Recovery could still be extinguished by Washington’s antics

 
Allister Heath

THINGS are either going very well or they are going very badly, depending on your point of view. The fact that it is possible to take such diametrically opposed views of the global economy is extraordinary, an unmistakeable sign of the extreme uncertainty facing the international financial system, courtesy of the preposterous shenanigans of American politicians.

If you choose to focus on yesterday’s services sector purchasing managers’ index for the UK, which rose at the fastest rate in 16 years, and a raft of other positive indicators, the boom days would seem well and truly back. The data is remarkable, even if some surveys clearly exaggerate the extent of Britain’s rebound; some economists now believe that UK GDP might have grown by over one per cent in the third quarter, an achievement that virtually nobody could have predicted just three or four months ago.

If you concentrate instead on the events on the other side of the Atlantic, the picture looks drastically different. It feels as if we have in fact returned to the deluded, over-optimistic days of 2008, when many didn’t realise until it was too late that the financial sector and economy were about to implode. In theory, we could be just 13 days away from financial Armageddon and a default on US government bonds – assuming, that is, that the game of Russian roulette in Washington goes badly wrong, and that the debt ceiling is not raised prior to the 17 October deadline.

The received wisdom is that Republicans and Democrats will eventually step back from the brink; perhaps that is one reason why Twitter felt it could announce its stock market flotation plans last night. A last-ditch agreement certainly remains the most likely outcome. Yet even the Panglossians in the markets are starting to get nervous, pushing up bond yields and selling off equities and the greenback, a development exacerbated by numerous dire official warnings yesterday.

The US Treasury was especially stark: “A default would be unprecedented and has the potential to be catastrophic… the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.” The horrible truth is that while the prospect of mutually assured destruction was enough to ensure that the cold war didn’t actually destroy the world, nobody knows whether the behaviour of the warring factions in Washington will remain equally rational in the current context. All past near-misses of this nature resolved themselves at the last minute; we can but hope that everything will end well this time also.

To add to the uncertainty and nonsense, lawyers and analysts in America are openly debating a variety of extreme ways out of the impasse if the debt ceiling isn’t lifted. Some argue that President Obama could issue his own bonds, separate from the usual US Treasuries; others claim that he will be forced to choose a potentially non-legal course of action to prevent a complete collapse; some even believe that whatever he chooses or is forced to do will be in breach of some sort of law but that he is unlikely to be impeached, given that the Democrats control the Senate.

Yet these kinds of discussions are deeply damaging to a country built on the rule of law and scrupulous adherence to constitutional practices. It is often said that a problem with investing in emerging markets is the political risk – but the events of the past few years have shown that there is plenty of that in the Eurozone and the US.

What is most galling about all of this is that it comes at a time when the UK and most other European economies are recovering. Politicians are meant to be there to support economies and their citizens; once again, however, they are showing themselves to be the problem, not the solution.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath