Political Games Trump Economic Reason

When President Obama and Speaker of the House of Representatives John Boehner began negotiations on raising the debt ceiling, they knew their work was under close scrutiny, certainly from the markets and especially from the major rating agencies, like Standard & Poor’s and Moody’s. It would be naive to think that politicians of their caliber would not have received such attention.

On the contrary, we bet they certainly did not foresee the crisis of confidence the markets have experienced in recent days, especially this last Monday (black), much less the speed with which such a scenario came true. Most likely, they thought that the problems concerning the European sovereign debt were so ubiquitous, they would obscure, with the markets, the political impasse we are seeing in Washington, and that the standoff could go on without great disturbance.

Above all, they had no idea that the political game in which they had engaged would become a historic moment, one of the first in American history, despite the conclusion of an agreement in Congress on the eve of the deadline.

The markets, as we have already seen in the past, sometimes tolerate deviations, large or small, but never when it comes to decision making, because the latter is at the heart of the action of the day, if not the action of the moment. This episode of indecision, described by Mr. Obama as uncertainty, is largely behind the current stock market turmoil, and it reminds us of the price we pay when the temptation of political games trumps economic reason.

All the Ingredients

Over several months, signals became apparent, and the convergence of several indicators suggested that the economic situation in the world, especially in the United States, was far from rosy.

We began with the situation in Europe that did not bode well, especially in the case of Greece, which experienced a stalemate in the wake of popular protests against the program of reformed budgets proposed budget by Prime Minister George Papandreou.

Then, the risk that the problems in Greece would extend, first to countries like Spain, also grappling with a wave of social protests, and then to Portugal and Ireland, which suffered in early July significant cuts from Moody’s. Finally, the specter of contagion reached Italy, a much larger player, which made ​​investors’ concerns much more significant: The economy of Italy is in fact equal to that of Greece, Spain, Portugal, and Ireland, combined.

In addition, indicators of employment and consumption in the United States continued to present a weak, if not anemic, report. This assessment was confirmed this summer by the publication, among others, of the ISM manufacturing index, which returned to a level comparable to that of two years ago. In addition, job creation, even if it progresses, remains very slow and hardly “regenerative,” when compared to losses of the last three years.

Finally, the U.S. debt, which stood at less than 60 percent of the GDP 10 years ago, now comprises almost 100 percent of the GDP, at $14.3 trillion.

In such a context, with the budgetary hesitations we have seen in recent months, the least we can say is that all the ingredients were present and the stage was set for a scenario of doubt, mistrust, and uncertainty, just as we experienced this week.

An Ideological and Political “War”

What is striking about this war in Washington, however, is that the base is ideological and political. On one side, Barack Obama, who wants to wrest an agreement at any price, estimating that he cannot afford the luxury of starting his next presidential campaign under the sign of failure and uncertainty. And on the other, a block of Republicans, including the tea party, who see this battle as a great opportunity to position themselves for the upcoming presidential elections.

What is even more fascinating is that if we took into account the political “games” and considered the fiscal situation to be simply American, we would be struck by this powerful paradox:

The U.S. fares poorly because of its considerable debt (by the way, that of Italy has now reached about 120 percent of its GDP, and Japan exceeds 160 percent), its recurring deficits, and the slow recovery of its declining competitiveness, when compared with emerging economies.

But it is also one of the least taxed in the world (as Obama has tried to sell to the Republicans without much success), and its tax base is barely visible when compared to countries like Canada, France, or Britain.

So, Obama’s proposals — to raise taxes, while proceeding, at the same time, with spending cuts — would, indeed, have constituted a balanced solution. But the intransigence of the Republicans, especially the radicals, led to an agreement that was unlikely to have passed the test of the markets.

A Crisis, Different from 2008, but Now …

And now, what to remember? First, the current crisis, even if it reminds us of 2008, is completely different: Its causes and actors are not of the same nature. But will its consequences be different? Only time will tell, once the accounts have been settled.

Meanwhile, skeptics and “critics” will say it is one crisis among others, a sign of a poorly-functioning system, and they will demand a strengthening of financial regulation. The opportunistic “investors,” for their part, will argue that stock market correction and a purging of the system are necessities, all the while taking advantage of this period of volatility for good business.

Finally, the resigned, “You and I,” will spend the coming months hoping that our retirement portfolio will be “saved,” until the next time!