Here’s the soundtrack for today’s post (blatantly taken from a previous post.. or two).

As is so often the case, Wolf beautifully summarized the economic ennui at Davos this year.

As an aside, the Cowboy  enjoyed the coinage attributed to Sir Martin Sorrell (of WPP fame) for describing the global recovery.  You will remember the alpha-pictorial discussions of the last couple of years relating to economic recovery (U-shaped and so on).  In that context, the world can be described, aptly in the Cowboy’s view, as facing a period of LUV (Europe, North America and emerging economies, respectively).  With Valentine’s Day fast approaching and economic uncertainty abounding, I suppose it is no surprise that Cupid has taken an interest in the dismal science.

Question 1:  Was that Cupid everyone saw cavorting during the wee hours in Davos?

Question2:  Who was he with?

Question 3:  Most important of all, is Cupid a monetarist or a Keynesian?

Money quote from Wolf’s column:

“The biggest challenges, then, are political. The world’s leaders showed an impressive ability to deal with the crisis. The will to co-operate last year, seen not least in the rise of the G20, was remarkable. But such co-operation becomes far more difficult as we return to politics as usual, particularly given high unemployment and deep political divisions inside the US, still the world’s hegemonic power. The European Union remains ineffective. Indeed, the inability of the eurozone to address the fact that the periphery cannot escape from its fiscal trap without strong expansion in demand at the core is proof of that. China, too, is inward-looking. Mr Zhu promised rebalancing. But is that going to happen after today’s stimulus measures are withdrawn?”

Martin is concerned that in the world’s post-crisis economic convalescence,  populist politics will trump sound judgment and difficult compromises, sending us once again into the breach (an incomplete W for those econoalphaphiliacs in the crowd).  As regular readers know, the Cowboy is no fan of populism.

When one couples Martin’s thoughts with the news that Moody’s is now warning that the U.S. sovereign rating may come under review for downgrade, you need not be ashamed if the hairs on the back of your neck stand up (like the letter I, perhaps).  Although concern is warranted, I don’t think panic is called for because of the depth of the U.S. Treasury market and the absence of fabulous investment alternatives, as I have argued here previously.  Indeed, today’s market activity underscores the fact that when fear takes hold, U.S. Treasuries are a safe, leeward anchorage (an underscore rather than a W, for those following on their keyboards).

Still, the U.S. deficit is a problem, but it is not a problem based on anything that American politicians are discussing.  Even the supposed fiscal hawks in the Tea Party movement aren’t focusing on the real problem.  The lion’s share of spending comes down to entitlements (Medicare and Social Security) and defense.  If you don’t touch those, you don’t solve the problem, unless you grow yourself out of it, which seems unlikely.  Retirement age up.  FICA compensation limit gone.  Health care reform necessary.  On that last point, you either do away with Medicare entirely or you have to get overall medical care costs under control and, as any insurance underwriter knows, you can’t just cover the expensive people (elderly).  You have to cover the healthy ones too.  It’s called adverse selection.  But I digress.

Of course we can also just reduce taxes to zero.  Unfortunately the Laffer curve is just that: a curve.  Optimal tax rates are not zero.  Low, yes, zero, no.  Granted it is difficult to know when you’ve reached the optimal point, but mindlessly and perpetually shouting for tax decreases doesn’t seem like the best way to find out.  Especially not in the face of stellar deficits and historically low tax rates.  Moody’s probably wouldn’t think so either.  What’s the most immediate impact of a drop in that sovereign credit rating?  Increased borrowing costs.  Hmmm…

The real problem is what Wolf outlines: political will.  The crisis is over, so U.S. partisanship and name calling is in full swing (with the supposedly responsible Republicans being the most guilty, ironically).  With the barbed wire strung and the trenches dug, who in their right mind would wander into the no-man’s land of entitlement reform, much less a reduction in defense spending?  No one facing re-election, ever.  Too bad we’re not an authoritarian regime like China’s, where the people are just told how it will be.  (That’s a sarcastic comment, by the way.)  So things will just have to get more and more acute until doing something is unavoidable.

Until then, we just have to hope for growth, an end to our various wars, and a new attempt at health care reform.

So, the wolves and the sheep have to lay down together.  The populism has to diminish.  The voters have to look beyond the sound bites.  And leaders need to do the unpopular.

Or do they?

Published in: on February 4, 2010 at 21:59  Leave a Comment  
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