Each week a number of Minyanville Professors will discuss a major economic or financial markets topic via an informal email exchange. This week's topic is the debt ceiling and the great divide between Washington and Wall Street and between Main Street and Wall Street. Participating are Peter Atwater, Conor Sen, Professor Pinch, and Kevin Depew.Conor Sen:
As you guys know, I've been captivated by the debt ceiling negotiations this weekend and how they reflect today's social mood. Wall Street seems to always have a poor understanding of how Washington works because they're looking at the system through Wall Street logic, not Washington logic. "The stakes are too high. Why can't these idiots get a deal done?"
Think about the times when you've seen children get the attention of parents in serious conversation. If they're agitated enough they'll nearly tackle a parent to interrupt their activities. The Mom might say, "Sweetie, your father and I are in the middle of something, can't this wait?" And the exasperated kid will scream out, "You're not paying attention!"
That's what this feels like. Not that an angry public, through their newly-minted Republican representatives in the House, are acting like children, though clearly some are making that case. But that they feel like this is their rare opportunity to get the attention of those with more power than they have to say, "You're not paying attention! We need help! And if your only plan is to patch together another can-kicking solution so you can go back to ignoring us, we'd rather shut 'er down."
Now clearly austerity measures aren't the fix to what ails the public. But the public, especially the bottom 50%, wants change -- real change. If the change they get doesn't work, they'll demand a different kind, but they will no longer accept the socioeconomic status quo. When polled earlier this year, only 4 of the newly-elected House Republicans said there would be any scenario under which they'd vote to raise the debt ceiling. That's the mood we're up against. And while Congress and the White House may figure out a way to work something out this time, until the fortunes of the bottom half of the country are improved, we're likely to see much more "economic hostage-taking" on the part of certain government factions.
I think that's very apt. There is a very different mindset taking shape out there, where folks who see this tremendous wall of debt are mad as hell and you get the sense they won't take it anymore. But at the same time, you have many folks -- who I think are by and large from the older generations -- that have spent their entire lives under the ideal that the government was there to help them, that government would always be there, expanding in reach and scope. The fact that we've seen the government expand the way it has during most Baby Boomers' lifetimes is not a mere coincidence to me.
Eisenhower worried about the expansion of government when he left office. Most folks just remember his "military-industrial complex" quote but the fact was, his view was that the US' strength came from its economy. That did not mean binging on borrowing to him. That meant a fiscally responsible government that tended to stay out of the private sector's way and let the market work.
All government spending exploded after he left. Kennedy spent much more on defense and space exploration, mostly as a counter to Eisenhower's resistance to getting involved in Vietnam and the fact that Sputnik was launched when Ike was president and the perception that we were losing the space race to the Soviets. LBJ? The Great Society came into effect. Nixon, Ford, Carter, Reagan, Bush I, Clinton, etc. all served as president as the government grew. And as the Baby Boomers started driving the agenda as well. I don't bring this up to stir the pot from an intergenerational perspective. In my mind, the pot has already been stirred and I'm just pointing it out. But we all know how bulletproof messengers are, right?
The bottom half issue is one that's a direct result of everyone watching, gobsmacked, as the Bush II Congress passed TARP; to cover an economy's sins. The level of panic was palpable because nobody knew who else was going down in the Fall of '08 and Winter of '09. But the bottom half doesn't see that because it's tough to. "Why should a relatively small cohort of bankers get this money when I can't pay my rent or put food on the table?" A powerful question, but from my vantage point, it's not one you can easily answer by cutting checks. If anything, the Fall of '08 -- and the build-up to it -- should open our eyes to what I see as many failings that aren't just political, but economic and societal as well. The bottom half would be better off if the education system better prepared them for the challenges of life, but at the same time, we've also become conditioned to hold many things in high esteem that at the end of the day aren't worth much. Just look at how much the highest paid athletes/actors make and ask yourself is THAT worth it? It's easier these days to see the price/cost of anything and everything, but assessing its value is an afterthought, it seems.
And now, with acrimony seemingly popping up everywhere you turn your head, "economic hostage taking" is going to be a symptom of this mood. Odd things like states going dry because their governments aren't funded (I'm looking at you Minnesota) are going to be more common. "Expect the unexpected" seems to be the theme du jour. And now with Moody's putting the US government on credit watch, I wonder what such a downward migration in credit quality would translate into in the bond market.
And where the dollar will sit vis-a-vis other currencies. Where would gold be if our sovereign rating migrated down a notch or two?
I wonder how folks in Bejing are feeling about their managed float now.
For what its worth, I think the Republicans have completely misunderstood their "mandate" since the 2010 elections. Republicans were not so much elected into office as incumbents were voted out of office. And I think both sides of the aisle need to understand the distinction going into 2012.
As I've offered before, the "Oxygen Mask" policy response to the 2008 crisis only exacerbated the economic divide, and timed with the ending of the housing boom -- which employed a vast number of Americans, not to mention an aging population -- it has set up a situation in which cutting government entitlement programs is all but socially impossible.
At the end of the day it comes down to choices, and socionomically there is no place for consensus and compromise today. Those peaked in 2000 along with the markets.
But I am very concerned about the lack of understanding people seem to have about how interdependent governments, corporations, and financial institutions over the past 50 years. And the mortgage industry was just one of hundreds of significant examples still out there.
I know I sound like a broken record, but people should stop looking at America's ability to pay and start to consider what it is we are really willing to pay. No where can that or is that captured in a bond rating.
That is the difference between corporations and governments and somewhere along the line investors and regulators forgot that.
Willingness is entirely situational and a function of social mood. And from what I see, there is a startling difference between the social mood on Main Street versus Wall Street.
For Wall Street 2008 was an event. For Main Street it was just more of the same.
And one further thought. It is really interesting to see folks like Soros and El-Erian pushing for fiscal union for Europe right now as a solution.Socionomically, it feels like they are pushing a string. The only folks who want a union are the globalistas.
Peter wrote, "At the end of the day it comes down to choices and socionomically there is no place for consensus and compromise today." The chart below from You.gov shows exactly what that inability to reach consensus looks like when extrapolated from polling data.
Democrats and Republicans show a perfect divide between supporting a candidate who seeks compromise versus supporting a candidate who will stand on principles regardless of the cost. Politicians understand this. And with respect to the debt ceiling, this socionomic divide gives us a higher probability than usual (usual being the 74 other times since 1962 that the policymakers have been presented with a choice of raising the debt ceiling) that no agreement will be reached by the August 2 deadline. I told Conor earlier when he wrote his piece (Why Congress Won't Lift the Debt Ceiling By August 2
) that he will probably look quite prescient on August 3. I suspect i have underestimated the political upheaval to come. It was the mid to late 1930s before the real political upheaval from the Great Depression occurred in this country. And our standard of living is so much higher that it will probably take another full year of 10% reported unemployment to get the ball really moving. Having said that, there is no doubt gamesmanship was involved in the most recent unemployment reports, and that data tweaking and gamesmanship will continue through October of this year so that 2012 comparisons will be very positive and easily beatable in the run-up to the election. That gamesmanship won't change the underlying reality of joblessness, of course.
But going back to our You.gov chart for a moment, let's consider that for a moment. What is really going on here? If you sift through the rhetoric of the two parties, the primary -- perhaps even primal -- separation point is theologically grounded. Let me explain what I mean by that, because I believe it is theological in a very deep primordial sense, not Baptist vs. Catholic vs. Judaism etc.
The primary objection, evident in the split between the two parties, is a fundamental objection to overt commonality. We have a system that we idealize as built upon a fundamentally theological framework where good deeds in service to the system, individualism and hard work, are inevitably rewarded and sins are punished. While Within this system, the poor are viewed as sinners. Within this theologically-grounded framework, debt, too, has taken on an increasingly representational role as the manifestation of our sin.
The grand irony is that while we let the largely faceless yet for-profit institutions, the banks (Bank of America
(BAC), Wells Fargo
(C), etc.) that fomented and encouraged our personal debt sins off the hook without punishment, cleansed their sinful balance sheets with public funds and through the intermediation of the Federal Reserve, we will afford ourselves no such quarter. We are hell bent for punishment and austerity. Someone has to pay for these sins. And that someone won't be institutions, it will be us. This is ironic because one of the largest roles of government -- this is my own view, and I understand this view is highly arguable -- is to provide a safety net for the people during severe economic crises. While it is true that government cannot spend its way to prosperity, there are times when the benefits of increasing debt by investing in infrastructure and public works projects outweigh the drastic social consequences of austerity. This is one of those times.
Furthering the irony, large banks and the men who run them were able to pocket their bonuses and cleanse their balance sheets thanks to the safety net we provided, an act of benevolent forgiveness that conveniently chooses to overlook the transgressive looting that actually occurred. In this perverted theologically-grounded structure, the safety net that should have gone to the people has instead gone to the banks.
This is not the fault of government, or the result of collusion between government and banks, it's the by-product of a negative wave
of social mood that is seeking self-punishment through austerity. So, austerity we shall get. When social mood finally shifts, the austerity will be rolled back, the debt ceiling debates will once again be buried on page 2,365 of the U.S. budget proposal and we'll resume a more normalized lifestyle.