Thursday, 6 November 2008

Good luck to Mr Obama. He will need it

Rarely has a US presidential candidate been as popular abroad as Barack Obama. Probably it has to do with his eminent use of classical rhetoric, and on his repeated use of the word “Change” without being overly specific about what will have to change. It has played into a world, tired of the Bush administration’s arrogance and disdain for other nations’ interests or points of view.
Obama may very well be the person to change American politics. Bush and in particular his vice president Cheney chose to take partisan politics to an extreme, and it has left USA with a dysfunctional political systems, unable to even begin handling he enormous problems facing the country: an “endowment” (pension) system that will be insolvent in a few years, the most expensive health system in world that still offers no coverage to 40m Americans, a crumbling transport and energy infrastructure, an education system in dire need of an overhaul. For the sake of his voters – and all other Americans – let us hope that Obama will have the good luck to make progress in increasing the ability of the political systems to make long-term decisions. Even if they are unpopular in the short term.

But for the rest of us, the changes that Obama will bring is likely to be more a question of form rather than substance.

Once sworn in as US President, Obama will still approach the world with the idea to promote american interests worldwide. At the very basic level, there are a number of parameters that have not changed significantly in the past 50 years. First, USA must prevent strategical alliances on the Eurasian continent from developing into a military threat to US security. Secondly, USA will maintain a strong position towards Middle East oil producers. Oil will not be allowed to fall under the control of hostile regimes, no matter their religious background. Third, America must protect its ability to project force to any location in the world. Fourth, USA must try to gain control over strategic elements of the global food supply. And, yes, even if USA has no significant strategic interests there, any USA administration will continue to prop up Israel.

These elements have been underlying the Bush administration forays into Iraq and Afghanistan. Bush and Cheney chose to stop playing by the rules of an international system of agreements, best symbolised by the UN, once they felt it was in America’s interest to do so.

Barack Obama may lead the US back towards participation in the international system of law, agreements and institutions created in the postwar period by the USA herself. If he chooses that route, there is no doubt that the international reaction will be strong ly positive. But do not be mistaken. America’s main national interests have not changed and will be pursued as vigourously by an Obama administration as by the Bush Administration. Only the form will be different.

On the subjects closer to voters and public opinion, terrorism, climate change, and poverty, Obama will probably be far more flexible towards international cooperation. Provided this does not entail a threat to vital American interests

There is a considerable hope out there that Obama will attack the economic problems besetting USA in a more aggressive way than his predecessor. This amounts to simplifying matters seriously, the situation is so complex that caution is required while at the same time speed is of quite some importance.

The immediate economic challenges for Obama contain: declining wage and asset (home and stock market) values, modifying mortgage debt and preventing foreclosures, fiscal impact of bailouts, introducing financial sector regulation, providing fiscal stimulus and cushioning the middle-class amid recession, high foreign debt burden, lay-offs, and continued tight credit conditions.

Later, when all of these items have been brought under control or resolved, US federal government finances will look disastrous, and he will then have to address that.

Obama is facing a cocktail of economic problems in bad need of being addressed quickly. Unfortunately, many of the problems have no easy solution but will entail sacrifice from many of the people who have just voted Obama into office. So the big question is whether he will be ready to use his newly-won political capital and act decisively now or move cautiously and risk being bogged down by competing demands from within his own party. Doing so could be costly for the US economy for years to come.

I have stated it before, but it bears repeating. USA is in the throes of a rapidly unfolding recession, entirely of her own making. American consumers, hooked on credit, have acted together with an underregulated financial system in creating a real estate bubble now collapsing faster and broader than most believed it possible. The very first priority is to stop the rot (or necrosis) in the financial system –including the credit card companies and the auto financing institutions. Next is to cushion the blow of the imploding property prices. Once this has happened the precipitous fall in economic activity will likely stabilise. But that will not be a sign that the consumer can go back to spending like yesterday. Many American household simply have to reduce debt by whatever means they have. Banks will be restricted in their business activities by new regulation. As a consequence there will be no quick return to the carefree spending of the good old days 15 months ago.

The most likely scenario is still no or negative growth in 2009 followed by an extended period of below-par growth. Given the weight of the US consumer in the global economy, the effects will be visible everywhere.

That the financial markets are particularly optimistic about the short term prospects seem rather misplaced. There are no quick fixes to the current situation. Obama will from 21 January 2009 be faced with an economic situation that may cost him the reelection 4 years later if American consumers do not see a marked improvement in their standards of living. So whoever has been afraid that this is the time for Obama and a Democratic congress to begin “redistributing wealth” can rest assured. It will not be any time soon that Obama will have the luxury of that kind of choices.

To those who find this too negative, there are always the historical facts to resort to: Democratic presidents have in the past 40 years been better for the stock markets than Republican ones. Budget discipline has been better under Democrats than under Republicans. Interest rates have been lower. So for the financial markets things will look up. It will just take some time. While we are waiting, things may deteriorate further.

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