Carry on printing
November 5th, 2010
Less than twenty four hours after the US nation spoke out in favour of smaller government and more prudent finance the Fed announced the expected additional $600 billion of quantitative easing. The President has spoken of the pain America feels about slow growth and high unemployment. He has shown no immediate wish to repent of his high spending and borrowing ways in an attempt to meet the tea party wing of the Republicans half way.
The mainstream is still neo Keynsian with a dash of radical monetarism. It is determined to “do what it takes” to lift the sluggish economy, with fiscal stimulus and monetary stimulus. If near zero interest rates won’t do it, they will print more dollars. If a large increase in public spending does not do it, they talk of wanting more. The only difference is the political realisation that the new Congress and many voters do not take kindly to the idea of increasing spending and borrowing further.
The tea party crusade is about a different vision of America. They want government to cut back its spending and its role. They want the budget to move toward balance from real cuts in spending. Meanwhile the political pros on the Hill from both main parties will be locked in negotiation and debate about how feasible cuts are, and how they might be able to squeeze more out from tax revenue, to start to bring the mighty deficit down.
Street wise Democrats now say they will need to bring the deficit down, but they do not fancy any difficult decisions any time soon. Seasoned Republicans say they need to curb the deficit, but stand ready to make compromises on what and when to cut. The tea party people will be pushed to an extreme, criticising from outside, or hugged to a more centrist position, allowing a bigger deficit for longer.
The election will make less of a difference than markets might like. QEII goes ahead regardless. The President had carried most of his radical bigger government legislation already. Democrats are unlikely to help Republicans unstitch the hard fought Health package. There will be more talk of curbing deficits, but Washington is not about to change its spending habits radically.
The extra money created will help keep short and medium term government bond yields low, and will assist rises in asset prices generally. So far the promise of more QE has pushed asset values up more in many emerging markets than at home in the US. Markets are warning the President and the Congress that the world’s large imbalances are not about to be corrected. The more money there is, the more the Emerging markets grow and save.
The race to the bottom in the currency markets is still on. The President may lash out more about China if things do not perk up quickly. We stick with our view that there will be no double dip. We also remain wedded to the proposition that the west, led by the US, borrowed and imported too much. These imbalances have to be corrected. That will mean slower growth, repaying debt, living closer to the country’s means, for some years to come. The Fed will not be able to force the pace as much as it would like, and runs the risk of lowering living standards more by devaluing the currency.
We continue to run balanced portfolios, with the emphasis on emerging markets.
