Welcome to the tax cut and spend, weak dollar RepublicansThe regular monthly bulletin from the Labor Department in Washington gave the stunning news on Friday: 40,000 more Americans had joined the dole queues in November, instead of the 25,000 that were expected to find them.
Too bad the news could not have been held for another hour because then it would have been 40,002 as Treasury Secretary O'Neill and Presidential Economic Adviser Larry Lindsey were unceremoniously bundled out to pasture.
The news was hardly earthshaking since it had been widely flagged around Washington for months as part of the order of business after the elections. O'Neill had been the most inappropriate and ineffective choice of Treasury Secretary since Bill Miller and Mike Blumenthal, Carter's incompetent duo. His stunningly brain dead performances on the international arena were only matched by his verbal faux pas and incomprehension about the state of the US economy. But, at the end of the day, he was fired because he was not a good team player and not sufficiently on board to help re-elect President Bush.
Don't cry for O'Neill though - he didn't cry for Argentina. He should be thanking Bush for making him $ 30 million richer for two years service as Treasury Secretary: $ 15 million a year - not bad! O'Neill was forced, kicking and screaming to sell his Alcoa stock to avoid any conflicts. Alcoa was $35 a share when he entered office and $ 45 a share when he finally sold. Today it is $25 and headed south. The after-tax difference between $45 and $25 is over $ 30 million on his total holdings.
Lindsey, on the other hand, was an excellent economist but seemingly ineffective at getting the economic team to sing from the same hymn sheet.
President Bush (aka Bush43) is now focussing on his re-election bid due in November 2004. He is painfully aware that his father (Bush41) won the first Gulf war but failed to be re-elected because he was complacent about the state of the economy. Clinton was elected on the mantra that 'it's the economy, stupid'.
Bush43 still has two mountains to climb to be re-elected. He must avoid a disaster in the Middle East. A 'successful' war in which Saddam was overturned would help his ratings, even if it stored up massive trouble for the west longer term by inflaming the one in five of the world's population that are Muslim. The chances of a favourable outcome short-term outcome in the Middle East are, we suppose, about 50-50. Longer term, that's after the next election, we are deeply pessimistic.
It is probably on the economic front that he faces the bigger challenge over the next two years. As we wrote in December 2000, whoever won the 2000 election inherited a poisoned chalice in the economy. The excesses of the 90s simply could not be unwound without pain and suffering. His first economic team utterly failed to square this with the US population and, as a consequence, today's problems are seen as Bush43s not a consequence of the Clinton, Rubin, and Greenspan excesses. The 'jewel' of the economic program was a tax cut of dubious relevance to making the economy more competitive. It was aimed at political payoffs to large contributors with the bulk of the benefits delayed until after the next election.
Bush's agenda is for further immediate tax cuts, this time expected to aim more at the middle class with increased retirement deductions, greater write offs for losses and a reduction in the double taxation of dividends. All measures designed to help revive the moribund stock markets that are still hopelessly overvalued.
Bush has now chosen another corporate executive, John Snow, a railroad executive as the new Treasury Secretary. It is hoped that he will be a better advocate of the strategy with Congress than O'Neill, although, as noted above, the track record for Treasury Secretaries from the corporate sector is lamentable.
Perhaps more interesting is what it foretells for the dollar. Dollar policy has tended to shift shortly after new secretaries took office: Baker in 1985 and Rubin in 1995. We believe the Administration will want a lower, weaker dollar to stimulate exports. As we noted last week, this would also accord with Federal Reserve Board thinking. However, with Japan and Europe both in the doldrums this could generate beggar thy neighbour currency policies and threaten the Administration's newfound zeal for loosened trade restraints as an engine of global economic growth.
Accompanying the tax cuts we expect the Administration will have a policy of continued budgetary stimulation, at least in the short run through the November 2004 elections. Big deficits are back, but never fear, the Fed is opening the floodgates with M3 exploding at continued double digit levels.
With majorities in both houses of Congress, President Bush has a good chance of getting his was on economic policy. The policies will not address the underlying imbalances in the US economy, such as too low savings, but they could well be enough to assure his re-election, just so long as that pesky Middle East does not blow the plans apart. Friedman is out, Keynes is back, and as he said 'in the long run we are all dead'
William R. Thomson
10 December 2002
Bill Thomson is Chairman of Momentum Asia, a distributor of Momentum's conservative (non-leveraged) alternative investment funds. He is also Chairman of the Siam Recovery Fund and advises governments and institutions in Asia. He was formerly Vice President of a major international bank in Asia and is a former US Treasury official.
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