Wall Street has taken to thinking in terms of walls. There is a “wall of money” waiting to tumble down on stock markets and into corporate investments if only investors could climb the “wall of worry” constructed by America’s politicians who can’t seem to put the nation’s finances in order.
There is little doubt that investors are sitting on the sidelines behind a wall of money. Corporations are hoarding billions here and abroad as they wait for some signal that the politicians can govern sensibly, and for some indication of the regulatory and health care costs they will face from Obamacare and Dodd-Frank. Nor is there any doubt that businessmen and consumers are facing what they see as a wall of worry or, more precisely of worries. To adapt Claudius’s lament, “When worries come, they come in battalions, the people muddied and unwholesome in their thoughts.” Some of these worries are justified, others are not.
Start with realistic concerns. Ben Bernanke’s Fed is printing money at an unprecedented rate in order to keep interest rates low. And plans to keep doing so until the unemployment rate drops to at least 6.5 percent. It is an enabler: The government is borrowing $40 for every $100 it spends (don’t try that in your house or business), and the Fed is printing money with which to purchase the IOUs the government is issuing, and then more so it can send interest payments to the treasury. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, fears that the Fed has gone too far and for no purpose, “that just throwing money at the economy is unlikely to solve the problems that are keeping a … worker from finding a good competitive job.” Richard Fisher of the Dallas Fed and Esther George of Kansas City also worry about Bernanke’s no holds barred use of the printing press. Among other things, zero interest rates are causing asset inflation—and shares, land, and house prices that are driven artificially skyward often come down with an unpleasant thud.
Enter the bond vigilantes. At some point investors will decide, as they did in the case of Greece and similarly situated eurozone countries, that the only way the U.S. government can pay its debt is by printing still more money, debasing the currency, and repaying its creditors with dollars worth far less than those it borrowed. At that point the interest rates they demand will shoot up, raising the government’s borrowing costs, driving down the value of the Fed’s portfolio of $2.6 trillion in bonds, driving up mortgage rates, aborting the housing recovery, making it costly for consumers to swipe their credit cards and throwing the economy into recession, or worse. This is a legitimate worry, one that makes the rulers of our biggest creditor, China, more than a little nervous.
A second worry with a realistic basis is that what has come to be called “the new normal” for the American economy includes an irreducible unemployment rate of 7.5 percent. Even if the lower Fed target of 6.5 percent is attainable, some economists reckon that at the current rate of job growth and labor force participation, we won’t get to that target until 2020. Others guess that even if the economy grows at annual rate of 2.25 percent—it is now growing at less than 2 percent, and that was before the recent increase in payroll and other taxes—it will take 5.4 years to get the unemployment rate down to 6.5 percent. The importance of removing impediments to economic growth is demonstrated by a second computation: If the economy would only grow at a rate one percentage point higher—3.25 percent—unemployment would drop to the Fed’s target in 1.8 years.
A final and wholly realistic brick in the wall of worry relates to the policies of the Obama administration. Its regulatory agencies have now filed their agendas for 2013: Proposed new regulations total tens of thousands of pages, with more to come as regulations implementing Obamacare and the Dodd-Frank financial reform law are written. These are not likely to stimulate growth or create jobs for other than bureaucrats.
Worse, it may well be that the chances for compromise on taxes and spending are fading: The president says he won’t negotiate over raising the debt ceiling and that the rich must pay still more; Republicans say no new taxes. And the president has nominated Jacob Lew, a long-time Democratic party loyalist and a recognized expert on budget matters, to replace Tim Geithner as secretary of treasury. Republicans find Lew abrasive, unbending, and given to storming out of meetings in the face of opposition to his positions. According to a report in the Financial Times, “Republicans … say he is competent but doggedly ideological in a way that has damaged efforts to find common ground.” The possibility of policy peace in our time may be fading.
There are other things worth worrying about, not least what the world will look like when the president’s new foreign policy team of Chuck Hagel at the Pentagon and John Kerry at the State Department complete America’s retreat from its former responsibilities as maintainer in chief of world order.
But some of today’s worries are unfounded. Leading the parade of things that should not interfere with a good night’s sleep is a worry that America will default on its debt. Yes, by early March the government will no longer be able to borrow unless Congress agrees to raise the debt ceiling, which Republicans say they will not do unless the president cuts spending, which he will not do unless the Republicans raise taxes, which they will not do. Or so they say. That impasse might threaten the government’s ability to continue operating on its current scale, but even if the government is forced to live on current tax receipts, it will have enough cash to cover interest payments ten times over.
Nor need anyone worry that the government will be shut down if the Republicans refuse to renew current spending authorizations. They tried that when the Clintons occupied the White House, and paid dearly when an angry public registered its disapproval at the polls.
Finally, in my view, there is no need to worry that the economy will continue to stumble along or even fall into recession. The recoveries in the auto and housing market are accelerating. Technology and entrepreneurship are enabling America to tap massive new supplies of low-cost energy, attracting manufacturing facilities that once located elsewhere, “reshoring” to use the popular phrase.
On the political front, the president has indicated a willingness to consider some reining in of entitlement spending, perhaps by slowing the cost-of-living escalator, perhaps by means testing some benefits, while some Republicans have said they favor tax reform that would increase treasury receipts without raising income tax rates. If the president can deliver his left, and Republican leaders their right, the twain just might meet.
Perhaps most important is what Goldman Sachs’s Sharmin Mossavar-Rahmani of the firm’s investment strategy group says in her group’s just-released Outlook. The U.S. has enormous “structural advantages”: abundant natural and human resources, the rule of law, a “magnet for … attracting highly educated talent …dominance in academic excellence at the university level … [and] in research and development”. And much more.
So do worry if you must, but be selective.