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Thoughts on US Election (FXA)

Thoughts on US Election

 

Post mortems are never easy after major swings in elections like the one Tuesday in the US.  So it is quite easy for Republicans to explain the shift as largely ideological…a vote against the socialist European model (which is a much scaled down version that followed the turbulent 60’s in its current form) as practiced by Obama, Pelosi and Reid, and a vote for laissez-faire capitalism which exists nowhere.  It is equally easy for the Democrats to conclude that the election was all about unemployment and the party leadership failed in not spending enough on jobs.  Neither party wants to admit that what the vote was about utter frustration with Washington and partisan business as usual.  With an ample majority, the public quite reasonably threw out the party holding the reins of power.  This happened in 2006 in Congress and 2008 everywhere.  Democrats in Congress thought the public is more patience…two years was not enough time to fix the economy after its worst setback since the Great Depression.  Like Democrats in 2006 and 2008, the Republicans got to run against something, which is a huge advantage especially when the policies of the majority are short on factuals…and long on counterfactuals.   I would not be surprised if in 2 years the economy is not growing jobs in a meaningful way the Democrats will take back the House, the Republicans will win the Senate and Obama will be a one-term president.

 

Despite the celebratory swagger of the Republicans – deserved and to be expected (is Boehner that different from Pelosi?)– and the tone deafness of the Democrats (when ever has a political party in defeat ever conceded ideological ground much less policy priorities…rewind to 2006…did GW change course?), in short order Congress will realize it has to get down to the business of business and this involves finding common ground and growing jobs.

 

Fortunately or unfortunately the only true common ground is on trade policy (perceived as no or limited fiscal costs) that means pushing the US farther down the path of a trade war with China.  Rest assured ideology is out the window here and both parties can agree with the need to create jobs and this means exporting fewer to China despite the powerful lobbyists from Wal-Mart and many US manufacturers.  If anyone wants a good assessment of how the US trade relationship with China in the last 15 years has added to US structural unemployment in exchange for cheap consumer manufactured goods have a look at Paul Tudor Jones’ letter to investors from October.  This is the outline of the underpinnings of a much harder position on China and yuan appreciation.  It also ups the stakes of Congress instituting trade sanctions.  If China is the key to the rest of Asian currency appreciation, we should expect more spillover to the region…especially as QE2 assures a weak dollar ahead…look for capital controls to become the new currency intervention as foreign reserves have become too massive for even activist currency regimes in EM land.  The coming move toward less open world trade is surely a negative for equities, commodities and global growth and in time could see the inverse relationship between the dollar and stocks break down…both will be weak. 

 

I also think the election makes the Fed the water boy for stimulus…it will be in an ever larger role in supporting growth as fiscal policy stimulus option is shut off at least and even more likely contracts (extending the Bush tax cuts is ceteris paribus for fiscal policy…adding to the deficit).  I think the UK government experiment is worth watching for how the US might benefit (or cost) from immediate fiscal tightening…few question the concept many question the timing.  It is also clear that the election result will bring forward fiscal consolidation.  Keep in mind the President’s bipartisan commission (one he appointed because GOP members of the Senate blocked a bill that would have given the commission teeth) on deficit reduction reports back to the President by December 01.  My guess is the House and Senate Republican leadership will want to restart this effort with people they deem appropriate and will want austerity measures up front.  In other words the Fed keeps the printing presses running. 

 

Healthcare reform reform could be the mutually assured self-destruction of incumbents in the coming months…I would be very negative on gridlock if this is the first push by the House leadership in January.  There is no room for compromise on this issue (Romney-care co-opted by Obama and Democrats). 

 

I am also quite skeptical that the GOP supply side orientation has been shelved despite the overwhelming conclusions of any reasonable person on the planet…tax cuts do not pay for themselves…sold as such and with the unstated intent to starve government into action also has a long history of not working.  So any Republican or Democrat (black-and-blue dogs that hung on) who says the deficit ad debt can be cut without revenue and spending measures is selling snake oil.  VAT is the common ground of reasonable people but I think reason is still in short supply in Washington and elections and election money is where policy originates and is implemented for the most part.

 

Finally, I am pretty confident that most Americans are pragmatic and have a long history of rejecting ideologues.  This Tea Party is ideological and will have a heavy imprint on the GOP ahead.  I think this will be problematic.  The left wing of the Democratic Party may appear ideological but frankly someone show me…I don’t see it and this is why pragmatic voters (independents) swung so hard for the GOP…they did not have the results…they cut taxes for the middle class (40% of the near $800bln stimulus and the largest single category) which no one even knew they got (in withholdings in paychecks) and funneled lots of money to state and local governments to maintain services and employment…which GOP exploited as catering to the public workers’ unions…(would be surprised to see how GOP ideologues lined up for these transfers).  If in 2 years the economy is roughly where it is today, pragmatism prevails and we can expect another wave of change…indeed would fit with 2006, 2008 and 2010)…the public is impatient and Washington appears to be fiddling while the nation burns.

 

Again from my window in rural Connecticut all I see is Japan

 

David Gilmore

 

 

 

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