Nobody should be surprised that Wall Street hit new records this week. After all, the U.S. has just witnessed the end of a sensational hostage crisis that was threatening national security and undermining economic confidence — and even more sensationally, this was the second such crisis in two months.
The U.S. budget battle was always likely to end in a Republican defeat and a rout for Tea Party firebrands; but the outcome has turned out to be even more dramatic: an unconditional surrender, instead of the negotiated ceasefire suggested here two weeks ago. Trying to spot historic turning points in real time is always risky, but the scale of this debacle suggests that U.S. politics and economic policy really will be transformed in at least four important ways.
So far, the battle of the budget in Washington is playing out roughly as expected. While a government shutdown has theoretically been ordered, nothing much has really happened, all the functions of government deemed essential have continued and financial markets have simply yawned. The only real difference between the tragicomedy now unfolding on Capitol Hill and the scenario outlined here last week has been in timing. I had suggested that the House Republicans would give way almost immediately on the budget, if only to keep some of their powder dry for a second, though equally hopeless, battle over the Treasury debt limit. Instead, it now looks like President Obama may succeed in rolling the two issues into one and forcing the Republicans to capitulate on both simultaneously.
Now that the worldwide panic over U.S. monetary policy has subsided, Washington is brewing another storm in a teacup: the budget and Obamacare battle that reaches a climax next Monday, followed by the debt limit vote required to prevent a mid-October Treasury default. The ultimate outcome of these crises is a foregone conclusion. As Senator John McCain told the press this week: “We will end up not shutting down the government and not de-funding Obamacare.” He could surely have added that a Treasury default is also out of the question.
So it was, after all, a storm in a teacup. Financial markets around the world have been going through a series of “taper tantrums” since May 21, when Ben Bernanke first mentioned the idea of gradually reducing or “tapering” the Federal Reserve Board’s monetary expansion. Throughout these four months, I have argued in this column that financial markets had grossly exaggerated or completely misunderstood the significance of Bernanke’s comments. This has turned out to be the case, as evidenced by the huge moves in share prices, currencies and bonds on Wednesday after the Fed announced that it would do exactly what Bernanke had suggested all along — namely, nothing.
The Davos economic forum, held every winter in the Swiss Alps, allows its participants to look down at the world from above: topographically because of the high-altitude location, but also symbolically, because of the high incomes, high status or high-minded rhetoric that characterize the jet-setting global elite dubbed “Davos Man” by the American political scientist, Samuel Huntington. This week, however, I discovered a sub-species of Davos Man with a very different perspective. At the “summer Davos” that the World Economic Forum now organizes every year in China, participants look at the world sideways, from the East instead of down. The shift in viewpoint is striking, even for people who travel frequently to Asia, as I do, but rarely experience such total immersion in the eastern elite’s hopes and fears.
The prospect of Congressional approval for a U.S. attack on Syria is probably good news for the world economy and financial markets, since the impact on the oil price of an intense but strictly time-limited military action is likely to be a classic case of “buy on the rumor and sell on the news.” History suggests that the moment U.S. bombs start raining down on Syria, oil prices will pull back and stock markets around the world will rise. But what about the bigger picture? How will a U.S. bombing campaign affect the stability of the Middle East and global geopolitics?
As the summer holidays wind down, the world is again moving into the financial Hurricane Season, which coincides uncannily with the meteorological hurricane season in the North Atlantic every autumn. Most great financial crises have occurred in the six weeks from late August to mid-October, for reasons I discussed in this column last September.
On the way to my holiday in Italy this year, I had an epiphany about the state of the world economy. I stopped for lunch in the truly miraculous Piazza dei Miracoli in Pisa, where Galileo Galilei is said to have dropped cannon-balls from the Leaning Tower to test his theories of motion. A few years later, Galileo invented the telescope to amass the detailed astronomical observations that were needed to prove beyond reasonable doubt the heliocentric theory of the universe — the idea that the earth revolves around the sun and not the other way round, as the Bible implied. Galileo was famously tried by the Inquisition for this heresy and decided to recant, presumably inspired by what happened to his fellow-mathematician Giordano Bruno, who was burnt at the stake for similar ideas. But after mechanically recanting, Galileo muttered under his breath the rebellious phrase for which he is still renowned: eppur si muove — “and yet it moves.”