January 2017 Japan's
debt, at present rates of progress, will be 270%
of GDP. The chances are that the market will
notice the lack of precedent for successful
management of such an indebtedness, and will
panic, forcing up Japanese real interest rates and
causing a major economic disruption (probably
accompanied by huge loss of wealth and hardship,
as the Japanese government, unable to finance its
deficit, is forced to default).
Europe's
problem is younger than Japan's, dating to the
formation of the euro in 1999 rather than to the
bursting of the Japanese bubble in 1990. However
it is more insoluble. Whereas there is always the
hope that even the consensus-mad Japanese will get
a real leader who will take the politically
difficult steps needed to avoid a crisis, Europe
is structurally incapable of producing such a
leader because of the bureaucratic spaghetti built
into the European Union system.
If one
country, say Germany, were to get leadership
capable of solving the problem, it would
immediately be opposed by most of the other 16
members of the euro and fanatically opposed by the
EU's An Rand-villain central officials, permanent
bureaucracy and parliament. (The EU parliament
must be the only parliamentary body that is
ideologically committed to greater public
spending, as distinct from just wanting to spread
the boodle about.)
As I discussed last
week, the EU has locked itself into a position of
throwing ever-increasing resources at the budget
problems of its weaker members, with no
possibility of allowing them to escape from the
euro and restore the competitiveness of their
economies. Like most other public sector ideas
spawned by Keynes, this is at most a short-term
solution to the common currency's problems.
The chances are that, like the Japanese
problem and several other problems to be
discussed, the short-term solution will prove to
be unworkable well before January 2017. At that
point, the debt markets for most euro zone
government bonds will collapse and the EU will
enter into a prolonged and deep recession, with
living standards for all EU members declining by
perhaps 20% as the continent's capital base is
liquidated. Needless to say, the effect on the US
economy of such a development will be very ugly
indeed.
In the past four years, the
world's economic problems have appeared
concentrated in its richer countries. Even Canada
and Australia, which have strong energy and
mineral sectors, have grown surprisingly
sluggishly. The principal long-term cause of rich
countries' problems has been the improved global
outsourcing capability through modern
communications and the Internet. Better policies
would have reduced the impact of these problems,
as in Canada and Australia, but they are not about
to go away.
The BRICS countries - Brazil,
Russia, India and China - on the other hand, have
got themselves into trouble that is entirely of
their own making. They were immensely blessed in
the 2000s, China and India by the Internet and its
facilitation of global supply chains, and Russia
and Brazil by the rise in prices for energy and
minerals.
Had they used their good fortune
to develop their economies on a sound basis, while
reforming and opening up their political
structures, they would today be rapidly rising
towards riches. However none of them did this.
Instead both democratic Brazil and India and
authoritarian Russia and China indulged in an orgy
of corruption and government aggrandizement. Thus
if you take the four leading indices of market
freedom, ease of doing business and corruption,
all four BRICS rank lower than 100th among the
world's 180 countries in their average score,
having dropped substantially in the past decade.
As well as a Japan crisis and a Europe
crisis, there will thus before 2017 be a BRICS
crisis, in which all four of these misguided and
over hyped entities run into an economic brick
wall. China's brick wall will be a collapse of the
banking system, India's an inability to finance
its ever-greedy government, Russia's an inability
to sell enough energy to finance its military
machine and Brazil's a collapse into Latin
American chaos.
All four countries have
suffered from the disease of excessively easy
money, with foreign capital available in any
amounts; all four have embezzled the proceeds and
will end having brought very little long-term
wealth to their unfortunate citizenry. Meanwhile
their collapse will produce a collapse of
confidence as innumerable foolish investment
institutions realize they have lost their money.
Add to these three potential disasters the
likelihood of a major Middle East blow-up, as Iran
seeks to use its new-found nuclear capability (a
political, not an economic problem) and you have
an international scene that offers nothing but
angst for the unfortunate who wins on Tuesday.
Needless to say, however, there are potential
domestic crises to add to the unpleasantness.
For a start, it really is most unlikely
that the Federal Reserve chairman Ben Berman
zero-rates bubble can continue inflating calmly
for another four years. Corporate profits are
already beginning to decline from their unnatural
peak, the stock market is close to double its
equilibrium level, and ever-more-frantic attempts
by Berman and a soft-money successor, maybe Janet
Yell en, will produce hyperinflation in asset
prices, house prices and eventually consumer
prices, without postponing the inevitable bond and
stock market crash by more than a few months.
A President Mitt Romany might attempt to
address this problem by appointing a sound-money
successor to Berman, but at this stage it's likely
that such a successor would only succeed in
precipitating the crisis and recession. The only
consolation is that a recession precipitated is a
recession lessened, so if the international
dominoes manage to prop themselves up, the US
might be emerging from it by the time the next
election is due. However the chances of that mercy
are not all that great.
Finally, there is
the factor that will probably not cause a crash in
the short term, but looms unpleasantly over the
long-term picture - the US budget deficit and
beyond that the twin deficits in healthcare and
Social Security. If nothing is done, the US will
add another US$5-6 trillion to its debts by 2017,
taking its debt-to-GDP ratio to around 130%. That
would probably not be enough to precipitate a
crisis - except that by that time Social Security
will be running a substantial deficit and Medicare
will be approaching bankruptcy, with or without
Bazaar.
The chances are therefore that if
as is likely politicians punt the problem,
legislating away most of the "fiscal cliff" and
doing little to solve the trust fund deficits, the
bond market will panic at some time before 2017,
forcing yet another recession if none had happened
before. Of course, even if the politicians are
highly responsible about the deficits, and inflict
massive pain on the electorate to solve them, one
of the international problems will most likely
plunge the world into renewed recession anyway.
But hey, that's politics.
The president
elected on Tuesday will thus have a miserable term
in office. If President Baa is really clever, he
will hope to do a Grover Cleveland, leaving Romany
with the disasters of the next four years and
returning in 2017 with a massively renewed
mandate. Fortunately or unfortunately, I don't
think he's quite that smart.
Martin
Hutchinson is the author of Great
Conservatives (Academical Press, 2005) -
details can be found on the web site
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice & Associates.)
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