I think the US is about to start on a long season of unnaccustomed criticsm, bad pr, isolation, and pain.
What began a month or so ago as a split with Germany over what should be the financial response to the on-going bank crisis is now developing into something more serious and damaging.
Back on 19th May I wrote ‘Things get Political and Nasty’. In it I suggested that Germany had just contested America’s assumption that the US should decide what response everyone should make to the Bank crisis. I said Germany had just broken ranks and France and GB would have to decide where their loyalties lay.
They have. Both have chosen Europe. The US is already in trouble and it will get worse at and after the G20.
Basically the US is finding itself publically isolated. And being seen to be isoalted is going to make following its chosen financial policy of no stimulus withdrawal, more bail outs and no austerity measures, harder and harder to defend and follow, as time goes by. Starting at the G20.
At the G20 everyone is going to be asked, well what have you brought to the party.
China will say, ‘Well we have softened our currency’s peg to the dollar. So, we don’t want to hear any more about it from anyone.’
Europe will say, ‘We have set up a huge fund to buy up bad debts from both banks and nations, but in respose to the bond market’s worries about our sovereign debt levels in Europe, we are now, from Hungary to Ireland, Greece to Germany, bringing in austerity measures to cut our debt levels.’
The UK will say, ‘ We too have back stopped our banking system and taken on debts to do so like Europe, but we too are bringing in draconian austerity measures to bring down our debts in short order.’
Japan will say, ‘We are sticking with the stimulate and bail policy which has served us so well for the last two dynamic decades. But whatever you think of us, just remember we have bought all of our own debt so no one is exposed to any of our bad debts but us. Ours is a noble national suicide pact. Admire our tenacity and our blind leadership!’
Then everyone will turn the the US and ask, ‘What about you Mr Obama?’ And he will say, ‘Well we have bailed out our banks massively. We have run huge stimulus programmes for cars and housing, tried direct money give-aways to consumers and tax breaks on housing and bought up the entire mortgage market via Fannie and Freddie both of which are now more toxic and unsalvageable than Chernobyl AND we have run up a deficit and debt of over10 Trillion dollars doing it all. And what is more we have NO policy whatsoever for austeriy or debt reduction. In fact we are more than likely going to have to bail out our banks and run a stimulus again later this year or early next.
So bad is our situation that Peter Orszag, one of our top budget and deficit officials is resigning AND The House of Representatives is planning to NOT pass a budget in 2010. The House always passes a budget. Only this year we can’t until after we discuss deficit reduction plans. Which won’t be until December. In other words our plan is to NOT even talk about deficit reduction until after the mid term elections. Because to do it before, would mean we would get slaughtered.’
Now this is BAD Pr.
The reason the US is so furious with Germany is because by tzking a different and austerity path, it exposes America. When everyone was doing the same thing no one looked bad. There was no light and shade. But now that Europe and GB have started to agressively reduce debt levels it exposes the US situation for what it is. A vast and balooning debt out of control and with NO political will nor ability, to do anything about it.
And it gets worse for the US. Amercia will have to inflate its stock markets all the way up to the mid-terms. But this is getting more diffcult, risky and costly. In case you hadn’t noticed the DOW has lost a lot of its pulling power. A hard bought late afternoon rally is no longer a guarentee that either Asia or Europe will carry the momentum. This is a problem.
There is a growing worry in the US governemtn and in Wall Street, that too many people in too many places are beginning to give credence to the idea that the Dow is manipulated and does not offer any guage of anything real. This too is very bad Pr. The kind of bad pr that just has to be stopped. Only no one has any idea how. The best bet is to go for a monster rally, that squeezes all those with short positions (Those betting on the markets going down) and try to force compliance with the ‘recovery story, even in the absence of belief in it. A hard one to pull off. I think they will fail. But I also think they will try. ‘They’, not being some mysterious cabal, but the Fed and the primary big banks and HFC dealers.
The G20 will be uncomfortable for the US. They will be seen as the world heavy weight who looks out of shape, old and flat footed. But the G20 is just the pre-fight press conference. It will after wards that Obama and Wall Street are going to have to be careful. Obama is losing international standing because he is being seen as weak at home. Verging on the lame duck. He should be looking at austerity now as Europe and GB are doing. But he can’t politically. He is being seen as desperate internationally because he is looking isoalted, losing his friends and trying to bully those who may be doing better at reducing debt.
It doesn’t matter if none of this is true ( though I think it is, obviojsly) because what matters at the moment is perceptions. And in the minds of a growing number of people, the US is not doing well.
Small things add up. Take the fact the the world’s largest IPO, for China’s Ag bank, is going to attract $2.8 billion of investment from Qatar and about $1 billion form Kuwait. Now the fact that the whole IPO may have to be scaled back from its original size because interst from Asian might not be all it could be – that shouldd be bad pr for China. Instead the fact that Ag Bank’s IPO will get huge investment from the Gulf States will be good pr for them and simultaneously bad pr for the US. These are the US’s allies. The US’s oil suppliers. And here they are buying Chinese debts NOT US ones. Now, its not Citi that the Oil nations are investing in its Chinese banks.
Unemployment in the US is not far from what it is in Spain. I am using the U^ measure which IS the real figure of people who want work and can’t get it. Existing house sales dropped 2.2%. And this is supposed to be IN recovery and after a long stimulus. And to top it all off – when the US points to Europes delinquent debtor nations and the problems they are going to create, someone is going to point to the looming State deficits anddebts and massive budget short falls which are going to come to a head starting with the nes school year in Spetember.
Its a new world. And one the US is NOT ready for.
Too real! I might have to go out and buy a comic.
Seriously though, unless Wall Street burns all the IOUs and derivatives thereof, there seems little hope for our friendly nuclear neighbour.
10 trillion dollars! One needs to re-invent what money is to pay a debt of this magnitude, but the banks have already tried that. Haven't they?
It's actually more than 10 Trillion BUT I want to make it clear this figure isn't just the cost of the bank crisis. It is the whole US debt. That said, just the cost of the Banking crisis on its own is several Trillions.
Hi Golem,
A potentially daft question..but aren't there differencies showing between US and IMF strategies, i.e. US – keep toking on the cash pipe, IMF – foaming mouthed austerity.
Is that right and if so, why would there be divergance from master to mouthpiece?
If I am wrong or over simplistic in the assumptions, well I caveated that with the opening words!
Thanks,
Ianu.
ianu,
I think it's an intersting question. My own take on it is that the IMF is foaming about other people, the people it ot its master choses, adopting austerity. What neither the IMF nor Washington expexted or wanted was for people other than those they had chosen, to decide they too would go for austerity.
Greece and Portugal – people that wouldn't get an invitation to dinner basically, they should have IMF directed austerity. 'Oneself', naturally, and others one relies on for trade and votes should not have austerity.
That they have not stuck to the Washington plan an gone 'off-piste' is just too, too rude.
That does make sense…but (and this is where my ignorance is cruelly exposed!) aren't the IMF scaring us all into austerity measures, UK included, which would be contradictory to the preferred US approach for us?
I did a *very quick* search for IMF pronouncments for the UK outlook and what we should be doing, but could only find eurozone pronouncments, which (if there are no UK specific prescriptions) would back up what you're saying. Maybe the IMF are being willfully misinterpreted by our fine leaders to scare us into acquiesence.
Hope that makes something approaching sense..
No I think you are right Ian there are holes in my argument, you could drive a bus through. I am grasping to understand the contradictions like everyone else.
The IMF is always, constitutionally in favour of cuts. They are also usually on the same page as the US. So, could it be that the IMF doesn't really like Obama? Possible. Doesn't seem like a good explanation of much though.
I think the reason things don't make logical sense is because the IMF and the US along with other leaders don't themselves quite know what they think or want. Maybe there is just no clear logic out there.
The IMF doesn't like massive deficits and debts normally. But it is willing to be part of a Greek bail out and to issue its own debts to fund it.
The IMF doesn't mind bailing out banks and the debts that entails. AS LONG AS, at the same time cuts/austerity measures are made to public spending. The IMF have always regarded spending on public and poor as a sign of weakness.
So, where does this leave us mere mortals? Well I think the US and the IMF are peeved at Euro style bank regulations and bank taxes, and bans on short selling. They are angry that Europe is taking a lead in cost cutting that exposes the US as lagging behind. Fine if we all do it together at a pace dictated by Washington. NOT fine if Germany sets a pace Washington doesn't like.
How's that? Are we getting anywhere?
I feel that somewhere in what we've written there is an important kernal of truth even if we haven't quite got it clear yet. What do you think?
I agree with you Golem. I guess that there is more common ground than disagreement between the two, but to expect the exact same message would not be realistic. You can see the UN trying to get uppity with the US at times, doesn't mean that ultimatly, they don't do its bidding.
As to the slight divergence between the US and the IMF, I guess that the Obama administration may be off script, or that generally confusion reigns, neither knows how to react and so don't have a unified message at the moment. Which is I think paraphrasing what you said.
Who knows though, it's a diversion from the main thrust of what can be discerned at the moment. (Thanks to you, in my case).
Ianu.