The air is America is full of recriminations and angry rhetoric about what the American people were put through by their own elected representatives. The establishment’s sentiments were voiced this week by Laurence Fink, the brilliant Chairman of BlackRock, the largest asset manager in the world.
- “I am much more worried about the United States now than I was the last time I was on your show, when I gave a very large endorsement towards the equity market. … People look up to our type of democracy and they are seeing worldwide how our democracy is not working as well as it should, how our democracy used to work a lot better. As a result of that, many of our foreign investors have had conversations with me and many at BlackRock about how should they think about investing in U.S. debt over the next few years.”
These comments would be supported by many in America and obviously by many more in Europe, Middle East and Asia. The sad and scary shenanigans of the U.S. Congress are probably interpreted in the rest of the world as evidence of America’s declining power. They should pause to look back to January 2013 and read what Larry Fink had said on same Market Makers show on Bloomberg Television on January 3, 2013:
- “I am very disappointed, I am incredibly disappointed. This is a negative for markets. I have been bullish on markets, more bullish than most. I would be fading this rally myself; I would be buying bonds here for a tactical reason in the short term. I look at this as a very bad warning sign”
Mr. Fink was not alone in his dour assessment of America. His was a consensus opinion among the financial & liberal elite in America. But he and his fellow bears were totally wrong, spectacularly wrong.
The Fiscal Cliff deal he railed against in January has resulted in an improved economy and a strong stock market that sped ahead of all emerging market darlings. And it lowered America’s fiscal deficit as no other program had done in recent years. As Lawrence Summers pointed out in his Reuters article this week,
- “The latest Congressional Budget Office projection is that the Federal deficit will fall to 2 percent of GDP by 2015 and that a decade from now the debt-to-GDP ratio will be below its current level of 75 percent.”
The Congressional Budget Office estimates the 2013 fiscal deficit to come in around $642 billion, a 42% decline from the 2012 fiscal deficit of $1.16 trillion. No other major economy, neither developed nor emerging, comes even remotely close to this stunning achievement, an achievement that was triggered by the widely lamented Fiscal Cliff deal of January 2013.
If Larry Fink was so utterly wrong to be pessimistic about America in January 2013, will he prove to be wrong again? We will table that discussion while we look at the reasons for high emotion in America.
1. The Civil War in America
The title of our year-end 2012 article was 2013 – Civil Wars Wherever You Look? The difference between America and the rest of today’s world is that America creates its own civil wars long before they become necessary. As we wrote then,
- “The reality is that America has remained successful and predominant precisely because American society has always addressed its problems before they become big.”
- “America has always been paranoid about losing its preeminence. But such paranoia has enabled America to address potential problems well before they become unmanageable. That is what today’s civil war is all about”
In contrast, the rest of the world remains complacent until their problems become big & unsolvable. That is because they actually trust their government and remain passively complacent about the damage their governments can inflict upon them.
In contrast, American society has an inherent distrust of government, especially of a government with professed big goals. This springs from the sentiments of America’s Founding Fathers, as Stratfor’s George Friedman wrote this week in a must-read essay:
- “The founders did not want an efficient government. They feared tyranny and created a regime that made governance difficult. Power was diffused among local, state and federal governments, each with their own rights and privileges. Even the legislative branch was divided into two houses. It was a government created to do little, and what little it could do was meant to be done slowly.
- The founders’ fear was simple: Humans are by nature self-serving and prone to corruption. Thus the first purpose of the regime was to pit those who wished to govern against one other in order to thwart their designs. Except for times of emergency or of overwhelming consensus, the founders liked what we today call gridlock”
Today’s civil war in America, though expressed and fought in fiscal terms, is a war about the nature and mission of American society. And the spirit of this war dates back to the conflict between “Jacksonian” and “Jeffersonian” traditions in American society, according to William Galston, senior fellow & Ezra K. Zilkha chair at Brookings Institution. .
2. The Spirit of Today’s Civil War
In his WSJ article The Tea Party and the GOP Crackup, Galston argues:
- “The tea party is Jacksonian America, aroused, angry and above all fearful, in full revolt against a new elite—backed by the new American demography—that threatens its interests and scorns its values.”
Borrowing from the well-known essay of Walter Russell Mead, Galston writes:
- “Jacksonians … embrace a distinctive code, whose key tenets include self-reliance, individualism, loyalty and courage. … They are suspicious of federal power, skeptical about do-gooding at home and abroad; they oppose federal taxes but favor benefits such as Social Security and Medicare that they regard as earned. Jacksonians are anti-elitist; they
believe that the political and moral instincts of ordinary people are usually wiser than those of the experts and that, as Mr. Mead wrote, “while problems are complicated, solutions are simple.””
There is a core existential reason for the Tea Party to oppose President Obama and Obamacare, according to Galston:
- “Mr. Obama, they believe, is pursuing a conscious strategy of building political support by increasing Americans’ dependence on government. A vast expansion of food stamps and disability programs and the push for immigration reform are key steps down that road.”
- “But ObamaCare is the tipping point, the tea party believes. Unless the law is defunded, the land of limited government, individual liberty and personal responsibility will be gone forever, and the new America, dominated by dependent minorities who assert their “rights” without accepting their responsibilities, will have no place for people like them.”
- “For the tea party, ObamaCare is much more than a policy dispute; it is an existential struggle.”
This is what drives the passion of Senator Ted Cruz and his colleagues. This is why their definition of the “American people” raises deep patriotic feelings in heartland America while inflaming and scaring much of coastal America and the rest of the world.
But this is a a core financial issue as well. Today’s is the age of the Federal Reserve pumping unprecedented amounts of liquidity every month into the financial system. This is the age in which stock investors, corporations and the wealthy are doing spectacularly well while middle America remains stagnant. This is the age in which corporations maintain trillions of dollars on their balance sheet and share that bounty with stock holders via dividends and buybacks without hiring Americans or expanding their businesses. Today’s is the age in which the real job generators of America, small businesses, are getting caught in a pincer of large corporations and beneficiaries of Government largesse. As Galston tells us:
- “Many tea-party supporters are small businessmen who see taxes and regulations as direct threats to their livelihood. Unlike establishment Republicans who see potential gains from government programs such as infrastructure funding, these tea partiers regard most government spending as a deadweight loss. Because many of them run low-wage businesses on narrow margins, they believe that they have no choice but to fight measures, such as ObamaCare, that reduce their flexibility and raise their costs—measures to which large corporations with deeper pockets can adjust.”
James Fearon, a student of civil wars at Stanford University, defines a civil war as “a violent conflict within a country fought by organized groups that aim to take power at the center or in a region, or to change government policies”.
By that definition, the fight against funding the Obama Administration with an unrestricted Continuing Resolution and raising the U.S. Debt ceiling is a classic civil war,
- a civil war between executives like Larry Fink who desperately seek verbal niceties & funding calm to soothe the worries of foreign investors and people like Senator Ted Cruz, a type of “Jacksonian hero” who “defies the experts and entrenched elites and “dares to say what the people feel” without caring in the least what the liberal media will say about him”, in the words of Galston,
- a civil war for control of the congressional agenda between financial firms like Fink’s BlackRock, largest beneficiaries of the Fed, and small businesses who have been hurt the most.
3. A Happy Outcome?
The most emotional outburst of this debt ceiling fight came on Tuesday from David Tepper, a hugely successful hedge fund manager, who asked;
- “when you start messing around with the debt of the United States of America, which by the way has not missed debt payments when we were way over-leveraged at the time of the revolutionary war when Hamilton made the decision to make the debt payments and you didn’t miss a debt payment during the civil war. This is the time you’re going to choose to miss a debt payment?”
But David Tepper was not that worried, not so worried as to sell down his stock portfolio. Even Larry Fink admitted on Tuesday that he “never thought we would eventually default.”. Because Larry Fink and global financial markets knew that both Jacksonian & Jeffersonian schools can take their fight to the edge but they will not damage the foundation of American success & prosperity.
So will the above worry expressed this week by Mr. Fink be proven as spectacularly wrong as his worry in January 2013 proved to be? That is what Anatole Kaletsky, a founder of GaveKal, opines in his Reuters article:
- “The outlines of a possible long-term U.S. budget deal are now fairly clear. … President Obama has a strong interest in agreeing to a long-term fiscal deal and refocusing his presidency on other issues. He is therefore likely to offer some significant concessions to settle the budget once and for all.”
- “The president has already indicated that he might be willing to trade some long-term economies in Social Security and Medicare for a Republican agreement to lift short-term sequestration spending cuts. Such a deal, in addition to reducing long-term fiscal pressures, would be doubly attractive to Obama. Lifting sequestration would provide a neutral or slightly expansionary fiscal policy over the next two years, thus strengthening recovery. Meanwhile, the Republicans’ vociferous insistence on Social Security and Medicare cuts would relieve Democrats of any blame for these fiscally necessary, but highly unpopular reforms.”
- “Apart from discussing Social Security and Medicare reforms, to which Obama has already agreed, the Democrats need to make only one more concession to facilitate a bipartisan deal: they must abandon their insistence on higher taxes. … Recent revisions to budget forecasts imply that the U.S. government no longer needs additional revenues to control its deficits.”
- “Obama and the Republicans could therefore reconcile their budgetary objectives by agreeing on tax reforms to boost the economy’s long-term structural growth rate, instead of seeking to squeeze more revenues out of the present dysfunctional tax structure. By focusing on “dynamic” accounting that takes account of the revenue gains from higher expected growth rates, tax reform could easily become a wi
nning proposition for both Republicans and Democrats.”
4. The Genius of American Society
Look at the rest of the world. Their civil wars become destructive because they are put off till they cannot be put off anymore. America’s civil wars always take place before America’s problems become unmanageable. So American society always wins as a result of American civil wars, including the most violent physical civil war between the North & the South. Paying that enormous price in 1860s made American unity an absolute given and so enabled America to expand geographically in the American continent & globally.
Today’s fiscal civil war in America seems stupidly violent and supremely unnecessary to most in the rest of the world. But what if the end result of today’s civil war is a serious tax reform deal that changes today’s unsustainable rising curve of long term entitlement spending? What if, as Anatole Kaletsky suggests, we get a slightly expansionary short term fiscal policy while simultaneously improving long-term fiscal pressures?
Our own aspiration is a step beyond Kaletsky’s. We think America will be ready for an income tax cut in early 2015. Seemingly unattainable today but highly likely in a year, we think. Think of that American economy:
- Federal deficit at 2% of GDP, a deleveraged American consumer, low priced abundant domestic energy, a Fed ready to put higher incomes in the pockets of American savers and an income tax cut to benefit small businesses.
We would buy that America with both hands and some. Wouldn’t you? Heck, even China would.
Send your feedback to firstname.lastname@example.org Or @MacroViewpoints on Twitter