Diary from a Financial Hub
Walking the streets of New York City, the world’s number two financial centre by most indices of such things, helps remind one of how different the world is when seen through the prism of money rather than, say, military clout. And it says something that even in politicopolis Washington DC the main word on everyone’s lips was “Europe” – followed by “what a mess” or “pack of jokers” or something unprintable.
Understandable. Barack Obama, normally a shoe-in for the White House, is looking vulnerable only because the economy has lost him independent white votes. What he needs like a hole in the head is a euro tsunami to rock the US economy at Christmas or some other unpropitious time. At the US Federal Reserve, officials spoke of how they had inoculated the US economy against whatever came out of Europe. But private analysts were less sanguine.
Debt To Us Part
Which is why Obama has been unusually hectoring when he talks about the confused goings-on across the Atlantic. He’s saying get your act together. Sotto voce, he’s adding, you could cost me my reelection.
Europeans are scoffing. The US gave the world the subprime crisis and has run up a public debt of $ 14 trillion. Who are the Americans to tell us what to do? Across the board I was surprised to see most policy-makers in the US relatively optimistic about the fiscal situation.
Said one leading Democrat, “If we let the Bush tax cuts expire and cut half-a-trillion from the defence budget, we’re back on the rails.” This was echoed by economic journalists. And even Republican congressional aides who looked at Pentagon matters said $ 400 billion worth of defence cuts was already built into the system and seen as not too damaging.
The problem was not the numbers, it was the politics. “It’s a public choice problem,” said Fed officials. “It’s the gridlock,” said everyone in Washington.
While this is broadly true, having just read the book Hamilton’s Blessing by John Steele Gordon, a brilliant and highly readable history of the US national debt, this political problem goes much deeper than the Tea Party movement or some other contemporary concern. As he notes, the US has piled on debt before – and sloughed it off almost as fast. But it has done so because of war or some other crisis. The past 50 years, Gordon writes, it has piled up more than ever before for no other reason “than to spare a few hundred people in Washington the political inconvenience of having to say no to one influence group or another.”
And, yes, he says the US tax code is among the worst manifestations of this problem.
Deven Sharma, the outgoing president of Standard & Poor’s, will go down in India as the Desi Who Downgraded a Superpower for being at the helm when his firm deprived the US of its Triple A credit rating.
The downgrade hasn’t made much difference. A 10-year Treasury bill’s yield is less than two per cent so clearly the US is not finding it hard to get people to buy its debt. This reflects the lack of investment safe havens in the world today. The dollar is bad, but the euro and yen are worse. Every jumped at the Swiss franc and nearly wiped out its economy sans banking.
It also reflects that fact S & P’s rating is hardly the last word – there other raters and they didn’t budge on the US. Also, the company made it clear that it was not moved by the state of the US’s finances but by the state of its politics.
I lunched with an S& P friend and determined Sharma was probably less of the hero than it was made out to be. Sharma was actually planning to jump ship beforehand because S & P had been split in half and he’d been given only the credit rating bit to run – contrary to an understanding he thought he had with the owners. The committees that decide the credit rating of a nation don’t inform the president until they’ve made their decision. Sharma could have stopped or delayed the call after the committee told him of the downgrade. But he didn’t. I was told that many believed he backed the committee because he was leaving and therefore didn’t give a damn.
For want of a promotion, a kingdom was badly dented…
Coming from India, with its central bank trying desperately to slowdown growth, its polity wracked by double-digit inflation and its companies fretting about running out of employable workers, to the US where inflation is a word one never hears, growth is so low as to be in the realm of statistical error and the only concern is jobs – is like coming to another planet.
Are India and the US umbilically connected by the world economy? If so, not much juice is running from one to the other. India would love to share its inflation around.
What is the same, of course, is the political gridlock. I was quizzed repeatedly about the Indian political economy and what was going wrong. I gave a stock equation: the core problem was inflation, especially food inflation; this was leading to angry voters who were hitting out the government; the latter was finding itself floundering over things like the country’s endemic corruption; the answer should have been more reforms to ease things along. Instead, the policy process has run smack-dab into Sonia Gandhi’s illness and a Congress succession struggle.
At the Fed, I discussed how some Indian economists thought a euro crisis would help India by bringing down global commodity prices, flattening inflation and easing interest rates. I said that was not impossible – India had its inflation debacle postponed by Lehman and all that.
But a euro crisis would probably have more negatives than positives for India. And to prove me right, when I returned, the euro’s foibles led the rupee to fall over 10 per cent against the dollar. In effect, meaning global commodity prices like oil are even dearer for India. And all that even though India does about as much trade with Greece as it does with Antarctica.