Category Archives: Society

Economic, Government, Politics, Society, United States

US budget and debt ceiling: a continuing danger to the world…

U.S. BUDGET & MARKET CORRECTION

The confrontation over the U.S. debt ceiling might have been resolved meantime, but there is nothing to prevent a repeat of the U.S. economic debacle when the government’s budget comes up for review again in January. Last week, after a wrangling spectacle that lasted several weeks, politicians in Washington slammed on the brakes at the last minute. For a long time, though, the differences between Democrats and Republicans appeared irreconcilable and seemed intent on driving the global economy off a cliff, by triggering a catastrophic default.

President Obama was quick to highlight that nothing has done more damage to America’s credibility in the world, or standing with other countries, than what we’ve seen over the past few weeks. Yet, any sense of relief is likely to be distinctly short-lived. For what will prevent this whole exercise being repeated in a few months? What was agreed on Capitol Hill was a stay of execution, rather than a reprieve. Congressmen still have utterly different views of the role and extent of government, and far less reason now than ever to trust each other.

Outside of America, the most important thing is to ensure that the risk of another global recession is eliminated because of the disaster that would follow a U.S. default. The world will expect that America’s politicians are mature enough to forge a long-term budget deal. In the likely absence of such bipartisan spirit, a partial fix would be to eliminate the need for Congress to approve each increase in the debt ceiling, and rely on the market to provide the necessary fiscal rectitude and discipline.

Market correction does not imply a recipe for unrestricted spending. The House of Representatives would still retain control of the purse strings, and could refuse to fund certain aspects of the government’s operations it was unhappy with. Otherwise, the U.S. will continue to bump up against the ceiling time and again, with the possibility and threat of a catastrophe unfolding. Given that the debt’s numerical value is bound to increase – even if it shrinks as a proportion of GDP – the market should be used as a rectifying tool, rather than politicians in Washington who have proved they are unfit to compromise on their conflicting (and perhaps even reticent) agendas.

AN IMPASSE THAT COULD BE BROKEN WITH MID-TERM 2014 ELECTIONS LOOMING

Following the deal to reopen the U.S. government, John Boehner, Speaker of the House of Representatives, said: ‘We fought the good fight. We just didn’t win.’ These words expressed by Mr Boehner, in theory the most powerful politician in Congress, disguises the fact that Republicans fought an ignoble and pointless fight that has inflicted deep damage on the United States. True, the U.S. government has averted the calamity of a debt default, but to suggest his Republican party did not win is putting it mildly. The Republicans achieved nothing of what it was seeking, most notably a postponement of President Obama’s signature health care reform. Instead, many will suggest it suffered a crushing defeat that might just bring the party to its senses.

That outcome, however, is far from guaranteed. Judging by reactions following last Wednesday’s Senate and House votes that ended the crisis, the ultra-conservative minority that has been holding America to ransom shows little sign of changing its ways.

America must now count the cost of this completely unnecessary exercise in futility. The $20 billion direct loss to the U.S. economy is just the start of it. The ‘good fight’ Mr Boehner refers to has further poisoned the atmosphere on Capitol Hill, and distracted America’s legislature from far more important issues – such as immigration policy reform and climate change. Then there is the damage to the country’s reputation and financial standing. The budget deal that has allowed the U.S. government to resume business has settled exactly nothing.

The government is being funded again, but only until mid-January; the U.S. Treasury is authorised to borrow, but only until early February. There is no guarantee whatsoever that the zealots, unchecked by Mr Boehner, will use these deadlines once again to provoke a repeat shutdown and a new round of brinkmanship on the debt ceiling.

Under the agreement, a bipartisan joint House and Senate panel is being set up, with instructions to work out by mid-December a blueprint to balance the budget, and thus resolve the arguments underlying all of the issues between Mr Obama and Congress. This may offer a glimmer of hope but few will give it much chance of succeeding where numerous attempts in the past have failed. To reconcile the vast differences between the parties on taxes and spending will require compromise on both sides not yet seen.

The best hope of averting a new crisis could lie in the approach of the 2014 midterm elections, because Republicans may fear a brutal backlash from voters. Ultimately, the impasse is not economic but political, and could be settled at the ballot box.

Pollsters clearly show that the majority of Americans blame Congressional Republicans for the folly that has ensued on Capitol Hill. If Republicans do bring about a repeat of the budget debacle early next year, then they will surely be heading for a fully deserved electoral disaster.

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Economic, Financial Markets, Government, Politics, Society, United States

A US default would trigger financial-armageddon…

AMERICA ON A PATH OF SELF-DESTRUCTION

For weeks, now, the world has watched anxiously as the richest and most powerful nation on earth has set itself on a definite course of self-destruction. First came the partial shutdown of the government over Congress’s refusal to agree a budget resolution; now, with even more seriousness, America is approaching the point at which it will reach the ceiling for its national debt, and will, presumably, have to default because no money is available for the U.S. to pay its debts.

The seriousness of the situation is such that the global financial system is built around the idea that America’s debt is the safest of all – usually in the form of bonds issued by the U.S. Treasury. It is this underpinning that makes the dollar the world’s main currency reserve, with Japan and China having each bought more than $1 trillion of U.S. bonds. Other nations around the world have also invested heavily, with hundreds of billions tied up in U.S. treasury debt. The thought now that such borrowing might not be secure has sent tremors through financial markets.

The consequences need to be understood. In a worst-case scenario, a U.S. default would trigger a financial-armageddon, and one that would match or eclipse that of the 2008 financial crisis. More likely, though, is a selective default, with individual bonds failing to be recognised (as each rolls-over). Whilst that would not immediately undermine the dollar’s currency reserve status, it would chip away at the faith and confidence the world has placed in America, accelerating the decline that many feel is already under way. Beijing’s repeated calls to ‘de-Americanise’ the world economy is eroding America’s prestige and prosperity, but, that said, there is no alternative reserve currency waiting to take the dollar’s place, as there was when the pound fell from global prominence.

Then there are the economic ramifications. Once the debt limit has been reached, the U.S. would be forced to live within its means. In the long-term that would be a good thing as expenditure could only be pared against tax receipts. The immediate constriction of government spending, however, on such a scale – given the current levels of American borrowing – would prompt an immediate and severe recession. The world economy would be brought to a shuddering halt.

One wonders whether the current antics, particularly that of the Tea Party, is appreciated to such an extent that it is undermining America’s image, power and credibility. The willingness of Tea Party Republicans to renege on fiscal promises that Congress has already made does raise questions far exceeding political gerrymandering.

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Britain, Economic, Energy, Government, Politics, Society

The folly of Labour’s energy policy and what needs to be done…

ENERGY MARKET

Ed Miliband’s headline-grabbing pledge to freeze energy prices until 2017 if Labour is elected at the next General Election has already seen one of the ‘Big Six’ suppliers, SSE, raise its prices by an average of 8.2 per cent. Dire warnings have followed that if other utility companies follow suite, as they are expected to, the poor will have to choose between heating and eating as the winter bites. Mr Miliband could not have planned it better – first, we witnessed billions being wiped off the stock market following his announcement on an energy-price freeze at the Labour Party conference. And now, two weeks on, we are braced for yet another round of what could amount to double-digit increases to the basic price of energy for consumers.

Despite SSE’s decision, we must examine more closely why the facts of the energy market fail to conform to Mr Miliband’s egalitarian rhetoric. To start with, while British consumers may well be aggrieved with rising energy bills, they are hardly in isolation. Last year, our electricity prices were ranked 12th highest in the European Union, below all of our major rivals (except France). Britain’s gas prices were the lowest in Western Europe.

Next, it should be pointed out that many of the factors behind rising prices are beyond the control of any energy company or politician. As North Sea supplies dwindle, the UK is increasingly reliant on imported gas from countries such a Qatar. Others are in the same fix, too, with prices being driven in accordance with the laws of economics and the market.

What comes next is even more important to understand. While Mr Miliband has sought to frame the energy debate as a ‘cost of living’ issue, this is cunning and shrewd brinkmanship. The fact that energy bills have risen by a quarter over the past five years, at a time of huge pressure on incomes, has infuriated many. Nowadays, though, energy prices are being more robustly used as a policy tool. They are being used to subsidise the next generation of power stations – where the cost of building and construction has risen sharply due to Labour’s failure to replace those it mothballed. This raises the extraordinary prospect of widespread blackouts as the conceivable position arises of demand outstripping supply. Surging energy bills are also being used to fund a decarbonisation agenda that has seen non-competitive renewables receive bountiful sums in subsidies.

Yet, all the more surprising that the Labour leader does not recognise this, despite the fact it was Mr Miliband who had set-up the regime in the first place, when he was energy and climate change secretary in the last Labour government. At first, and to be fair, the Conservatives were happy to go along with it, although they have increasingly had second thoughts. Unfortunately, when the coalition came into being the control of energy was handed to the Liberal Democrats – who remain as fixated to the green and environmental agenda as Labour. The LibDem part of the coalition has made clear – through Vince Cable, the Business Secretary – that the renewables levy is non-negotiable.

So, what could the Conservatives do to bring down prices – and persuade voters that Labour’s offer is pie in the sky politics, if not complete nonsense?  A blueprint on Tory energy policy could be set out, countering the need to argue on a point-by-point basis with Labour on its policy, and one which should be designed to provide immediate relief. This is an opportunity for the Tory party to show how a majority Conservative government would help consumers.

A plan to create a proper market in energy, with smaller providers able to compete, would provide the market with competition that is much needed, particularly if new entrants to the market were made exempt from eco-levies. The current oligopoly serves no one’s interests other than the shareholders of the Big Six and the huge profits retained by them.

A new vision should accept that more money will be needed for energy infrastructure, but one where the new generating capacity is as cost-effective as possible, and delivers electricity at the lowest possible price. Embracing the shale gas revolution, for instance, would be a good start in that direction. Others might suggest decarbonising by building other types of energy driven plants but with a more rigorous subsidy regime in place. The sums wasted on renewable energy supplies have been astronomical. The status quo is to continue lumbering businesses and firms with unaffordable and uncompetitive energy costs.

Those subsidies that survive under such a plan should be stripped out of energy bills and instead become part of general taxation. Disguising such costs by loading them onto consumers discriminates against the poorest, an unfair and dishonest approach when many are struggling to pay for their gas and electricity anyway.

Keeping energy costs down can only be achieved if the market is made to work properly, not through a price-fixing cartel where the market is effectively rigged.

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