Brinkmanship the issue, not debt, in US.

Below is my published letter in the " Letters to the Editor "  section  of the  Australian Financial Review,

Brinkmanship the issue, not debt, in US

PUBLISHED: 23 Oct 2013

  

     

In the letter “US debt default inevitable in the long term” (AFR, October 18), Tim Walshaw contends a default will eventuate, based on the current trends.
But any such default would be as a result of political ineptitude to preclude any sensible compromise incorporating taxation reform. US federal tax revenues (excluding local and state tax regimes) will be only 17.4 per cent of GDP in 2014. The massive deficits and debt explosion are the product of previously enacted, unsustainable tax cuts legislated at the height of the global financial crisis and, to a lesser extent, the cost of wars in Iraq and Afghanistan combined with increased funding for unemployment and food stamps, whose recipients now number 48 million. 
Further tax revenue problems are due to the action of large multinational companies adding to their non-US holdings abroad to ensure their increased earnings remain in low company tax rate countries. Having an unsustainable tax base has been conveniently ignored by Congressional members who contend the budget deficit should only be eliminated by cuts to government spending. This intransigency to accommodate a mixture of tax increases and a scaling back of future benefits, opposed vigorously by civil libertarians and a radicalised Tea Party, ensures the current stalemate is likely to continue.
Hence the looming sovereign debt problem is due entirely to political brinkmanship and dismissal of any alternative that may provide fairer and more ethical outcomes.

Lindsay Byrnes

US confidence index falls

http://www.gallup.com/poll/122840/gallup-daily-economic-indexes.aspx


Americans' confidence in the economy has deteriorated more in the past week during the partial government shutdown than in any week since Lehman Brothers collapsed on Sept. 15, 2008, which triggered a global economic crisis. Gallup's Economic Confidence Index tumbled 12 points to -34 last week, the second-largest weekly decline since Gallup began tracking economic confidence daily in January 2008.”

US Deadlock puzzle

If anyone thought bizarre political outcomes are a feature of Australian politics spare a thought for the 800,000 workers now on unpaid leave at the mercy of a powerful tea party force within the Republican Party, shamelessly opposing funding for the universal health care entitlement called Obacare.

Although benefits under the scheme don’t begin until next year, enabling time to explore funding options, opponents to the scheme consider it so wasteful and an affront to liberty they feel impelled to make a stand now. Any talk of a levy or funding tax increase causes tea party die- hards to a point of apoplexy from a meltdown of the frontal lobes since they are elected on a platform the only good government is the one smaller than its predecessor.

But the reality is, once fully implemented, the amended scheme passed as law will already hold down spiraling heath care costs whilst reducing the deficit and increase productivity and jobs which mirror so called conservative values.

But on the ground insurance Agencies and websites were overwhelmed with new registrations, from an estimated 48 million uninsured Americans as the scheme gets underway. Paradoxically the early teething problems have been overshadowed by the publicity afforded to the scheme by the Republican funding rejection, unwittingly contributing to its success as millions seek to register.

One should not rule out a similar stalemate on the 17th October when the debt ceiling is reached, so investors need to brace themselves for dislocation to equity markets, should the unthinkable of a government debt default also become a possibility.

The most successful free market that ever operated

Probably the most successful free market ever operated was that of the Australian aborigines. Like indigenous groups elsewhere, they traded ceremonial artifacts, grinding stones, sea shells, ochre’s, shields, axe heads, spears and even ‘water rights’ along the permanent waterways that marked trade routes. This enabled a “United Nations” approach to trade as scarce resources in one region were exchanged for another’s in the same manner as modern economists suggest trading between nations having different natural resources yields optimum outcomes. The tribes relied on carved symbolic message on a message stick to communicate accompanied by translators who negotiated trade agreements, sustainable because of their affinity to the land, spanning a period of over 50,000 years.  

In stark contrast in the modern world a will to power was to distort markets so that advancements in science and trade were dissipated to the extent of continuing conflicts.

But no empire dating back to the fall of the Roman Empire rivalled that which had its roots in the Industrial Revolution in England from 1740- 1780, - a logical melting pot for trade and progression of the recently discovered Newtonian mechanistic world - as suggested by John Gribbin in ‘Science a History 1543- 2001’

Hence although the industrial revolution underpinned improved living standards and supported much bigger populations, it also led to massive exploitation of people and land. The 'mercantilists' ensured laws were passed to preference British enterprises and shipping companies, to the detriment of other nations. But philosopher and moral ethicist Adam Smith criticized  the 'mercantilist' system, in his influential classical economic work entitled ‘Wealth of Nations’ in 1776. Smith pointed out that the Merchants had gained monopolistic power as a consequence of bans on foreign competition. Mercantilism was also associated with a monetary system which used exported bullion to pay for imports- mainly from Asia- which reduced money supply to exert downward pressure on prices and economic activity at the expense of impoverished workers.

Mercantilism adversely affected the colonies who were forced to use English ships, pay duties and trade in commodities whose prices were set by the British Empire. This action created an underclass of colonial citizens, a significant factor leading to world war and eventual American independence. The classical economics of Smith overturned the mercantilist system and his free market ideas remained popular up until the great depression of the 1930’s.

It was then John Maynard Keynes presented a new radically different system to offer hope we could avoid recurrences of the painful boom and bust nature of markets, which was largely adopted by Australia.
Our post World War 2 boom was fuelled by immigration and exports to markets for primary produce. But our fortunes were considerable enhanced by the discovery of large scale mineral deposits in the seventies to establish new markets for the nation , to gain further traction more recently from the huge demand emanating from China. Hence the big questions remains will the market for our minerals remain strong or do we need to brace ourselves for a significant slowdown.

We are bound to see a future slower China with exports curtailed by weak global demand and constrained by less capacity for internally based stimulus measures. However in China the response by authorities has been to loosen the banking ratio reserve( funds banks must keep in reserve)and reduce official interest rates which were cut on a number of occasions given a  more accommodating monetary policy made possible by subdued inflation. There has also been a modest pickup in the prospects in the US and the beleaguered European Union to signal weak growth for the first time since the onset of the global financial crisis.

Overall markets today,although still constrained by trade barriers and currency wars are much more open and transparent than the past. An inbuilt stabilisation is available to the extent most nations have opted for a floating exchange rate over their currency or like China, have their currency pegged to the US dollar. 

But they still remain corrupted to the extent self interest is evident with tariff barriers, dumping and import restrictions to curtail free trade between the nations.