Nemesis and after

Alf Young

Here are three things that happened in the United States in the past 48 hours. As predicted, President Obama was humbled in the mid-term elections, particularly in the House of Representatives where Republicans and their Tea Party insurgents seized decisive control, bringing almost certain gridlock to his next two years in office. Then, as the last results were still being counted, America’s central bank, the Federal Reserve, voted 10 to 1 to launch what, in the jargon, is known as QE2.
     No, not another ocean-going liner. QE2 is a second attempt by the Fed, costing up to another $900bn by next summer, to buy in loads more US government debt by printing dollars and recycling what value it can squeeze out of the dud mortgages it bought from US commercial banks during the great financial meltdown. $600bn of new money spent on US Treasury bonds. Another $250bn to $300bn from its mortgage-related holdings used to buy up even more government debt.
     Quantitative Easing they call it. Sounds like a new regime from Weight Watchers. For the Fed it’s actually about keeping US interest rates, already as close as they can get to zero in conventional monetary policy terms, as low as possible for as long as it takes until a sustained recovery takes hold and the spectre of years of Japanese-style deflation is banished from the risk register.
     And the third striking event across the pond? Oh, the US president before Obama, George W Bush, usually seen these days picking up his dog Barney’s morning droppings from the Dallas grass, is reading the first reviews of his memoir of his time in office, ‘Decision Points’. Can we rank these three events in order of significance?

     The Bush book, we can safely say, will be the also-ran. I’ve only read reviews as yet, but if it gets into the Top 100,000 in Amazon’s ratings I’ll be bitterly disappointed. It is, however, much harder to choose between Obama’s near-nemesis politically and the Fed’s increasingly desperate efforts to kick-start recovery in the once-mighty American economy. My own preference, because of its potential impact on the rest of us over the next few years, is to go with the Fed and the prospects for its QE2.
    There are those who argue Barack Obama needed this bloody nose if he is to have any chance of a second term in 2012. He wasn’t responsible for the financial crash or the recession that followed. That happened on George W’s watch. He, by the way, claims he was ‘blindsided’ by a financial crisis ‘that had been more than a decade in the making’. It’s all Clinton’s fault then. While poor Dubya was fully focussed on ‘kitchen table economic issues like jobs and inflation’ the regulators and rating agencies let him down, he writes, by failing to ‘flag up’ what the banks were up to. Perhaps he means they had weapons of mass destruction, but no one told him. While he was focussed on overthrowing someone who, they told him, had them. But didn’t.
     Obama has been punished because millions of Americans are still living with a shattered dream. Their jobs are gone. Their homes have plummeted in value. Their savings are running out. And what hope can they have for their kids? Yes we can, he told them in 2008. Two years on, Obama’s prime failure is not to have resurrected that dream by now.
     His sin, in Republican/Tea Party eyes, is that he pursued the wrong strategy. He tried federal stimulus, health reforms and other big government programmes when he should have been tackling the deficit head-on, cutting government down to size and allowing radical tax cuts and American enterprise to do the rest. It sounds not that different from the prescription being dispensed over here by our own Cameron/Clegg coalition.
     This president says he will learn from the voters’ rebuke and work across the aisle with the new Congressional leadership. Quite how he does that without squandering his remaining support among Democrats, many of whom think him much too timid in pursuing his original vision, is anyone’s guess. At least now, so the logic goes, a Republican-controlled House will have to take its share of the blame if the US economy is still mired in the same economic malaise two years from now.

     But this political drama on Capitol Hill pales against what the Fed is up to. Although it would never say so in bald terms, QE2 is not just about ensuring low domestic interest rates to foster recovery at home. It’s ultimately about using those interest rates to engineer a weaker dollar, one that will enable America’s embattled manufacturers to sell more of their goods into world markets. And that’s where the millions of new jobs that are needed will come from.
     Or will they? The problem is that globalisation has led to a bi-polar world. While we in the North and the West have binged on debt, hoping low inflation and a growing tide of cheap imported goods from the East and the South would see us through, our suppliers in the new industrialising powerhouses have been using their fiscal surpluses to underwrite our own growing debt mountains. They quite like the current deal and the power it brings. And if the Fed thinks a cheaper dollar is they key to kickstarting recovery at home, more of them will intervene to stop their own currencies appreciating too much and killing off their own economic miracles.
     As our own equivalent of the Fed’s Ben Bernanke, Mervyn King, put it last month: ‘The major surplus and deficit countries are pursuing economic strategies that are in direct conflict’. Unless they all recognise the need to act in the collective interest, King went on, ‘it is only a matter of time before one or more countries resort to trade protectionism…That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world. Every country would suffer ruinous consequences – including our own.’
     I doubt too many Tea Party activists, railing against that socialist Islamist Barack Obama, have thought too deeply about such a ruinous global endgame. But just as they were cheering their victories on Tuesday evening, their own Federal Reserve was embarked on another round of quantitative easing which, were it to unravel into trade or currency wars or both, could leave us all nursing broken dreams for a very long time to come.

Alf Young is an award-winning journalist who writes regularly for the Scottish Review