It’s the economy, stupid
It’s the economy, stupid. Always is. On the eve of America’s presidential elections, the world’s biggest economy is showing signs of life.
The $US15 trillion economy has been through the wringer since its subprime mortgage bubble burst five years ago and took the world financial system with it.
US homeowners watched in horror as home prices in major US cities tumbled more than 30 per cent from their peak in late 2006.
In some states, the falls were even worse. Las Vegas home prices plummeted 60 per cent, Phoenix 55 per cent, Miami 50 per cent and Detroit 40 per cent. Even the best-performing cities have seen double-digit price falls: New York home prices are down 20 per cent.
American households have paid a massive price for the risky lending of their banks, most shockingly the introduction in the early 2000s of so called NINJA loans to borrowers with No Income, No Job or Assets.
When these borrowers proved unable to repay their loans - unsurprising in hindsight - America’s entire financial edifice crumbled. Big banks had to be bailed out. Smaller banks went bust. Foreclosures on homeowners soon numbered in the millions each year.
This is the bleak economic context of these US presidential elections. The middle class in America has seen no growth in their take-home pay for a decade, and has gone backwards once inflation is taken into account.
The US jobless rate, about 4.5 per cent before the crisis, reached double digits in 2009 - President Barack Obama’s first year in office.
It hadn’t reached this level since the early 1980s recession and, before that, the Great Depression.
But at the 11th hour of this presidential race, there are hopes the American economy may be turning a corner. The jobless rate fell below 8 per cent in September. At 7.8 per cent, it is now exactly where it was in January 2009 when Obama assumed office.
New home building also put on its biggest monthly surge in four years in September. Global share markets have rejoiced, putting on their strongest performance all year last week.
The good news could be enough to tip the scales in favour of Obama when Americans go behind the curtain on November 6.
But America’s economic future is far from assured. Fortunes hinge on two critically important but, to non-economic geeks, near-incomprehensible policy issues. Just what the heck is the “fiscal cliff” and “quantitative easing” anyway?
First, quantitative easing. This is what central banks do to stimulate economies when they have already slashed official interest rates close to zero per cent. The US Federal Reserve recently did this by announcing an open-ended commitment to keep printing money until the economy turns the corner. In practice, it does this by buying a type of asset called “residential mortgage backed securities”.
When it does so, it increases the supply of money in the economy, giving banks access to more funding so they can lend more and at lower interest rates.
Borrowers in the US are now looking at 30-year mortgages with a fixed interest of about 3.5 per cent - a pretty attractive deal. With house prices nearly half what they were in some cities and appearing to have bottomed, new home sales are starting to pick up. Consumer confidence is flickering to life. A housing recovery alone is not big enough to save the entire US economy, but it is a necessary step towards recovery.
But the major threat to the US economy is the prospect it goes careering over a “fiscal cliff” at the end of this year. Fiscal refers to fiscal policy and the tax and spend decisions of government. When governments raise taxes or cut spending they take demand out of the economy, slowing activity.
And the US budget is set to do both in the new year thanks to the expiry of large scale tax cuts from the Bush era and planned massive cuts to defence and military spending. If left to happen, taxes will rise on about 90 per cent of households.
Both Republicans and Democrats want to extend the bulk of these tax cuts, providing relief to households, but at a substantial cost to America’s already debt-laden balance sheet. The sticking point is that Obama is determined not to renew the tax cuts for high income earners above $US250,000. This, of course, is a key constituency for Republican candidate Mitt Romney.
Whoever wins, their first order of business will be to broker a deal to pull America back from this fiscal cliff. Most economists expect a deal, but if last year’s Congressional debacle over lifting the US government’s debt ceiling is anything to go by, it could be a white-knuckle ride.
But, to paraphrase another famous quote, history suggests you can count on America to do the right thing. But only after it has exhausted all other possibilities.
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