Recession in the US might have been avoided, but stock market glee will fade and March could bring the start of $1.2tn cuts. Negotiations ahead will be complicated by the inevitable arrival of the US at its $16.4tn debt ceiling, the legal cap on government borrowing…
It’s a triumph! The fiscal cliff has been avoided, US politicians have discovered the spirit of compromise and stock markets are booming. Happy new year.
Sadly, none of the above is accurate. First, the largest part of the cliff remains, since $1.2tn of spending cuts over a decade will start to be implemented from March if no further deal can be done. Second, it’s stretching credibility to conclude the bipartisan mood in Washington is softening; the compromise that will see income taxes rise slightly for the richest Americans is so modest that it could have been struck weeks ago without brinkmanship.
Third, the stock market glee requires context. A one-day rise of 2% or so in share prices is not be sniffed at but we’ve seen larger rallies greet overhyped “fixes” for the eurozone crisis.
These usually fade once investors reflect that the avoidance of an immediate calamity is not the same thing as a determined attempt by politicians to address an underlying debt problem. Reaction to the US fiscal fudge could follow the same script: near certain recession has been avoided, but that’s not much to shout about.
So fans of clifftop dramas should settle back and prepare for another episode as the March deadline approaches. Indeed, Barack Obama barely paused before warning Republicans that they’ve “got another thing coming” if they believe spending cuts alone will be the focus of the next round of talks.
In other words, even the tax element of the tax-and-spending debate has not been settled definitively.
What’s more, negotiations ahead will be further complicated by the inevitable arrival of the US at its $16.4tn debt ceiling, the legal cap on government borrowing.
The new year deal did not contain a provision for an increase – the clearest illustration of how compromise was achieved only by ignoring the tougher issues.
It’s a case of out of the frying pan and into the fire, concluded John Ashworth, senior economist at the thinktank Capital Economics. “Given the cantankerous nature of the negotiations over the past 10 days, it is now very possible that we will see another standoff over those spending cuts and the debt ceiling that leads to a shutdown of the federal government by late February or early March,” he predicts.
That worry, it hardly needs saying, is unlikely to prompt cash-rich US companies to decide that this is the moment to increase investment and hire more workers.
Consumers will also be nervous; many now face immediate cuts in their disposable incomes because the less-heralded element of the deal was the agreement not to extend the temporary reduction in payroll taxes, the equivalent of UK national insurance contributions. For those earning $50,000 a year, it means a $1,000 cut in income.
Surely, it might be said, the political stakes are now so high and the confidence of US consumers so fragile, that a so-called “grand bargain” on tax and spending can be thrashed out at the second attempt. Don’t bet on it.
The missing ingredient in this drama is alarm in financial markets. The US can still borrow for 10 years at less than 2% (partly because the US Federal Reserve is buying US debt and other assets at a rate of $85bn a month), the dollar is relatively stable and the US economy is still growing.
As Richard Lewis, at the fund manager Fidelity Worldwide, puts it: “We are unlikely to see much change in behaviour unless or until serious dollar weakness calls time on Washington shenanigans.”
If the muddle-through option is still on the table in March – and it probably will be – don’t be surprised if the politicians again grab it.
guardian.co.uk © Guardian News & Media Limited 2010
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Bubbles, tulips, booms and busts: same story, different dates
By: All Things Forex
Published December 24, 2012, in Forex News
Salutary lessons can be learned from past financial crises. Boom-bust events tend to follow a classic arc: a tale with a grain of truth in it is seized on and peddled to credulous investors by an unholy alliance of greedy optimists and swindlers…
Perhaps one of the most cheering moments of 2012 was when Sir Mervyn King summoned Barclays chairman Marcus Agius and told him that after the appalling revelations about Libor-fixing, the bank’s chief executive Bob Diamond would have to go – or, as the Sun headline had it: “Sign on, You Crazy Diamond.”
Both King’s high moral tone and the headline-writers’ cheek seemed refreshingly modern – but for anyone wandering the damp streets of London with half an hour or so to kill during this festive season, a corner of the British Museum offers a healthy dose of historical perspective on these and many other events over the past torrid five years.
Tucked away in Room 69a, just around the corner from a display of Roman pottery, is a small temporary exhibition dedicated to “Bubbles and Bankruptcy: Financial Crises in Britain Since 1700″.
One exhibit is a cartoon from Punch, published after the Bank of England bailed out Barings (yes, that Barings) in 1890. A stiff-looking woman with an apron made of banknotes – the Old Lady of Threadneedle Street – crossly hands out cash to a queue of cowed financiers, saying: “You’ve Got Yourself into a Nice Mess With Your ‘Speculation’!” It must be reassuring for King to regard himself as today’s incarnation of that starchy matron.
It’s also salutary – and somehow comforting – to see artifacts from the events of the recent crash boxed up in glass cases as historical exhibits: an empty champagne bottle from the flotation of the ill-fated Northern Rock; a Steve Bell cartoon of ravenous fat cats having their toenails gingerly clipped by George Osborne; and a handful of credit cards from the bailed-out banks.
These now-poignant objects sit alongside exhibits illustrating a bevy of other investment frenzies and financial crises: the South Sea bubble, tulip mania and the railway investment boom – and bust – of the mid-19th century.
Apart from the facile (but nonetheless true) insight that there’s nothing new under the sun, the exhibition holds one or two other lessons for today’s policymakers.
The first is that these boom-bust events tend to follow a classic arc: a tale with a grain of truth in it is seized on and peddled to credulous investors by an unholy alliance of greedy optimists and downright swindlers.
An engraving in one case shows a certain Gregor MacGregor, a dashing-looking Scottish general who went off to Latin America and came back claiming to have discovered a lush territory called Poyais. He raised an extraordinary £200,000 – detailed in minute letters on a loan document on display – from investors convinced by the tale of vast, untapped riches in a faraway colony.
Unfortunately for MacGregor and the hundreds of would-be settlers who believed his tale and boldly set out across the Atlantic from Leith, Poyais turned out to be largely uninhabitable, and his backers lost their money.
Anyone reading the wild predictions about the potential riches to be made from exploiting shale gas deposits in the US should recognise the ring of a story so compelling that, given enough time, it could easily become a vast investment bubble. Fortunes will be made, but also lost.
A share certificate from the Sheffield and Retford Bank is a reminder that when Britain’s railways arrived, they certainly transformed the economy and created millionaires; but many of the early firms set up to drive brand-new lines across great tracts of the country went bust. The Sheffield and Retford made many loans to these companies. When they defaulted, the bank failed.
Some of the items on display also highlight the way that Britain’s political and social elites have always been prone to being seduced by smooth-talking investors. An 18th-century ballad, the Bubblers Medley, printed at the time of the South Sea crash, talks of the “Stars and Garters” tempted into the scheme alongside “harlots” from Drury Lane.
However, Gordon Brown and Alistair Darling should note that while the then chancellor of the exchequer, John Aislabie, did buy shares in the South Sea company, he shrewdly sold them before the crash – as visitors can see from the bill with his signature – making them over to some more gullible citizen.
When veteran bank-watcher Sir Donald Cruickshank appeared before the parliamentary commission on banking standards recently, he also called for some historical perspective, urging its members to immerse themselves in a copy of Anthony Trollope’s The Way We Live Now.
Reading the rip-roaring adventures of shady financier Augustus Melmotte, who takes London by storm with his eye-watering wealth, drawing politicians and aristocrats into his net, it’s hard not to think of the charming chancers in charge of Britain’s banks, who convinced us (and themselves) they were financial geniuses before the crisis – and were revealed to be self-deluded at best.
True, Melmotte certainly wouldn’t resort to the vulgar “done … for you big boy” tone of the emails that surfaced in the Barclays Libor settlement, but the sentiment is similar. Or, as Cruickshank put it: “I don’t think bankers are any worse than they have been before: they always calibrate off society … We have been here before.”
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