In Contempt of the People

October 3, 2013

In assessing investment opportunities, it’s unwise but not uncommon to compartmentalize economics and politics.  Sooner or later, the worlds of politics and economics converge especially in the arena of foreign exchange.  Italy, which for decades was characterized as a good dynamic private economy coexisting with a totally dysfunctional government, exemplifies this merger.  The lira was a perennial loser before joining the European Monetary System, and the third largest member of the common currency area has experienced weaker growth than the other big members. 

The United States is also believed to have huge economic advantages that will overcome its sick politics.  While self-government has become increasingly cantankerous and downright unworkable, U.S. advantages in areas such as demographics, energy independence, and entrepreneurial know-how have and will continue to buttress America’s brand name, or so the experts claim. 

That conventional wisdom hasn’t been corroborated by movement in the dollar’s external value versus currencies of other industrial economies.  The D-mark translation value of the euro (1.439) is worth 2.73 times greater than the mark’s dollar value in 1969, while the yen and Swiss franc are 3.67 and 4.86 times more valuable against the dollar now than then.

The Tea Party faction of the Republican Party has forced a partial shutdown of the federal government and exhibits a willingness to allow Washington to default on its debt if that’s what it’s going to take to stop implementation of a single piece of lawfully approved legislation in the area of healthcare.  Obamacare is not perfect, but the system it aims to improve is downright shameful.  In many facets, America sits at or near the top of the list of nations.  Healthcare measured on a cost/benefit basis happens to be one area where there is broad worldwide agreement supported by objective empirical evidence that America stands far back in the race for excellence.  It’s dubious whether any cause is so important that it’s worth the risk of losing everything to win, and the choice of obstructing the repair of a broken and unaffordable healthcare program is very peculiar to say the least.

The Tea Party is acting within allowable limits according to the law.  In contrast, a judge can exact penalties on and declare a person in contempt of court if he or she behaves in such manner to prevent the court from functioning.  There are analogous sanctions that can be imposed on people deemed in contempt of congress, and public-sector unions are not allowed to strike, lest such action jeopardize the public safety.  Former President Reagan solidified his popular image of toughness when striking air traffic controllers in 1981 were fired and replaced.  The Tea Party is insisting on their way or the highway on an issue that’s been tested repeatedly in Congress, not to mention the Supreme Court, and which passed the ultimate test of a presidential election when the issue became a litmus test for millions of Americans.  What the government shutdown represents is an example of brazen contempt for the people.

Whether a default occurs on October 17, enough water has flowed under the bridge for confidence in the U.S. political system to never quite be the same again.  This erosion of confidence has been happening for a couple of decades, but it’s been possible to overlook and rationalize that every industrialized country has corrupt and incompetent political leaders at the helm.  Then along comes an event that is so much in the public’s face that the damage proves lasting, and that’s what I suspect is now happening.

Truth be told, U.S. economic trends aren’t as good as their reputation, either.  The table below compares growth in real GDP and jobs over the past four years with growth in these vital signs since the end of 1999, the previous 25 years, and the second half of the twentieth century.  Y2K was a crossed Rubicon, but not due to the feared breakdown of our digitized world but rather because the economy has functioned much more weakly afterward.  The past four years have been better than 2000 through mid-2009 but fall way below pre-2000 norms. 

% per year last 4 years Since 2000 1975-1999 1950-1999
GDP 2.2% 1.6% 3.4% 3.7%
Jobs 1.2% 0.3% 2.1% 2.2%


Chronic weaker-than-expected growth in jobs and GDP renders the achievement of low inflation fairly meaningless as a potential dollar support.  Besides, other economies have subdued inflation as well.  Weak nominal income growth in the United States points to quantitative monetary stimulus for much longer than analysts were prophesizing just weeks ago.  That’s liable to be another  dollar depressant.  Policy change is needed to escape the current rut, but the incohesive political state of the nation stands in the way.  America is not alone grappling with its difficult problems, but as the country commanding the economic high ground, it has more to lose than other nations.  Being engaged in endless military operations in faraway lands is also corrosive to domestic public finances and confidence.  Dollar depreciation versus the euro, the main currency barometer of dollar sentiment, will be blunted by the appreciating trend against those emerging market currencies associated with current account deficits. 

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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