Back in the spring, Ben Bernanke told the world that “tapering” would start “later this year”. The Federal Reserve Chairman was indicating, in other words, that America’s central bank would start to wind-down its $85-a-month money-printing habit by the end of 2013.
Such an outcome now looks increasingly unlikely. My view, in fact, is that the Fed, could soon unleash more, not less, quantitative easing – ramping up the policy rather than tapering. Such an outcome, were it to happen, would be incredibly risky. Speeding up monetary stimulation, rather than slowing it down, could spook financial markets – and even cause a panic. Yet in recent weeks, I’ve heard several well-placed economists and policy-makers, especially in the US, start to contemplate such action.
Financial markets remain fixated on the question of whether or not America’s political classes will impose an entirely avoidable disaster on themselves, their fellow US citizens and, by extension, the rest of the world. While there are signs of rapprochement this weekend, Congress may yet fail to agree a new “debt-ceiling” limit. That could spark a world-wide market meltdown, so upending the fragile global recovery.
Those on the Democrat side of the aisle feel they’re on solid ground. The party controls both the White House and the Senate. President Obama’s sweeping healthcare reforms have been extensively debated, passed into law and ratified. And last year he was re-elected, no less, having campaigned on a ticket featuring this policy.
While still in opposition, David Cameron used to promise that a “Conservative government would share the proceeds of growth” between higher public expenditure and tax cuts. That was the Tory mantra – repeated ad nauseam from 2005 until the summer of 2008. It was a slippery phrase, allowing the Cameroons to have it both ways. By pledging to “match Gordon Brown’s spending plans”, Cameron hoped to banish the Tories’ “nasty party” reputation. The promised lower taxes, meanwhile, placated his core vote.
While “sharing the proceeds of growth” seemed like clever political positioning, it was actually economic nonsense. Brown’s spending plans, coming after years of turbo-charged state borrowing, were profligate. Matching them was “me too” student politics. Talk to some senior Tories now and, when recalling the “sharing the proceeds of growth” years, their eyes roll as their right index finger faintly twirls.
What will be the hottest topic at this week’s World Economic Forum in Davos? The Algerian hostage crisis or the global “bonds-into-equities” swap? The latest horrors from Syria or the prospects of a British EU exit?
There will be heated debates aplenty when the annual Swiss mountain gab-fest convenes on Thursday, on a head-spinning array of topics. It strikes me, though, that year after year, there’s one overarching issue that simply won’t go away.
For several years now, storm clouds have loomed large over much of the Western world. The sub-prime debacle dealt the “advanced” economies a shocking blow. With the US still sluggish, and Western Europe back in recession, four years on from the “credit crunch” the economic climate remains harsh.
The West’s response to sub-prime has, in my view, made our predicament even worse. Faced with widespread institutional insolvencies and high debts, governments have shielded politically powerful banks from reality, while indebting themselves, and so us, even more.
“We’re not as cynical as the pundits believe,” proclaimed President Obama last Wednesday. “We are greater than the sum of our individual ambitions”. When it comes to post-election oratory, few can match the 44th President. Hoarse, even broken-voiced, after months of campaigning and the final desperate push, the most powerful person on earth basked in the adoration of supporters in Chicago, as they reveled in his re-election.
As the crowd’s roar hit fever pitch, Obama’s rhetoric soared, his final sound-bite fitting snugly into TV news bulletins across the globe, precisely as was intended. “We remain more than a collection of red states and blue states,” the re-confirmed President thundered. “We are, and forever will be, the United States of America”.