Thursday, September 6, 2012

As Obama speaks

Here are a few random thoughts on the upcoming U.S. presidential election and the economic situation.

Mitt Romney seems to be holding his own in the polls, and his campaign seems to have some momentum. He has shown himself to be steadier and more astute than John McCain four years ago (for example, in his choice of a vice presidential running mate). Also, I have heard a lot about younger voters losing enthusiasm for the President and being less likely to vote than older voters are.

And then there are the one million or so undecided voters in swing states whom commentators believe will determine the election outcome. I would not be surprised if all Romney has to do to win most of them over is to continue to look like a competent economic manager in an economic environment which increasingly looks like it desperately needs just that. (A couple of days ago it was announced that U.S. manufacturing contracted for a third straight month in August.)

Some are looking to Federal Reserve Board Chairman Ben Bernanke for a solution, but his policies are increasingly being questioned. Many economists and bankers are talking about a fundamental structural shift having occurred in the U.S. economy.

At the recent Jackson Hole meeting, James Bullard (St Louis Fed president) suggested that the sluggish recovery and persistent unemployment stem not so much from cyclical weaknesses as from longer-term structural factors. Other Fed district bank presidents - and many economists - agree, doubting the wisdom of further easing action on the part of the Federal Reserve.

The Federal Reserve Bank of Dallas recently published a paper by the former chief economist at the Bank of International Settlements, William White, which warns of the unintended consequences of ultra easy monetary policy. White sees the economy as a complex adaptive system which cannot be readily modelled. He believes that cheap credit leads to malinvestment and has a pernicious effect on the financial sector, essentially corrupting markets.*

Governments and the financial sector will resist tightening but the current easy money environment is not sustainable. The long-term risks include hyperinflation and deflation.

On the fiscal front, President Obama has, as I understand it, no long-term plan for dealing with the national debt. (Under his proposals, the debt would stabilize and then start to rise again after ten years.) It's clear, at least, that the Republicans take the debt issue more seriously than the Obama team.

The national debt constitutes a threat to America's long-term economic future and geo-political standing, and the problem seems all the more intractable given the alarming degree of political polarization (and social fragmentation?).

I am not an American so I can't speak with any authority on this - and I hesitate to speak at all on these matters - but it certainly seems that the country is seriously divided, and President Obama has been contributing to this with his class-oriented rhetoric. (I find this mildly shocking, actually, coming from the head of state of an advanced country.)

As I write this, President Obama is giving his acceptance speech at the Democratic National Convention. I am not tuned in but will check news reports before posting, just to make sure nothing unexpected happened or was said. Suspect that many in the audience will be cheering like mad but secretly wondering how it all could have gone so badly wrong.


* Dallas Fed president, Richard Fisher, who has openly supported White's views, is a former Democratic Senate candidate and worked for the Clinton administration. (He has an interesting background. Born in L.A. to an Australian father and a South African mother (of Norwegian descent), he grew up mainly in Mexico and struggled financially before completing degrees at Harvard, Oxford and Stanford.)