Shutdown Showbiz! Washington washes Oz in cash!
They say that politics is show-business for ugly people.
And it’s been as ugly as it gets in the US over the past few weeks.
I’m sure you’ve all been following the shutdown saga in the US. “Shutdown” was actually the third sequel in the unpopular “Diehard Debt” series, and the plot lines are starting to wear a little thin.
The country lives in trouble times. Debt keeps rising and bumping up again and again against a self-imposed (and then self-relaxed) debt ceiling.
Now the Tea Party have taken the Republicans hostage. “Give us Obamacare and we’ll let the country go,” they shout over the barricade walls.
Obama refuses to negotiate with terrorists.
It goes right down to the wire. The nation (and the world, which is the nation anyway if you’re an American) looks doomed. But then, at the last minute, the Republicans break free, cut the wire, and the bomb is defused.
Phew. Bruce Willis lights a cigarette.
It is enough to make you wonder if it is just some lame melodrama designed to distract us from something else. But that would be easier to believe if everyone involved, republicans and democrats, didn’t come out of it looking like idiots.
But the Tea Party ‘fanatics’ as everyone’s calling them now come out of it looking worse of all.
An agenda to rein in the size of government is a sellable message. But gunning hard for Obamacare was very poor strategy. Americans widely recognise that their health care system is a long way from world’s best practice.
And health is too much of a ‘feel good’ issue to successfully couple it with the evils of big government. And focussing on Obamacare when there actually are some real evils on the table (like a NSA scandal) makes it look at best like you’re just out of touch…
… or at worst, like you’re just a puppet to the interests of big business. All the more so when you remember that it was the Bush tax cuts to the wealthy that put you in this mess in the first place.
And so Obama didn’t have to budge. The more energy the Tea Party gave to this portraiture of themselves, the better.
And so in the end it was the republicans who realised they were burning political capital for nothing. They had to cave in and take the country back from the brink. In their calculation, the damage done by making Obama look like a hero was less than by making themselves look like dills.
It’s all straight-to-video drama, but it’s had a real impact on the economy. The markets didn’t blink – they knew there was no real chance of default. But the government is a major part of the economy. Having it off-line for two weeks means there’s a real subtraction from fourth quarter GDP.
And the data suggests that it’s given consumer confidence a real shock. And the American consumer will be well aware the government’s only succeeded in kicking the can down the road for three more months. These issues haven’t gone away.
And in many ways, the timing couldn’t have been worse. Through most of this year, the signs have been pretty solid out of the US. Jobs data, house prices – they’ve all been making solid comebacks.
And the major headwinds of the past few years have been easing. The pace of household and business deleveraging continues to slow. Total household debt has fallen 12 percent since it’s peak in 2008, but fell just 0.7 percent in the June quarter this year. With debt levels stabilising, this has given consumers and business more room to spend.
There have also been signs that the vicious blood-letting in the public sector has come to an end. State and local governments shed 129,000 jobs in 2009, 262,000 in 2010, and 230,000 in 2011. However, by 2012 the blood letting had been stymied to 26,000 jobs, and public sector employment is actually up 31,000 jobs so far in 2013. Check out the chart:
Of course, the government is still living beyond its means, so maybe come January, job cuts might be back on the agenda.
So the whole debt debacle has shaken confidence just at a time where the US recovery was on the most solid footing it’s had in years.
But what does it mean for us over here?
Well the first thing is that any talk of winding back Quantitative Easing any time soon is completely off the table. Remember Sept-taper? That’s gone. QE is here to stay.
And so that means the flow of cash out of the US isn’t letting up anytime soon. And remember it was talk of Sept-taper that caused the USD to regain its strength (and the AUD to fall) mid year. That’s now reversed, and the AUD is heading higher.
At the same time, you’ve got to think the international community is losing patience with the US, and maybe it’s still at the margin, but USD assets aren’t looking as secure as they once did.
The official press in China was out last week calling for an end to the reserve currency status of the USD. That’s a bit rich, given that China is the biggest holder of American dollars. And what’s going to take its place? Certainly not the heavily manipulated Chinese yuan.
But you’ve got to think that China and Japan might be using this period of calm to back their USD holdings off a bit. You know… just in case.
And with just a bit of extra selling pressure, the USD could fall even further. And that means the AUD could go even higher.
And remember it’s the high AUD that’s been keeping Glenn up at night. If it goes back to parity, another rate cut is almost a certainty.
Which will pump even more cash into the Aussie housing market.
It’d be a bizarre ending to a bizarre movie. But these are very unusual times.