The US Government’s debt ceiling has been one of the most talked about themes in financial and non-financial circles for weeks. The un-parallelled levels of debt that have been created, almost beggar belief at more than $17trillion. A staggering figure and here is the question.
What exactly does the US have to show for this vast amount of debt?
The somewhat cheeky answer is a massive amount of repayments, or the reputational damage and fall from grace of electing not to pay and ceasing to be the leaders of the free world. Purchases of Treasuries are paper creations and while I am clearly a fan of financial markets and the opportunities they create, there are as yet unexplored, antiquated alternatives.
A tale of the rich and the poor relations
Just as in trading, we look at our charts to see what has happened in the past, in order to gauge what is possible for the future, maybe we need to look at this from an economic history perspective.
In terms of the background, lets go back in time to the 1970s and to the UK, where I grew up. The discovery of the black gold – North Sea Oil – certainly fuelled the economic boom of the 1980s, but billions ($400bn plus) were wasted – particularly supporting an overweight welfare system and unemployment. Quick money – easy come, easy go brings with it very little to show other than what could have been. While Britain was undergoing huge structural reforms following years of socialist degradation, there was a very large opportunity missed – something that the current UK Government would do well to note, as they face the same opportunities with shale gas.
By contrast, Norway took a different route, instead channelling its windfall gains into a sovereign fund – currently worth $485bn and likely to be $1trn within a generation. Such is the scale of this, little old Norway and its sovereign fund owns an estimated 1% of world equity – a colossal stake for such a small nation. Rules such as not spending more than 4% of the fund’s capital in any given year, provides one of a number of steps in place to make sure that future generations inherit a healthy economy – a long term, better society for its citizens.
Great, but what about the US?
One question is what does buying bonds actually do? Hard to answer, I am afraid. It certainly does create more artificial money in the market but how does that help? Hard to answer, I am afraid.
So as opposed to this massive – not sure what superlative fits the bill here, but gigantic unleash of cash, what else could have been done – indeed could still be done?
One economic statistic that remains stubbornly high, in the US, is that of unemployment. This has been a key indicator for the US Federal Reserve in spite of all the money pouring into the economy. Until unemployment is reduced, and its related friends, consumer spending and housing starts pick up, the US is still in murky waters.
So what could be done differently?
How about a raft of massive public spending?
Yes – you heard me – a monetarist say exactly that – and why? Because it is not important whether it’s monetary or fiscal or spending that is used, it is fixing the problem that is critical.
In the US, home to some of the world’s best (and worst) infrastructure, the network is getting up to 80 years old and is starting to become decrepit, if not falling apart. Back in the 1930s, the US underwent one of the biggest construction and infrastructure booms ever witnessed – dragging the country out of the great depression of the early 1930s through “The New Deal”.
Under Roosevelt, the Public Works Administration organised and funded useful buildings – hospitals, Schools, roads, bridges and dams – with over 34,000 projects undertaken in 3 years. This involved re-deploying many of the unemployed. Projects included the Lincoln Tunnel, Oakland Bay Bridge, La Guardia airport and the Boulder (now Hoover) dam – critical infrastructure, even in today’s society.
Perhaps a centralised driving of infrastructural projects will help create world class facilities, once again from those that are certainly worn and weathered. Recent bridge collapses, roads crumbling and schools being closed down, underline the urgency and evidence behind this.
Spending on infrastructure, in the US, has been in rapid decline since 2008 – understandable with so many more pressing issues to deal with. So how do you view infrastructure – is it a cost or investment?
How about just 10% of the QE3 money – only a lazy $8.5bn a month – pumped into public works – rebuilding or repairing the country’s arteries. Some of the benefits from this may include:
Job creation – immediately tackling the US Fed’s biggest problem – unemployment! Needless to say, with a job, people spend more – they buy cars, clothes, houses and hey presto, consumer spending is ticking up and another box ticked!
With public spending comes of course, private sector support – imagine how many new Caterpillar machines would be needed – helping out in Peoria, Illinois, massively! Jobs created laying roads and building the equipment for it. Then of course, there comes the discretionary spending with the good times – a quick trip to JC Penny, Macy, Bloomingdales or Nordstrom for some retail therapy, while slurping through a 12oz Starbucks, browsing on your iPad, all of which creates a need to hire more staff to service demand, who then themselves, spend, creating a virtuous circle of growth!
However, outside of the multiplier effect of spending – as outlined above, the result of the government’s spending is not simply a lasting legacy of debt – instead, a legacy of quality infrastructure, public and government facilities and a pathway to a more prosperous future, just maybe?
So why isn’t this happening?
Maybe I am a crazy economist – perhaps I have missed something? I don’t know, but it all sounds pretty logical and what’s more has a proven history of pulling the US out of massive depression, as it did in the 1930s. Perhaps we are now more sophisticated, and something so obvious, doesn’t work any more. Maybe we should be “throwing money from a helicopter” to resolve the problem, although QE1 and its subsequent sequels QE2 and QE3 haven’t really worked – after all, every movie goer knows that a sequel is never as good!
That said, for those owning property in the Hamptons, my best friend included, life isn’t that bad, with average prices in the fairy tale region, up 35% on last year!
But don’t panic, the Cavalry is coming!
Next year, we will likely see Janet Yellen take over the reins as Chairman of the Federal Reserve – interestingly she is considered a Dove, when it comes to economics – meaning a greater focus on unemployment than inflation and it may well be great timing and exactly what the US needs.
But isn’t it about curbing government spending?
Interestingly, the recent shut down of the US government – which was all about not raising the debt ceiling and so on, really had little to do with saving money – more about political jostling. The “Obamacare” lower cost healthcare program is at the core of this, with the political opposition very much against it. That I am struggling with, as Obamacare is estimated to save the US tax payer more than $190bn over 10 years – now we could never let that happen, could we?
Nope – it’s about politics!
It seems, as always, that politics and short term pyrrhic victories are more important than creating lasting change for good. If we step back from this and objectively look, Norway, with its sovereign fund, is creating a long-term better society for its citizens. Another country, one I have spent a lot of time in this year, is Singapore. It too has a sovereign wealth fund and also no political bickering (or political parties, for that matter) – instead a growing economy that is creating a long term better society for its citizens.
Now don’t for a moment, misconstrue that I am an advocate for giving away your democratic rights, but then again, any country without proportional representation, isn’t really a democracy, anyway!
Interesting enough, Norway also has proportional representation, as is the Senate, here in Australia, but for the home of democracy, lets consider the US. In the 2000 US Presidential election – 48.3% Gore, 47.8% Bush – George Bush wins by having less votes? To Quote Pauline, “Please explain!”
What does this mean?
In conclusion, I am of the view – and one I regularly debate with our US analysts and the trading team – that the US will push hard this year. A new approach from the Fed will get traction and that will drive the US market higher. All companies there have gone through a bloodletting of cost savings and now, leaner, meaner and with some help from Ms Yellen, are likely to be well placed for growth. Watch this space!