In this Feb. 1, 2012 file photo, President Barack Obama reverses an earlier stand, now encouraging donors to give generously to the kind of political fundraising groups he has assailed as a "threat to democracy."
"It's the Weather, Stupid"
April 9, 2012
Author: Niall Ferguson, Member of the Board, Belfer Center for Science and International Affairs
It must be the weather. For some reason, everyone thinks that the economy is recovering and so President Obama is going to be reelected. Just put a bit of blossom on the trees and people lose their minds.
Or maybe it’s not the weather. Maybe we’re all just fed up with the Republican Party’s interminable process of nominating Mitt Romney as its presidential candidate. Who needs The Hunger Games when you’ve got the Pennsylvania primary?
So let’s have a little reality check. First, according to Gallup, Obama’s approval rating right now is 46 percent. That’s better than the 40 percent he was scoring in the second half of 2010, but it’s still too low. Since Eisenhower, all two-term presidents have been above the 50 percent line at this stage in their first terms.
Second, don’t mistake that 22 percent stock market rally we’ve seen since November for a real economic recovery. Remember, this is the result of massive monetary stimulus, not only by the Federal Reserve but also by other central banks. Since fall 2008, the central banks of the E.U., the U.K., the U.S., and Japan have slashed interest rates to near zero and increased their balance sheets by a combined $8.76 trillion. The Fed believes that the recovery will eventually come through the “portfolio rebalancing channel” (PRC), whereby cheap money boosts asset prices, which boosts consumption via the so-called wealth effect, which boosts production, profits, capital spending, employment and—who knows, one day—maybe even home prices.
But there’s another PRC at work here: the People’s Republic of China. After all, the U.S. stock market index is now a barometer of the global economy, not the U.S. economy: foreign sales account for nearly half of all revenue for the companies in the S&P 500 index. Over the past five years of financial crisis, China has been the fastest-growing market for nearly all of America’s biggest corporations.
So guess what happens if there’s any decline in the stimulus provided by the two PRCs? We found out last week, when the Fed signaled that it might not turn on the monetary spigot known as QE (“quantitative easing”) a third time. Coming on top of Wall Street worries about a slowdown in China, this—plus the latest lousy economic news from Europe—stopped the stock market rally in its tracks.
Remember what caused the financial crisis? That’s right, it started with a crash in the overleveraged housing market. Well, last week Zillow (the online real-estate guys) predicted that home prices will fall by another 3.7 percent this year.
How’s that deleveraging process coming along? Slowly, according to McKinsey. Between 2000 and 2008 total private and public debt in the U.S. rose by 75 percent of gross domestic product. Since the crisis struck, it’s come down by just 16 percent.
What about those too-big-to-fail banks that nearly blew the world up? As Dallas Federal Reserve President Richard Fisher recently reminded us, the five largest banks still own more than half the assets in the banking system.
Meanwhile, the unintended consequence of global monetary expansion at a time of growing Asian consumption and Middle Eastern instability is rising oil prices. Are you ready for the $4 gallon, folks? At this rate, the price of gas is going to regain its pre-crisis peak before the stock market does. Unfortunately, rising gas prices act like a tax on consumers.
Speaking of taxes, let’s not forget that Washington is still miles from fixing the chronic hole in the nation’s public finances. Paul Ryan’s radically reforming budget passed the House, but you know it won’t get through the Senate. The president thinks that demonizing Ryan is the way to stay in the White House—he mixed up quite a metaphor cocktail last week by calling his budget both a “Trojan horse” and an example of “social Darwinism.” But Obama’s cynical decision to scupper a deal on the deficit last year has set the nation on course for crass across-the-board spending cuts (code name “sequestration”) next year.
Consider three scenarios. In one, the recovery keeps going. In another, the bond-market vigilantes finally wake up—or the Fed stops buying two thirds of new Treasuries—and long-term interest rates rise. In a third, all the headwinds described above choke off recovery and we have a rerun of last year. Now attach some probabilities to those.
True, the economy isn’t the sole determinant of election outcomes. But two out of three scenarios could spell victory for the Romney-Ryan ticket I’d love to see.
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