Opinion

Anatole Kaletsky

Economic optimism now official

By Anatole Kaletsky
November 23, 2012

Economic optimism is now official. The year ahead could be “a very good one for the American economy,” Ben Bernanke, the chairman of the Federal Reserve, declared on Tuesday. If he turns out to be right, these words could probably be applied to the world economy as a whole.

Since Bernanke, even more than other central bankers, has spent the past four years warning of perils such as the “fiscal cliff” and the dismal condition of the U.S. labor market, this statement, delivered in the carefully worded peroration of a speech to the prestigious Economic Club of New York, marks an important turning point.

Not because Bernanke has a crystal ball that offers him economic clairvoyance. But because his views have an enormous impact on business and financial sentiment around the world. And sentiment — especially about government policies — is the biggest problem for the world economy today.

In terms of objective economic and financial conditions, the end of this year looks like a turning point in the slow recovery from the global financial crisis. Outside the euro zone, which now accounts for just 17 percent of global output and will shrink to just 9 percent by 2060 according to the Organization of Economic Co-operation and Development,  economic statistics are clearly improving.

Unemployment, though still high, is steadily falling. Banks are now adequately capitalized. Property prices have stabilized, stock markets are rising and credit conditions have returned more or less to normal. For much of this year, the main obstacle to hiring and investment decisions, according to many business surveys, has been uncertainty about politics and monetary policy. That uncertainty is almost over.

This may sound preposterous. After all, businesses and financiers have been obsessed all year with the euro crisis or speculation about Fed monetary policy or the U.S. presidential election or China’s surprisingly chaotic leadership transition — and now the prospect that the United States will fall off a fiscal cliff, dragging down the whole world economy.

But that is the point. Political uncertainties have been resolved or dramatically improved in all the most important economies. Yet business sentiment is so negative that almost nobody believes this.

Consider what is happening around the world — with the glaring exception of the Middle East, where war and political chaos is unfortunately quite normal. China has belatedly anointed its new leadership, which should end the paralysis in economic policy and ensure that the country’s gradual adjustment to a slower growth does not deteriorate into an economic collapse. In Europe, the crisis has certainly not ended, but German Chancellor Angela Merkel’s decision to back unlimited ECB bailouts and to keep Greece within the euro, essentially guarantees that the euro will not disintegrate, nor the banking system suffer a Lehman-style meltdown. At least until next October’s German elections.

Best of all, the uncertainty about U.S. politics and monetary policy, which have preoccupied businesses and investors this year to the exclusion of almost all other issues, is about to disappear.

Bernanke made clear on Tuesday that his optimism about the economic outlook depended entirely on the assumption that Congress would ultimately back away from suicidal legislation that would deliberately push the U.S. economy over a fiscal cliff on January 1. The bad news is that a plausible deal to avert this self-inflicted catastrophe has not yet been outlined. Fear of another Lehman-style financial crisis therefore quite reasonably restrains business decisions around the world.

But the good news is that this uncertainty is almost over.

By New Year’s Day, 2013, Congress and President Barack Obama will have chosen one of two options. The first is to deliberately sabotage their nation — in which case the world will be back to economic Armageddon. The second will be to tear up the fiscal suicide pact.

As long as Washington decides to avoid fiscal suicide, it hardly matters how. The best outcome would be to agree on broad outlines of long-term fiscal consolidation, while avoiding any spending cuts or tax hikes in 2013. The alternative would be merely to “kick the can down the road” by extending today’s fiscal legislation and increasing the Treasury’s borrowing powers. This is not ideal, but investors and business leaders could live with it.

The Fed would then continue financing Washington’s deficits at near-zero interest rates for another two or three years, as explained last week in this column — and as Bernanke has now promised again. The long-term problems of demographics and healthcare costs would then have to be addressed in the next election cycle, after 2016.

Whichever option Washington chooses, the current uncertainty about U.S. fiscal policy will, for better or worse, be resolved by January 1. Assuming the fiscal cliff is averted, investors and businesses around the globe will have lost their main excuses for avoiding decisions.

When they look at Europe, they will see a continental economy in recession, but no longer close to a Lehman-style financial shock. In China, the new leadership is now in a position to act, if necessary, against risks of the economic slowdown getting out of hand. In the United States, monetary policy is now fixed until 2014 and the presidential election is out of the way.

Business leaders may like Obama or hate him. They may agree with Fed policy or disapprove. But there is no longer any point in delaying business decisions until after the next Fed meeting, or until healthcare reform is abandoned or until a new president with new policies is inaugurated next year.

That leaves the fiscal cliff as the only serious policy uncertainty to fret about.

Assuming that Washington decides not to commit economic suicide on January 1, the business obsession with politics will then have nothing left to feed on. Business leaders and investors will be forced to redirect their attention to economics and the financial fundamentals of their businesses. They may be pleasantly surprised. Once this political uncertainty is neutralized, prospects for most of the world economy look pretty good.

PHOTO: Federal Reserve Chairman Ben Bernanke speaking at the Economic Club of New York, November 20, 2012. REUTERS/Brendan McDermid

 

Comments
13 comments so far | RSS Comments RSS

As you say, “This may sound preposterous” because it IS preposterous. You need a SERIOUS adjustment in your medication.

Frankly, I agree with only ONE single comment you made.

I prefer “economic Armageddon” to a single day more of what this wealthy-controlled government is doing to this country.

Unfortunately, I think Obama will allow the wealthy class to dictate terms, which means a “suicide pact” for the middle class and poor, including those on “entitlement” programs — with “entitlements” in this case being the original, positive meaning, and not the twisted negative propaganda meaning of the “greed is good” people who are destroying this country now.

Posted by Gordon2352 | Report as abusive
 

Unemployment is improving? Banks are in good shape? Where, on Pluto?

All you need to know about this guy is that he writes for The Economist.

Posted by Loucleve | Report as abusive
 

Oh yes, almost forgot.

Europe is in great shape too. Everything is grand.

Posted by Loucleve | Report as abusive
 

I think that you are missing the point. The author is suggesting that businesses have been dealing with the risk of uncertainty due to many global challenges, but these challenges are now resolved (good, bad, indifferent, it doesn’t matter, they are resolved). With less uncertainty, businesses can get back to business instead of watching from the sidelines.

You’ve obviously never read The Economist…astute, politically neutral and pro-business (unlike, say, WSJ). ‘Economic statistics are clearly improving’ are based on fact, not personal preference. Try to bash the opinion part of the article rather than the actual facts.

Posted by Mike_s1 | Report as abusive
 

I have always found Anatole Kaletsky’s articles insightful and, more often than not, on target. I think he’s probably right.

But even if he’s not, as Pascal argued about believing in God, there’s no down side to believing that he is right. Mood is a little-appreciated ingredient in all economic recoveries.

At this point we could all use some rational, or for that matter, some irrational exuberance!

Posted by jrpardinas | Report as abusive
 

FOCUSSING FOR A MOMENT ON EUROPE AND NORTH AMERICA:

———

US Federal Government:
15% taxation/GDP.
25% spending/GDP.
0% annualized GDP growth (with annualized growth never above 5% in the last 60 years, over a presidential tenure).
===
We need to fix this unsustainable mess, right now. After four years of deficit spending stimulus, we’re over 100% debt/GDP, and the stimulus isn’t working. These numbers are now the limiting factor for “sentiment”.

> “Best of all, the uncertainty about U.S. politics and monetary policy…is about to disappear.”
Shares always get oversold (a buying opportunity) prior to US presidential elections. As pointed out in the Reuters/RAND panel discussion, the US system is somewhat more robust than people seem to think. IN THE SHORT TERM, your assessments are almost bound to be correct.

IN THE MEDIUM/LONG TERM, however, besides the “fiscal cliff”, there is another elephant in the room:
http://www.reuters.com/video/2012/11/22/ reuters-tv-quantitative-easing-a-time-bo mb-stephen?videoId=239344066
— “The fundamentals don’t support the current bond-spreads.” — No kidding. There are surely some more choppy economic waters ahead… The market might improve (or, might still collapse if they get it wrong — especially if we let ourselves believe that market collapse is no longer a possibility); but in either case, volatility will remain with us for some time to come.

———

Now let’s look at the global picture.

> “Political uncertainties have been resolved or dramatically improved in all the most important economies.”

Perhaps true in the Middle East (many aggrieved peoples are obtaining some degree of political settlement, which in theory should mean greater stability in the long term — although democratic governments are hardly more predictable than dictatorships!) It’s been interesting to watch Netanyahu deal with the new Egyptian government (which itself enjoys newfound credibility with Hamas and others).

South America is getting progressively more predictable over the long term, with the gradual taming of FARC and the fading away of old hard-line communist threats. Post Cold War, the CIA thankfully no longer appears interested in overthrowing left-leaning leaders like Chavez (instead, we can wait until the political tide changes internally within Venezuela for them to rebalance their own affairs).

The Korean Peninsula has been quiet (at least, it terms of news) for a year or two…

I wonder, what are the chances of peaceful resolution of the current dispute in the South China Sea? Perhaps fairly high, given the culture and maturity of the people in South East Asia. Perhaps the current “tension” is partly posturing and positioning for the final resource-sharing deal…

…Which brings us onto another excellent point from that Reuters/RAND panel discussion (link above): China is poised for growth, if their new leaders are as smart as we think they are (I can’t understand why they’re not abandoning that idiotic, demographically suicidal one-child policy). How can we play a part in China’s growth? What do they need from us???

———

Back to the question of volatility. I’ve seen some pretty big waves in the stock market. I’m seeing the development of nine-monthly to three-yearly cycles in oil prices:
http://scotterb.wordpress.com/category/o il-crisis/

Alongside monthly swings in steel:
http://www.google.co.uk/finance?client=o b&q=NYSE:X

We may not be able to clearly foresee where the market is ultimately heading, but I’m predicting volatility in any case. Like using wave power to generate electricity, smart traders can tame these waves and make a profit. The volatility can be turned to our advantage, for the benefit of all…

So what safe bets are there in the current market? Which companies might do well, in any of the conditions that might emerge?
===
NYSE:LMT — Lockheed Martin Corporation
P/E: 10.48
New products coming to market — technical problems have largely been overcome.
Export driven, in the defense market (which always grows in volatile times).

Posted by matthewslyman | Report as abusive
 

…Of course, there are down-side risks even to Lockheed Martin, but what I’m saying here is that there’s upside potential in any currently foreseeable market scenario — even the completely wild “outside the box” cases.

Posted by matthewslyman | Report as abusive
 

p.s. Bernanke looks pretty tired in this picture. I think it’s dangerous to get congressional leaders/ Federal Reserve chairmen negotiating late into the night to force a deal through (this happens all too often these days). The political settlements that come out of those sorts of negotiations are never well thought out, and often don’t stand up to later congressional scrutiny. Psychologists have proven that tired people tend to gamble on rapid gains, rather than patiently negotiating a far better deal… I sincerely hope they won’t push this “fiscal cliff” negotiations right up against the deadline…

Posted by matthewslyman | Report as abusive
 

The Stimulus may not have worked as well as hoped but, then again, what would the alternatives have been?

Republicans will never cut Defense which gobbles up an outsized share of GDP to service activities of essentially zero economic value. They’ll also not want to cut taxes on the super-rich citing the bogus and thoroughly-discredited trickle-down theory.

Austerity, in general, doesn’t seem to work in deep recessions. The Europeans have pursued savage austerity measures and all they’ve accomplished is to write themselves off the world’s economic map.

Assuming one is not an inveterate denier of reason and of available experiential and scientific evidence (i.e. not an American right-winger): What would make anybody think that austerity might work any better in the USA?

Posted by jrpardinas | Report as abusive
 

Thinly Traded Optimism!

Some bad things coming down the pike real soon. Years from now most will wonder what happened to the social safety nets.
This is a real bad scene.

Posted by Laster | Report as abusive
 

Please, sir – send me a pair of the rose-clored glasses you are using or some of the wacky-tobacky you must be smoking. We have no agreement on a budget – good, bad or indifferent. The EU is a mess and since “globalization” is the name of the game, we are tied to its success or failure. No one knows the outcome of the Affordable Healthcare Act on small businesses, big businesses or individuals and it might not be a bed of roses for anyone. Big corporations such as Ford are increasing their activities in other countries, which does not bode well for our own factory workers and owners. Plus, just for good measure, home foreclosures are looming for more homeowners – the price of food will go up next year due to natural disasters such as the drouhgt – the unemployment number is still way above what it should be – more hunger and poverty in our own country – and why put your savings in a bank if you are going to get low interest while the banks use your money to pay obxcene bonuses and more “wars” on the horizon.

Of course we will muddle through the coming years – but at what cost?

Posted by AZreb | Report as abusive
 

@AZreb: “why put your savings in a bank if you are going to get low interest while the banks use your money to pay obscene bonuses and more “wars” on the horizon.” — That’s right (money in the bank is effectively being confiscated by central banks right now, in a globally competitive currency devaluation).

So what are you going to do with your savings then?

May I suggest investing in the shares of an “ethical fund”? You might also lose money that way, but over the medium to long term, this strategy is almost guaranteed to do better than money in the bank (especially under the economic circumstances you describe)…

Posted by matthewslyman | Report as abusive
 

Well this guy is wrong, the central bankers of world are plotting a 1 World Company Limited, where they implode every nation-state republic to consolidate and buy up everything, signing everyone onto their fraud derivatives.

Posted by AJ876 | Report as abusive
 

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