A Holiday Gift Idea, Worth Sharing

The prevailing mood seems to reflect that the end of the world, as we have known it, is near. Wherever I turn, I hear people groaning:

Europe is headed for bankruptcy;

China has a new leader coming and is stepping on its brakes;

the U.S. is in a death spiral of gridlock;

and the global economy is doomed to decades of stagnation!
There is, of course, some truth in all those observations and the sad overall conclusion that follows is both difficult to swallow and to discredit. However, if we in America seize the opportunity that is upon us, we can turn coming events to our advantage and actually emerge ahead in the global economic game in the relatively near future. As you will see, there is another side to each of those points and the overall conclusion.

Europe has been skating on the thin ice that has kept Greece afloat for far too long. The core of that problem was that even though the Eurozone created a common currency and a monetary union, they deliberately delayed creating a fiscal union with a common euro-wide budget (as we have in the United States) because they simply could not have agreed on that at the time Euroland was created about 15 years ago. Consequently, Greece went completely uncontrolled fiscally and fell deeper and deeper into a hole by borrowing to cover their deficits from unthinking European banks for far too long. The strong European nations have been jockeying for most of this year to find a solution, which will be overall expensive, and fall heavily on the richer countries. They are slowly finding a solution; the failure to do so likely would be far more expensive to everyone. Though it is impossible to accurately predict timing and outcomes, it really is at least a 70/30 bet that Europe will get its act together in 2012.

China is inscrutable in many ways. The facts that are clear are: China will not kill the goose that lays its golden eggs, which is largely the United States of consumers; China will give ground slowly on the revaluation of its currency versus the dollar, but it will continue to move in the direction of loosening its controls; China will be careful to avoid excessive economic and financial overheating, which could lead to bubbles and all the adverse consequences that they have seen follow in the advanced market economies; and lastly China is engaged in a generation change of national leadership, at the top, and as in previous changes in the past, they deliberately slowed growth to maintain political stability. China is maturing in modern socioeconomic terms and will continue to be a vitally significant leg under the world economy.

The United States, in a largely different way from Europe, but with some common elements, has been struggling with the political challenges of reining in its fiscal deficits for much of the past year. The pressure has come entirely from within the U.S. caused by self-imposed debt limits and political disputes about how to reduce deficits. The incontrovertible evidence of the pressure coming from within is that the dollar and U.S. bonds have continued throughout to have strong demand from abroad, indicating that the United States has some reasonable period of time ahead to work out a solution to its deficit problems, because financial markets are well known to anticipate events for at least two years ahead.

I do not suggest for even a second that we as a nation can now suddenly breathe a sigh of relief and go back to our profligate ways. Basically we have 12 months to do something substantial and real. By good luck, that 12-month period includes a presidential election which will amount to a national referendum on competing plans for dealing with the deficit issues. Also by good luck, the famous Bush tax cuts of 2002 expire on December 31, 2012. By themselves, the expiration of those cuts would contribute to well over $3 trillion in deficit reduction over the following decade. President Obama will be president, regardless of the outcome of the 2012 election, when those tax cuts are due to expire. (His first term expires on January 20 2013 and until then he has all the powers of the presidency, including vetoes, even if he fails to gain a second term.)

If and when those tax cuts expire, the political burden of reestablishing those cuts, or some other new tax plan, is significantly different from the political calculus of simply letting them expire, which requires no action unless a veto-proof majority in both houses of Congress has previously passed an extension or new tax plan before January 20, 2013, which, regardless of the election, is almost impossible. That fact alone gives the president, primarily because of his veto power, and the Democrats in Congress a powerful negotiating tool in reaching a compromise deficit plan before that drop dead date occurs.

Similarly, the sequester plans to cut defense and social benefits, currently in place to begin on January 1, 2013, also bring strong pressure to bear on both Democrats and Republicans to resolve their differences before the end of 2012 and perhaps even before the presidential election, depending on what the polls suggest as the year proceeds.

What does all that political speculation reveal? The answer is that unless the whole nation has put their heads in the sand or gone crazy, (yes, a not universally discounted possibility) before the end of 2012, there should be a definitive plan to seriously address our deficit issues. And, there is something like a 90/10 chance that the currency and bond markets will remain positive about the outlook for the U.S. economy.

All of the above can be seen to add up to a new vision of the future by the end of 2012. Of course, much will depend upon the leadership throughout the world. Mrs. Merkel in Germany has been showing real strength of character, vision and confidence. Though not too much is known about the new Chinese leaders, early signs are promising. The United States may be the biggest question, but big challenges often bring out the very best in people and Obama, and whomever the Republicans come up with, will surely be called on to stretch their leadership skills to find the right policies as well as sell them to the American public.

Europe should be beginning to emerge by then from its travails with a new fiscal union creating new discipline in conjunction with the European Central Bank’s support of the Euro. The United States should have the bulk of its deficit problems dealt with and the beginnings of a real recovery from the 2008 recession in sight. And China will have a new leader who should be finding his accelerator.

Overall, if the above assessments are anywhere near correct, there should be some clearer sailing ahead and doomsday thinking will have to wait again for another confused period to regain its adherents.

March on, mes amis!