I am hoping I have misread the situation, but from the distant Island where I sit, it appears we have been treated to the unedifying spectacle of Washington politicians using a principle of unintended but inevitable self harm to protect tribal constituencies and thereby endanger what’s left of the US economy. As if that was not enough, they also have adopted a means which is virtually guaranteed to take much of the Western World with it. In 1971, John Connally, at the time America’s Treasury Secretary, told the international markets : “The dollar is our currency but it is your problem.” With two thirds of the world’s investment trade in US dollars and 99% of this going through Wall Street we can now see what he meant. All those economies in the West that need to borrow (ie virtually the lot) are now looking extremely nervously at the US to see what Washington is going to come up with next.
First can I check out if I have my facts right.
I understood that Bill Clinton despite his shonky personal life, left the White House with a National zero debt deficit. He had achieved that in part by insisting on sharing the tax burdens between both rich and poor and attempting as best he could to serve the interests of Middle America. This may have been a slight problem for the wealthy classes and corporations in the US but was good news for the West in general because it made the American Bonds very secure in their triple A rating and ensured stability for the rest of the nations who needed a massive secure international fund to borrow against. Stable economies in the world scene are presumably good for the US economy as well in that they provide the trading partners and allies.
Clinton was followed by George W Bush who despite his renowned lack of both intelligence and international understanding turned out to be a very cunning constituency politician. His main constituency of the rich and the powerful via the corporates rapidly destroyed the small National surplus as they moved to secure their fortunes. With virtually no interest in fate of the poor, US industries were closed down on US soil and cheaper manufacturing was chosen overseas. The desultory trickle down streams were shut off one by one and the gap between rich and poor grew at an accelerating pace. Prior to Enron and the Sub Prime mortgage crash etc, Wall Street had a field day. Small or even non-existent tax on investment gains encouraged bubble after bubble whereby paper exchanged hands many times without increase in tangible product, while banks were packaging and repackaging parcels of debt and on-selling this for amazing profit. With the gold standard largely defunct and US based manufacturing proportionately smaller, US bonds were sold overseas in increasing proportion. The AAA rating of those bonds ensured that the predominantly Asian investors took a larger and larger share of US wealth.
Obama has tried to return to exactly the same principles that Clinton used to bail out the US economy last time. The Republican influence in Congress has been blocking him by insisting that Washington returns to exactly the same form of reasoning that George Bush used to protect his constituency (now reformed as the Tea Party). Perhaps George Bush was right and his turning zero debt into a $9 trillion debt in the space of 8 years was a minor oversight and a small price to pay for ensuring the viability of the real constituency of the corporations. I know when women got the vote but the date for the advent of the voting influence of the “corporate personhoods” is harder to nail.
That the Pareto Principle (of ensuring help for one party does not create harm for others) is being ignored almost goes without saying. Constituency appeasement means by definition you look after the direct interests of the group who support you.
There is however a consequence that is overlooked by the politicians. If the collateral damage of those harmed builds to the point where you discover their future is enmeshed with yours, self harm inevitably follows. For those relieved the worst is over it should be remembered that Moody’s has placed the US on negative credit watch, explaining that even the negotiated agreements to make spending cuts are yet to be turned into any sort of reality. Given the vested interests and powerful lobby groups it is hard to see substantial cuts for example being made in the military sector. About the only thing the US has in its favour is the size of its economy which constrains the rating agencies from taking the sort of action it takes with smaller nations. For example NZ had its rating reduced because its gross debt to GDP ratio is 32%. The US ratio is now a staggering 96%. The mystery to independent observers is not that Congress has taken so long to authorise an increase in the debt, but that the Credit agencies have delayed what looks to everyone else to be the inevitable.
The strange blind-spot in the US economy is that of taxation. Ignoring the blindingly obvious need to tax those who are holding more money than they can possibly use in a single lifetime to reduce the colossal and unacceptable debt is one thing, but if the consequence of not using this source strikes a death blow to principal investments, based on such matters as the confidence of the Share market and the on-going security of the triple A rating for investment bonds, then the individual loss to the wallets of the rich is bound to be infinitely greater than any direct tax. To insist on the right not to lose an additional $1000 in tax when even a rather dim Wall Street banker can see the alternative is taking a million dollar bath in investment losses is nothing if not curious. One consequence of the now increasingly likely move to down-grade the AAA rating of the US bonds to AA is that there would be a massive tightening of credit conditions as companies and economies holding US bonds will then be required to buy more bonds to retain the equivalent security. The other consequence for massive damage is that Asian markets would have far less reason to value US bonds and would take their investment elsewhere. This would be a great boost for countries with physical assets eg Australia with its gigantic mining assets. I guess the only ones who will be surprised when the stock markets tumble hitting the very folk Congress was trying to protect will be the politicians and the Tea Party gurus. If Sarah Palin is one of the minds behind the current Tea Party stance to protect their constituency by blocking the Obama tax suggestion, in retrospect this may endanger any future possibility of her winning the Nobel Prize in economics.