Tuesday, June 10, 2008

Earning the Trust of the World

It is difficult for an individual or an organization to earn the trust of the market. Although market participants may want to give an individual or an organization the ‘benefit of the doubt’, especially when a person or the leadership of an organization is new on the job, trust has to be earned and trust is not gained overnight. But, trust can be quickly lost and once it is lost it becomes even harder to earn it back..

There seems to be very little trust in the Bush administration these days and to hear members of “the team”, including President Bush, out in public talking up a strong dollar seems a little bit absurd and surreal. From time-to-time, the Bush administration has spoken about a strong dollar, but has never seemed to do anything about it. And, this charade has gone on for seven years or so.

Now, when this administration is in its waning days, when it can do little or nothing in the way of implementing appropriate policies, when it is subject to internal questioning of what it has done, “talking the good talk” just highlights how incompetent and how out-of-touch the Bush administration really is. The President has never really had much of an interest in economic policy making and has failed to appoint or listen to quality advisors. The results that have been achieved only point up these failures.

The internal questioning is another issue. Individuals that have been members of the Bush administration have given us their impressions about economic policymaking after they have left the administration, but now we have people within the monetary wing of the team expressing doubts and concerns in the public square. (See my post of June 6, 2008, The Bermuda Triangle?” which was posted on Speaking Alpha on June 10 with the title “Fed Policy and U. S. Economic Turmoil”.) Fed Chairman Ben Bernanke has spoken out three times in the past week to argue for a strong dollar and to waylay worries about the jump in the unemployment rate. (see:http://online.wsj.com/article/SB121305516121159161.html?mod=todays_us_page_one.) Yet, one worries about the leadership within the Federal Reserve System with so many governors and district bank presidents speaking out. This is coupled with the fact that the Board of Governors only has three confirmed governors plus one who resigned a week ago. Where is the source of any confidence here?

But, let’s look to the future, to the presidential candidates. Polls inform us that the state of the economy is, by far, the most important issue on the menu of voters concerns. The two candidates are contending that economics is the big issue that they will fight over in the upcoming election and that they stand miles apart in terms of what they would do.

Yet, what do the participants in international markets hear? They hear discussions about tax cuts…tax cuts for middle-income families and retirees…tax cuts for corporations and upper-income families…and expanded unemployment aid…and subsidies for state relief programs…and enlarged coverage of health care…and help for families facing foreclosure on their homes…and so on, and so on.

How will these be paid for? By letting the Bush tax cuts expire…by cutting back on other programs…by the reduction of support for the military through redirecting the use of resources…by taxing corporations like those in the oil industry…by better management of programs…by efficiencies…and so on, and so on.

The markets are interpreting this debate as promising more and more government debt. They have heard these arguments before. More benefits for the electorate…paid for through reductions in government or better management of programs. International markets are just hearing “more of the same”. And, when they look at the advisors to these candidates they see one candidate who admits that he doesn’t know much about economics and has two old friends, Phil Gramm and Jack Kemp, as his primary advisors. (“Back to the Future” Part VII or VIII.) The other candidate…well, that remains to be seen…we are told that the overall plans will be forthcoming this fall. Not much of a confidence builder here.

What about monetary policy? The bet is still on that United States monetary policy will help to underwrite the government debt. The first concern is with the leadership of the Federal Reserve System. Disarray within the body is not a good sign. The absence of so many principals it also not a good sign. And, the monetary authority is still strapped with the assignment to pursue both economic growth and low inflation...something that is very, very difficult to do. Furthermore, with a credit crisis still at hand…the Lehman earnings report did not help nerves at all…and the possibility of a recession…unemployment up, car sales and retail sales down and the housing market still in the tank and so forth…along with high oil and food prices…the best bet is that the Fed will support policy actions to lower unemployment and spur on economic
growth. It is currently the American way to inflate oneself out of problems.

Not only is this the way of the government, it is also the way of the people. A timely article on this point is the David Brooks piece in the New York Times of June 10, 2008: http://www.nytimes.com/2008/06/10/opinion/10brooks.html. I have also presented some points on this: see my blog of June 4, 2008, “Economic and Financial Power and Leverage”. Discipline does not seem to be a word to be found in the American vocabulary these days.

One of the problems is that we have to get rid of the Keynesian idea that monetary policy has a responsibility for high levels of economic employment. For one, statistical research has shown that monetary policy has very little, if any, influence over the unemployment rate over time. So, empirically, the relationship between monetary policy and employment is a weak one. Secondly, the Keynesian model was developed to provide a foundation for government spending policies at a time when greater national autonomy in economic policymaking was desired to achieve higher levels of employment so as to avoid social revolution. (See Donald Markwell, “John Maynard Keynes and International Relations, Oxford University Press, 2006.) These times have passed, yet, as Keynes himself argued, the ideas of economist long dead still influence the making of economic policy. The monetary authority needs to focus on inflation as its primary responsibility and not some dream about achieving high employment.

The difficulty that the United States is facing is exacerbated by other institutions within the world that are earning the trust of international financial markets. The European Central Bank (ECB) is one such institution and the Bank of England is another. The ECB has, as its main function, the goal of low inflation. It is determined to crush inflation. (See http://www.ft.com/cms/s/0/42ffd73e-3688-11dd-8bb8-0000779fd2ac.html.) The Bank of England is also taking a strong stance against the rising tide of inflation. Nations within the world community cannot ignore what is going on in the rest of the world and conduct economic policy independently of everyone else. History seems to side with the nations and institutions that establish and maintain the trust of others within the world community. To this end, participants in international financial markets are leery about placing any trust in the current leadership of the United States and are not comfortable with what they are hearing from the potential future leadership.

The future of the value of the dollar? Right now, it is hard to be bullish. There will be recoveries and rebounds…there always are. But, aside from these short-term swings, what is there to be confident about in terms of the future of the economic policies of the United States. Candidates have to get elected…and the candidates have to tell the electorate where they stand in terms of what they would do if elected. The policies and programs that are being proposed almost assuredly will not be enacted within the next two or three years. America must get its act together. That is the only way that the rest of the world will come to trust this country again. What needs to be done, however, will take time and patience. And, with time, trust can be re-earned. Until then, I believe the value of the dollar will remain soft.


andy said...


I recently noticed you on seekingalpha and was on your blog. I am curious if you would be interested in either blogging with us or joining our round table discussion.



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