A Few Comments About The Election

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Macroeconomics

So Barack Obama is the new boss in the White House. Oh boy what a job he has in front of him. Whether you voted Republican or Democrat you better hope he has a plan to turn the US economy around. Though we don’t hold with the constant comparisons to the Great Depression of the 1930’s when GDP fell 19%, when 5000 banks failed and unemployment reached 25%, we do agree the US is facing a potentially deep and painful recession. The depth of that recession and the length of time it takes to come out the other side however are related to how seriously the new administration tackles the much more important issue of the huge budget deficit and consumer debt.

I am currently reading Alan Greenspan’s fascinating account of his days as chairman of the Fed; was it only 10 years ago that America enjoyed a balanced budget? The deficit will soon be approaching $1 trillion and household debt is standing at $13.9 trillion, nearly equivalent to the entire economy of the country. Consumer spending accounts for 70% of the US economy so to get the economy moving again will require consumers to spend. With debt at record levels, that means either household or national debt (personal borrowings or tax cuts funded by increased government borrowing) will have to increase further. For consumers to just tread water and maintain current levels of debt, demand will drop. For ten years, the economy has been growing based on increased debt. Real salaries have been stagnant or according to Jeff Randall of the Telegraph Newspaper, actually dropping from a median of $69,000 to $67,000 from 2000 to 2007. Americans (along with many other consumers around the world) have been living beyond their means.

So what should President-Elect Obama do? Limiting the depth and length of the recession has to be top of his list. Without the economy back into modest growth, there is no hope of reducing the budget deficit and no hope for consumers to reduce their personal indebtedness. Inflation is dropping fast and in the short to medium term is not a major threat, but commodity prices are highly sensitive. Both oil and metals prices could bounce back in the medium term due to capacity reductions. Meanwhile the Fed will bring down interest rates. Financial institutions are beginning to lend to each other again although bank to business lending will remain much more restricted and costly for the next 12 months. The new administration is lining up a stimulus package by way of a tax rebate for the first quarter which may provide temporary relief ” providing consumers spend it and don’t just use it to reduce debt.

There were worrying references made during the campaign to what sounded like protectionist sentiment regarding NAFTA. We can be sure with the strong dollar and falling domestic demand in the rest of the world, imports into the US will increase in 2009. The new president should take some lessons from history and resist the inevitable calls for trade barriers, duties and anti-dumping measures. Global trade is the bedrock of free markets. Without it, the deflation of the 1930’s really does become a possibility. Though Mr Obama lacks any international experience he does have the support, at least philosophically, of the leaders of Europe and Japan in a way that President Bush never did. He ought to be able to build a wider consensus for better regulated financial systems.

Personally I am optimistic. As Jeff Randall said in his article, “America is disinclined to wallow in pessimism. Its power and influence were built on a belief, woven into the nation’s DNA, that success is the natural order for those living under the stars and stripes.” So here’s to enterprise and grit, may it yet win through.

–Stuart Burns

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