Posted on 06/30/2002 3:29:23 PM PDT by Pokey78
Will George Bush be turned out of office by Enron or by Arafat? No one can say but financial scandals such as Enron or WorldCom cannot happen in England or even damage the global economy. Irving Fisher, the leading American economist of the first half of the 20th century, lost all his own money in the slump. In his excellent book Booms and Depressions, first published in the dark year of 1932, he discussed the origins of the Wall Street crash of October 1929. “In Britain there had also been a boom market: and, on the tide of it, Clarence Hatry had financed a group of enterprises so recklessly that presently he could go no further without forgery, and that expedient failed him on September 20, when his hopeless condition became known and seven of his issues were suspended from the London Stock Exchange. His subsequent failures involved $67 million: and after the announcement of September 20, many of his stockholders had to fortify themselves by selling their American stocks. The bad news and then consequent English sales in New York, with a slight downward effect on the New York price level, constituted the first nudge.” It would be some claim for a speculative English financier to have been the straw that broke the back of the global economy of the 1920s, eventually causing the great depression of the 1930s, the return to power of Franklin Roosevelt in the United States, the National Government in England and Adolf Hitler in Germany. “Hatry caused the Second World War” makes a good headline story. There are, however, more convincing lessons to be drawn. The first is that movements of money are more important than merely psychological reaction. The great boom markets of the 1920s and 1990s were both created by a huge expansion in the finance available for stock market investment. Money created the euphoria, not the other way around. Wall Street did not mind greatly that Clarence Hatry had forged some municipal bonds: Wall Street did notice the initial outflow of funds to London, which was followed on September 26 by the Bank of England raising Bank Rates to 6.5 per cent, at that time a penal level. Compared to the power of interest rates and money flows, mal-accounting by businessmen or speeches by politicians have only a slight impact on the global economy. In the United States, the business scandals have given rise to a political debate in which the Democrats blame the Republicans and the Republicans blame the Democrats. Rather eccentrically, Dick Gephardt, a leading Democrat, blames the current President for what has occurred, because the scandal has been allowed to continue for “eight years”. Since the Democrats were in the White House for six and a half of the past eight years, that would seem to put the blame on Bill Clinton rather than on George Bush. If the ultimate blame is to be allocated, it should surely fall on the monetary policies of the second Clinton term; the chief responsibility lies at the door of President Clinton himself and of Alan Greenspan, the Chairman of the Federal Reserve. In the second Clinton term, the US external deficit quadrupled, a sure sign of underlying trouble. The American public is likely to split the blame between the two Presidents, the one who stoked the boiler as well as the one who was on the footplate when the whistle blew. The Clinton boom years were the most irresponsible period of American finance in the 20th century, not excepting the 1920s. That was what Bush inherited. Yet President Bush is now in the White House, which is “where the buck stops”, as President Truman said. The worst damage has been in the heavily regulated global telecoms market, where over-valuations have occurred in most countries. The response of some American businesses, including Global Crossing, and WorldCom, was a resort to false accounting. The blame will touch the Bush presidency if only because the Republicans are seen as the party of big business, and big business is in the dock. It will destroy the Bush presidency only if a combination of weak stock markets, possibly weaker house prices and of a falling dollar, leads to a downturn in the real US economy. The falling dollar reflects the fact that foreign money is no longer flowing into the United States. A weak stock market may undermine consumer spending. A second-dip recession is one of the possibilities. After all, the US stock market has now been falling for two and a half years; that may be telling us something important. On the other hand, the real US economy has been recovering, proving its resilience. In the first quarter of this year, US growth was running at 6 per cent; that was the early stage of the recovery. In the second quarter it has still been running at around 3 per cent. There has also been a recovery in US industrial capital expenditure. Inflation is not a threat, despite the weaker dollar. Even the stock market could be called in to support the case for optimism. Since Christmas 1999 there has been a steady decline in most markets, but only the Nasdaq has had a crash. The bubble was inflated to bursting point, but apart from the most overblown areas there has been a gradual deflation, which may have to go further, not a sudden collapse. The sigh of a bubble deflating slowly could be regarded as reassuring. So far, nothing has happened which decisively alters the balance of political support in the United States. The Democrats do not yet have a convincing candidate for 2004. Al Gore has put his head above the parapet, but most Democrats seem to see him as the man who lost the last election, not as the man who will win the next one. Without a recession, there is nothing yet to suggest that George Bush will not get his second term. Certainly there is nothing in the foreign policy field. To the bewilderment of many European observers, and even of the US foreign policy establishment, the American electorate sees foreign policy in simple terms of black and white, friends and enemies and right and wrong. In the 20th century, Europeans usually saw the Americans as naive about foreign policy, either as simple idealists, like Woodrow Wilson, or isolationists, like Senator Taft. Yet Europe had to be rescued three times by the United States, in two World Wars and one Cold War. Our sophistication did not perform as well as US naiveté. Yesterday, in The Sunday Telegraph, John Simpson reported that even the British are back to playing the sophisticated game. “In 32 years of reporting on international affairs, I have never seen Britain and the United States more separated from each other ... the way George W. Bush’s Administration deals with the outside world is affecting even the most traditionally pro-American elements in British society ... leading British civil servants I spoke to about last week’s speech by Mr Bush regarded it as — I quote — ‘puerile’, ‘absurdly ignorant’ and ‘ludicrous’.” If John Simpson says so, I’m sure it is so, though I know some other “traditionally pro-American elements” who are still strongly pro-American, whether or not they share President Bush’s views on the Middle East. I do not myself agree with all the propositions in his speech, but I did not find it in any way “puerile” or “ludicrous”. Most Americans I know, both Republicans and Democrats, think he got it right. They see Israel as the only reliable ally of the United States, in a sea of hostile Arab powers, hostile to Israel and potentially supporting terrorists against the United States. They regard the attacks of September 11 as a declaration of war. They do, largely, support the creation of an independent Palestinian state, as does President Bush. They do sympathise with the Israelis, under attack from terrorists. They were horrified by the family snap of the baby suicide bomber. In the Middle East, as in Afghanistan, the President’s policies have great public support in the United States. The more sophisticated alternatives are seen as weak and ineffective. The American public wants to face the Palestinians with the real choices as they see them. They have wholly lost trust in Arafat. The older President Bush, as the victorious President of the Gulf War, once had record approval ratings. A comparatively minor recession cost him re-election. His son has the support of the American people on his Middle Eastern policy. In 2004, the economy may again be the decisive issue.
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When are the angry masses finally going to break into the pompous pundits' press hideouts, tar and feather them and run them out of the press business for good!
Bush Sr. did not lose the election because of a recession. He lost because he broke his word.
Liberal pundits will never understand this, partly because they do understand how anyone could consider breaking your word important. Nevertheless, to the Republican base, being a "man of your word" is still very important.
So far, it looks like Bush Jr. understands this.
This has been happening for two years -- you are behind the curve.
This selling puts negative pressure on the stock and bond markets. The only solution is to raise interest rates in support of the currency. But raising rates gives investors an attractive alternative to stocks in the form of bonds, causing stock to be sold resulting in lower markets.
You are behind the curve again. Rising interest rates are GENERALLY when people want to sell their bonds because their bonds were bought at a lower rate.
What's the end result? The dollar will continue to weaken (George Soros says it could lose 1/3rd of its value in the next few years; this could be the one thing in his life that he is right abour) and rates will go up.
I guess it's possible that Soros could be right on this one thing in his life -- but I doubt it.
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